UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 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, 2010

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

For the transition period from:                    to

Commission file number: 0-26366

ROYAL BANCSHARES OF PENNSYLVANIA, INC.

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

PENNSYLVANIA	23-2812193
(State or other jurisdiction of incorporation or organization)	(IRS Employer 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 checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding twelve months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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

Large accelerated filer o Accelerated filer o Non-accelerated filer þ (do not check if a smaller reporting company) Smaller reporting company 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, 2010
$2.00 par value	10,856,978
Class B Common Stock	Outstanding at July 31, 2010
$0.10 par value	2,086,689

TABLE OF CONTENTS

PART I — FINANCIAL STATEMENTS
	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. (Removed and Reserved)
	Item 5. Other Information.
	Item 6. Exhibits.
SIGNATURES
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL STATEMENTS

Item 1. Financial Statements

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)

	June 30,			December 31,
	2010			2009
	(In thousands, except share data)
ASSETS
Cash and due from banks	$	22,844		$	25,289
Interest bearing deposits		91,987			33,009
Total cash and cash equivalents		114,831			58,298
Investment securities available-for-sale (“AFS”) at fair value		338,819			438,719
Federal Home Loan Bank (“FHLB”) stock, at cost		10,952			10,952
Total investment securities and FHLB stock		349,771			449,671
Loans and leases held for sale		—			2,254
Loans and leases		634,960			686,864
Less allowance for loan and lease losses		22,763			30,331
Net loans and leases		612,197			656,533
Bank owned life insurance		8,450			8,263
Real estate owned via equity investment		10,676			12,492
Accrued interest receivable		15,985			14,942
Other real estate owned (“OREO”), net		30,795			30,317
Premises and equipment, net		6,040			6,306
Investment in real estate joint ventures		—			2,520
Other assets		34,733			51,130
Total assets	$	1,183,478		$	1,292,726
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits
Non-interest bearing	$	62,302		$	63,168
Interest bearing		729,525			818,587
Total deposits		791,827			881,755
Short-term borrowings		99,500			114,500
Long-term borrowings		136,339			139,675
Subordinated debentures		25,774			25,774
Obligations related to real estate owned via equity investment		727			3,652
Accrued interest payable		8,339			6,150
Other liabilities		16,967			16,906
Total liabilities		1,079,473			1,188,412
Shareholders’ equity
Royal Bancshares of Pennsylvania, Inc. equity:
Preferred stock, Series A perpetual, $1,000 liquidation value, 500,000 shares authorized,
30,407 shares issued and outstanding at June 30, 2010 and December 31, 2009		28,167			27,945
Common stock
Class A, par value $2.00 per share, authorized 18,000,000 shares; issued, 11,355,466 and 11,352,482 at June 30, 2010 and December 31, 2009, respectively		22,711			22,705
Class B, par value $0.10 per share; authorized 3,000,000 shares; issued, 2,086,689 and 2,089,284 at June 30, 2010 and December 31, 2009, respectively		209			209
Additional paid in capital		126,095			126,117
Accumulated deficit		(73,036	)		(67,197	)
Accumulated other comprehensive income (loss)		2,971			(1,652	)
Treasury stock — at cost, shares of Class A, 498,488 at June 30, 2010 and December 31, 2009		(6,971	)		(6,971	)
Total Royal Bancshares of Pennsylavania, Inc. shareholders’ equity		100,146			101,156
Noncontrolling interest		3,859			3,158
Total equity		104,005			104,314
Total liabilities and shareholders’ equity	$	1,183,478		$	1,292,726
The accompanying notes are an integral part of these consolidated financial statements.

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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Statements of Operations — (unaudited)

	For the three months						For the six months
	ended June 30,						ended June 30,
(In thousands, except per share data)	2010			2009			2010			2009
Interest income
Loans and leases, including fees	$	11,331		$	11,204		$	22,450		$	22,549
Investment securities available-for-sale:								—
Taxable interest		3,804			5,308			8,273			10,270
Tax exempt interest		—			—			—			19
Deposits in banks		38			58			73			86
Total Interest Income		15,173			16,570			30,796			32,924
Interest expense
Deposits		4,472			6,632			9,479			12,884
Short-term borrowings		1,056			42			2,336			84
Long-term borrowings		1,306			2,944			2,608			5,895
Obligations related to real estate owned via equity investments		5			63			19			103
Total Interest Expense		6,839			9,681			14,442			18,966
Net Interest Income		8,334			6,889			16,354			13,958
Provision for loan and lease losses		4,290			6,956			6,193			9,753
Net Interest Income (Loss) after Provision for Loan and Lease Losses		4,044			(67	)		10,161			4,205
Other income (loss)
Service charges and fees		285			359			576			705
Income from bank owned life insurance		93			349			188			693
Income related to real estate owned via equity investments		583			681			780			867
Gains on sales of loans and leases		124			277			628			277
Net gains on sales of other real estate owned		174			74			331			37
Net gains (losses) on the sale of AFS investment securities		422			(74	)		588			(288	)
Other income		202			35			273			64
Other income,excluding other-than-temporary impairment losses		1,883			1,701			3,364			2,355
Total other-than-temporary impairment losses on investment securities		(165	)		(12,668	)		(341	)		(16,906	)
Portion of loss recognized in other comprehensive loss		—			7,563			—			7,563
Net impairment losses recognized in earnings		(165	)		(5,105	)		(341	)		(9,343	)
Total Other Income (Loss)		1,718			(3,404	)		3,023			(6,988	)
Other expenses
Employee salaries and benefits		2,793			3,063			5,754			6,179
Impairment of real estate joint ventures		1,552			—			1,552			—
Professional and legal fees		1,130			968			1,933			1,992
OREO impairment		960			—			1,762			550
Occupancy and equipment		788			857			1,587			1,729
FDIC and state assessments		765			834			1,629			1,065
OREO and loan collection expenses		670			1,200			1,358			1,482
Pennsylvania shares tax		370			318			739			639
Expenses related to real estate owned via equity investments		140			221			265			384
Directors’ fees		98			146			179			345
Stock option expense (benefit)		50			(53	)		(22	)		58
Other operating expenses		725			765			1,358			1,121
Total Other Expenses		10,041			8,319			18,094			15,544
Loss Before Taxes		(4,279	)		(11,790	)		(4,910	)		(18,327	)
Income taxes		—			—			—			—
Net Loss	$	(4,279	)	$	(11,790	)	$	(4,910	)	$	(18,327	)
Less net income attributable to noncontrolling interest	$	259		$	264		$	701		$	480
Net loss attributable to Royal Bancshares of Pennsylvania, Inc.	$	(4,538	)	$	(12,054	)	$	(5,611	)	$	(18,807	)
Less Preferred stock Series A accumulated dividend and accretion	$	491		$	484		$	981		$	699
Net loss available to common shareholders	$	(5,029	)	$	(12,538	)	$	(6,592	)	$	(19,506	)
Per common share data
Net loss — basic and diluted	$	(0.38	)	$	(0.95	)	$	(0.50	)	$	(1.47	)
The accompanying notes are an integral part of these consolidated financial statements.

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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders’ Equity and Comprehensive Income
Six months ended June 30, 2010
(unaudited)

																		Accumulated
												Additional						other								Total
	Preferred stock		Class A common stock				Class B common stock					paid in			Accumulated			comprehensive			Treasury			Noncontrolling		Shareholders’
(In thousands, except share data)	Series A		Shares		Amount		Shares			Amount		capital			deficit			income			stock			Interest		Equity
Balance January 1, 2010	$	27,945		11,352	$	22,705		2,089		$	209	$	126,117		$	(67,197	)	$	(1,652	)	$	(6,971	)	$	3,158	$	104,314
Comprehensive loss
Net loss																(5,611	)								701		(4,910	)
Other comprehensive income, net of reclassifications and taxes																			4,623								4,623
Total comprehensive loss																										$	(287	)
Common stock conversion from Class B to Class A				3		6		(2	)		—					(6	)										—
Accretion of discount on preferred stock		222														(222	)										—
Stock option benefit													(22	)													(22	)
Balance June 30, 2010	$	28,167		11,355	$	22,711		2,087		$	209	$	126,095		$	(73,036	)	$	2,971		$	(6,971	)	$	3,859	$	104,005

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders’ Equity and Comprehensive Loss
Six months ended June 30, 2009
(unaudited)

																	Accumulated
											Additional						other								Total
	Preferred stock		Class A common stock				Class B common stock				paid in			Accumulated			comprehensive			Treasury			Noncontrolling		Shareholders’
(In thousands, except share data)	Series A		Shares		Amount		Shares		Amount		capital			deficit			loss			stock			Interest		Equity
Balance January 1, 2009	$	—		11,345	$	22,690		2,096	$	210	$	123,425		$	(33,561	)	$	(26,106	)	$	(6,971	)	$	1,898	$	81,585
Comprehensive loss
Net loss															(18,807	)								480		(18,327	)
Other comprehensive income, net of																										—
reclassification and taxes																		15,460								15,460
Total comprehensive loss																									$	(2,867	)
Issuance of Series A perpetual preferred stock (30,407 shares) and warrants to purchase common stock (1,140,307 shares)		27,582										2,825														30,407
Accretion of discount on preferred stock		150													(150	)										—
Dividends paid on preferred stock												(359	)													(359	)
Stock option expense												58														58
Balance June 30, 2009	$	27,732		11,345	$	22,690		2,096	$	210	$	125,949		$	(52,518	)	$	(10,646	)	$	(6,971	)	$	2,378	$	108,824

     The accompanying notes are an integral part of these consolidated financial statements.

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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (unaudited)
Six months ended June 30,

(In thousands)	2010			2009
Cash flows from operating activities:
Net loss	$	(5,611	)	$	(18,807	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		347			458
Stock compensation (benefit) expense		(22	)		58
Provision for loan and lease losses		6,193			9,753
Impairment charge for other real estate owned		1,762			—
Net amortization (accretion) of discounts and premiums on loans and investment securities		972			(117	)
Net gains on sales of other real estate		(331	)		(37	)
Proceeds from sales of loans and leases		4,145			3,065
Gains on sales of loans and leases		(628	)		(277	)
Net (gains) losses on sales of investment securities		(596	)		288
Distribution from investments in real estate		(110	)		(100	)
Gain from sale of premises of real estate owned via equity investment		(328	)		(502	)
Income from bank owned life insurance		(188	)		(693	)
Impairment of real estate joint ventures		1,552			—
Impairment of available-for-sale investment securities		341			9,343
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable		(1,043	)		50
Decrease (increase) in other assets		17,266			(8,582	)
Increase in accrued interest payable		2,189			4,353
Increase in other liabilities		1,048			2,085
Net cash provided by operating activities		26,958			338
Cash flows from investing activities:
Proceeds from call/maturities of available-for-sale (“AFS”) investment securities		58,231			89,912
Proceeds from sales of AFS investment securities		113,318			42,442
Purchase of AFS investment securities		(66,113	)		(186,002	)
Net decrease (increase) in loans		27,262			(49,904	)
Purchase of premises and equipment		(81	)		(265	)
Net proceeds from sale of premises of real estate owned via equity investments		3,498			1,918
Distribution from investments in real estate		110			100
Net decrease in real estate owned via equity investments		(3,170	)		(1,416	)
Proceeds from sales of foreclosed real estate		7,709			253
Net cash provided by (used in) investing activities		140,764			(102,962	)
Cash flows from financing activities:
(Decrease) increase in non-interest bearing and interest bearing demand deposits and savings accounts		(9,483	)		12,589
(Decrease) increase in certificates of deposit		(80,445	)		104,032
Repayments in short-term borrowings		(15,000	)		—
Repayments of long-term borrowings		(3,336	)		(3,224	)
Repayment of mortgage debt of real estate owned via equity investments		(2,925	)		(872	)
Proceeds from issuance of preferred stock		—			30,407
Cash dividends		—			(359	)
Net cash (used in) provided by financing activities		(111,189	)		142,573
Net increase in cash and cash equivalents		56,533			39,949
Cash and cash equivalents at the beginning of the period		58,298			14,259
Cash and cash equivalents at the end of the period	$	114,831		$	54,208
Supplemental Disclosure
Interest paid	$	12,253		$	14,613
Transfers to other real estate owned	$	9,618		$	17,184

The accompanying notes are an integral part of these consolidated financial statements.

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

Note 1. Summary of Significant Accounting Policies

Basis of Financial Presentation

The accompanying unaudited consolidated financial statements include the accounts of Royal Bancshares of Pennsylvania, Inc. (“Royal Bancshares” or the “Company”) and its wholly-owned subsidiaries, Royal Investments of Delaware, Inc., including Royal Investments of Delaware, Inc.’s wholly owned subsidiary, Royal Preferred, LLC, Royal Captive Insurance Company, Royal Asian Bank (“Royal Asian”) and Royal Bank America (“Royal Bank”), including Royal Bank’s subsidiaries, Royal Real Estate of Pennsylvania, Inc., Royal Investments America, LLC, RBA Property LLC, Narberth Property Acquisition LLC, Rio Marina LLC, and its three 60% ownership interests in Crusader Servicing Corporation, Royal Tax Lien Services, LLC, and Royal Bank America Leasing, LP. The two Delaware trusts, Royal Bancshares Capital Trust I and Royal Bancshares Capital Trust II are not consolidated per requirements under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, “Consolidation” (“ASC Topic 810”). These consolidated financial statements reflect the historical information of the Company. All significant intercompany transactions and balances have been eliminated.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information. Applications of the principles in the Company’s preparation of the consolidated financial statements in conformity with US GAAP require management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. These estimates and assumptions are based on information available as of the date of the consolidated financial statements; therefore, actual results could differ from those estimates. 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 consolidated 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, 2009. The results of operations for the three and six month periods ended June 30, 2010 are not necessarily indicative of the results to be expected for the full year.

Accounting Policies Recently Adopted and Pending Accounting Pronouncements

In June 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-16 “Accounting for Transfers of Financial Assets” (“ASU 2009-16”) which updates ASC Topic 860 “Transfers and Servicing”. The purpose of ASU 2009-16 is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. ASU 2009-16 became effective on January 1, 2010. Earlier application was prohibited. ASU 2009-16 must be applied to transfers occurring on or after the effective date. Additionally, on and after the effective date, the concept of a qualifying special purpose entity is no longer relevant for accounting purposes. Therefore, formerly qualifying special-purpose entities (as defined under previous accounting standards) should be evaluated for consolidation by reporting entities on and after the effective date in accordance with the applicable consolidation guidance. If the evaluation on the effective date results in consolidation, the reporting entity should apply the transition guidance provided in the pronouncement that requires consolidation. The adoption of ASU 2009-16 did not have a significant impact on the Company’s consolidated financial statements.

In June 2009, the FASB issued ASU No. 2009-17 “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities” (“ASU 2009-17”) which updates ASC Topic 810 “Consolidations”. The purpose of ASU 2009-17 is to improve financial reporting by enterprises involved with variable interest entities. The FASB undertook this project to address (1) the effects on certain provisions in ASC Topic 860 as a result of the elimination of the qualifying special-purpose entity concept in ASC Topic 860, and (2) constituent concerns about

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the application of certain key provisions of ASC Topic 810, including those in which the accounting and disclosures do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. ASU 2009-17 became effective on January 1, 2010. Earlier application was prohibited. The adoption of ASU 2009-17 did not have a significant impact on the Company’s consolidated financial statements.

In January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”), which updates ASC Topic 820 “Fair Value Measurements and Disclosures”. ASU 2010-06 is intended to provide a greater level of disaggregated information and more robust disclosures about valuation techniques and inputs to fair value measurements. A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. Additionally, a reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009. The adoption of ASU 2010-06 did not have a significant impact on the Company’s consolidated financial statements.

In February 2010, the FASB issued ASU No. 2010-08, “Technical Corrections to Various Topics” (“ASU 2010-08”). ASU 2010-08 clarifies guidance on embedded derivatives and hedging. ASU 2010-08 is effective for interim and annual periods beginning after December 15, 2009. The adoption of ASU 2010-08 did not have a significant impact on the Company’s consolidated financial statements.

In February 2010, the FASB issued ASU No. 2010-09, “Amendments to Certain Recognition and Disclosure Requirements” (“ASU 2010-09”), which updates ASC Topic 855 “Subsequent Events”. ASU 2010-09 states that an SEC filer must evaluate subsequent events through the date the financial statements are issued but is no longer required to disclose the date through which subsequent events have been evaluated. This change alleviates potential conflicts between Subtopic 855-10 and the SEC’s requirements. The adoption of ASU 2010-09 did not have a significant impact on the Company’s consolidated financial statements.

In February 2010, the FASB issued ASU No. 2010-10, “Consolidation: Amendments for Certain Investment Funds” (“ASU 2010-10”), which defers, for certain investment funds, the consolidation requirements resulting from the issuance of ASU 2009-17. Specifically, the deferral is applicable for a reporting entity’s interest in an entity (1) that has all the attributes of an investment company or (2) for which it is industry practice to apply measurement principles for financial reporting purposes that are consistent with those followed by investment companies. ASU 2010-10 is effective for periods beginning after November 15, 2009. The Company adopted the provisions of ASU 2010-10 during the first quarter of 2010. The adoption of ASU 2010-10 did not have a significant impact on the Company’s consolidated financial statements.

In March 2010, the FASB issued ASU No. 2010-11, “Derivatives and Hedging: Scope Exception Related to Embedded Credit Derivatives” (“ASU 2010-11”), which amends and clarifies the accounting for credit derivatives embedded in interests in securitized financial assets. ASU 2010-11 is effective for interim periods beginning after June 15, 2010. The adoption of ASU 2010-11 is not expected to have a significant impact on the Company’s consolidated financial statements.

In July 2010, the FASB issued ASU No. 2010-20, “Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” (“ASU 2010-20”), which is intended to help investors assess the credit risk of a company’s receivables portfolio and the adequacy of its allowance for credit losses held against the portfolios by expanding credit risk disclosures. (“ASU 2010-20”) requires more information about the credit quality of financing receivables in the disclosures to financial statements, such as aging information and credit quality indicators. Both new and existing disclosures must be disaggregated by portfolio segment or class. The disaggregation of information is based on how a company develops its allowance for credit losses and how it manages its credit exposure. The amendments in ASU 2010-20 apply to all public and nonpublic entities with financing receivables. Financing receivables include loans and trade accounts receivable. However, short-term trade accounts receivable, receivables

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measured at fair value or lower of cost or fair value, and debt securities are exempt from these disclosure amendments.

The effective date of ASU 2010-20 differs for public and nonpublic companies. For public companies, the amendments that require disclosures as of the end of a reporting period are effective for periods ending on or after December 15, 2010. The amendments that require disclosures about activity that occurs during a reporting period are effective for periods beginning on or after December 15, 2010. For nonpublic companies, the amendments are effective for annual reporting periods ending on or after December 15, 2011. The adoption of ASU 2010-20 is not expected to have a significant impact on the Company’s consolidated financial statements.

Note 2. Regulatory Orders

FDIC Orders

On July 15, 2009, Royal Bank agreed to enter into a Stipulation and Consent to the Issuance of an Order to Cease and Desist (the “Orders”) with each of the Federal Deposit Insurance Corporation (“FDIC”) and the Commonwealth of Pennsylvania Department of Banking (“Department”). The material terms of the Orders are identical and require Royal Bank to: (i) have and retain qualified management, and notify the FDIC and the Department of any changes in Royal Bank’s board of directors or senior management; (ii) increase participation of Royal Bank’s board of directors in Royal Bank’s affairs by having the board assume full responsibility for approving Royal Bank’s policies and objectives and for supervising Royal Bank’s management; (iii) eliminate all assets classified as “Loss” and formulate a written plan to reduce assets classified as “Doubtful” and “Substandard” at its regulatory examination; (iv) develop a written plan to reduce delinquent loans, and restrict additional advances to borrowers with existing credits classified as “Loss,” “Doubtful” or “Substandard”; (v) develop a written plan to reduce Royal Bank’s commercial real estate loan concentration; (vi) maintain, after establishing an adequate allowance for loan and lease losses, a ratio of Tier 1 capital to total assets (“leverage ratio”) equal to or greater than 8% and a ratio of qualifying total capital to risk-weighted assets (total risk-based capital ratio) equal to or greater than 12%; (vii) formulate and implement written profit plans and comprehensive budgets for each year during which the Orders are in effect; (viii) formulate and implement a strategic plan covering at least three years, to be reviewed quarterly and revised annually; (ix) revise the liquidity and funds management policy and update and review the policy annually; (x) refrain from increasing the amount of brokered deposits held by Royal Bank and develop a plan to reduce the reliance on non-core deposits and wholesale funding sources; (xi) refrain from paying cash dividends without prior approval of the FDIC and the Department; (xii) refrain from making payments to or entering contracts with Royal Bank’s Holding Company or other Royal Bank affiliates without prior approval of the FDIC and the Department; (xiii) submit to the FDIC for review and approval an executive compensation plan that incorporates qualitative as well as profitability performance standards for Royal Bank’s executive officers; (xiv) establish a compliance committee of the board of directors of Royal Bank with the responsibility to ensure Royal Bank’s compliance with the Orders; and (xv) prepare and submit quarterly reports to the FDIC and the Department detailing the actions taken to secure compliance with the Orders. The Orders will remain in effect until modified or terminated by the FDIC and the Department.

The Orders do not restrict Royal Bank from transacting its normal banking business. Royal Bank will continue to serve its customers in all areas including making loans, establishing lines of credit, accepting deposits and processing banking transactions. Customer deposits remain fully insured to the highest limits set by the FDIC. The FDIC and the Department did not impose or recommend any monetary penalties in connection with the Orders.

Following are the actions Royal Bank has taken to respond to and comply with the Orders as of the date of this report:

1.

Board Oversight and Senior Management

The board of director’s has increased their participation in the affairs of Royal Bank. A Regulatory Compliance Committee comprised of outside directors and management was created in the third quarter of 2009. The purpose of the Committee is to monitor compliance with the Orders. Royal Bank has recently completed an internal assessment of senior management’s qualifications and has submitted the report to the FDIC and the Department for their review.

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2.	Reduction of Classified Assets
	Royal Bank has eliminated from its books via charge-off all assets classified as “Loss”. Royal Bank submitted to the FDIC and the Department a “Plan for the Reduction of Classified Assets” (“classified assets plan”) required under the Orders. The FDIC and the Department have approved the classified assets plan. No material advances were made on any classified loan unless approved by the board of directors and determined to be in Royal Bank’s best interest. Royal Bank was successful in reducing net classified loans (outstanding loan balance less charge-offs) plus other real estate owned (“OREO”) from $149.6 million at June 30, 2009 to $118.3 million at June 30, 2010.
3.	Reduction of Delinquencies
	Royal Bank submitted to the FDIC and the Department a “Plan for the Reduction of Delinquencies” (“delinquency reduction plan”) required under the Orders. The FDIC and the Department have approved the delinquency reduction plan. No advances were made on any delinquent loan unless approved by the board of directors and determined to be in Royal Bank’s best interest. Royal Bank’s delinquent loans (30 to 90 days) amounted to $36.3 million at June 30, 2009 versus $22.4 million at June 30, 2010. Royal Bank’s non-accrual loans were $80.8 million and $67.2 million at June 30, 2009 and June 30, 2010, respectively.
4.	Reduction of Commercial Real Estate Concentrations
	Royal Bank submitted to the FDIC and the Department a “Plan for the Reduction of Commercial Real Estate Concentrations” (“CRE concentration plan”) required under the Orders. The FDIC and the Department have approved the CRE concentration plan. Management has been working diligently to reduce the concentration in commercial real estate loans (“CRE loans”). Royal Bank was successful in reducing the CRE concentration from $289.1 million at June 30, 2009 to $238.4 million at June 30, 2010, which amounted to 223.42% of total capital and 244.73% of Tier 1 capital.
	At June 30, 2010, total construction/land loans (“CL loans”) amounted to $106.2 million, or 99.51%, of total capital and 109.0% of Tier 1 capital. CL loans were approximately $21 million less than what was projected under the CRE concentration plan at year end 2009. Royal Bank no longer has a concentration of commercial real estate loans as defined in the joint agency “Guidance on Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices” issued on December 12, 2006.
5.	Capital Maintenance
	Under the Orders, Royal Bank must maintain a minimum total risk-based capital ratio and a minimum Tier 1 leverage ratio of 12% and 8%, respectively. At June 30, 2010, Royal Bank’s total risk-based capital and Tier 1 leverage ratios were 14.57% and 8.83%, respectively.
6.	Budget Plan
	Royal Bank submitted to the FDIC and the Department a revised 2009 budget and profit plan required under the Orders. The FDIC and the Department have approved the 2009 budget and profit plan. In addition Royal Bank has submitted to the FDIC and the Department a 2010 budget and profit plan.
7.	Strategic Plan
	Royal Bank submitted to the FDIC and the Department a three-year strategic plan required under the Orders. The FDIC and the Department have approved the three-year strategic plan. The board of directors and senior management are executing the strategic plan and will incorporate any modifications as deemed necessary by our regulators.
8.	Liquidity and Funds Management

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	Royal Bank submitted to the FDIC and the Department a liquidity and funds management plan (“liquidity plan”) required under the Orders. The FDIC and the Department have approved the liquidity plan. At June 30, 2010, Royal Bank had $112.5 million in cash on hand and $57.9 million in unpledged agency securities. At June 30, 2010, the liquidity to deposits ratio was 28.2% compared to Royal Bank’s 12% target and the liquidity to total liabilities ratio was 19.9% compared to Royal Bank’s 10% target.
9.	Brokered Deposits and Borrowings
	Royal Bank submitted to the FDIC and the Department a plan for reduction of reliance on non-core deposits and wholesale funding sources plan (“brokered deposit plan”) required under the Orders. The FDIC and the Department have approved the brokered deposit plan. Since entering the Orders Royal Bank has not renewed, accepted, or rolled over any maturing brokered certificates of deposit (“CDs”); nor has Royal Bank issued new brokered CDs. Brokered CDs declined $82.8 million from $226.9 million at June 30, 2009 to $144.1 million at June 30, 2010. Royal Bank has redeemed an additional $36.4 million in brokered CDs through July 2010. Borrowings declined $48.1 million from $283.9 million at June 30, 2009 to $235.8 million at June 30, 2010. The borrowing amounts do not include the $727,000 in obligations owned via equity investment which are not guaranteed by Royal Bank or any of its subsidiaries.
10.	Cash Dividends and other Payments to the Company
	Royal Bank will seek approval from the FDIC and the Department prior to declaring a cash dividend to the Company and prior to making payments or entering into new contracts with our affiliates.
11.	Executive Compensation
	Royal Bank submitted to the FDIC an executive compensation plan (“compensation plan”) required under the Orders. The FDIC has approved the compensation plan. Royal Bank was not required to submit the compensation plan to the Department.

Royal Bank has submitted all required quarterly reports to the FDIC and the Department detailing the actions taken to secure compliance with the Orders as of the date of this Report.

Federal Reserve Agreement

On March 17, 2010, the Company agreed to enter into a Written Agreement (the “Federal Reserve Agreement”) with the Federal Reserve Bank of Philadelphia (the “Reserve Bank”). The material terms of the Federal Reserve Agreement provide that: (i) the Company’s board of directors will take appropriate steps to fully utilize the Company’s financial and managerial resources to serve as a source of strength to its subsidiary banks, including taking steps to ensure that Royal Bank complies with the Orders previously entered into with the FDIC and the Department on July 15, 2009; (ii) the Company’s board of directors will, within 60 days of the Federal Reserve Agreement, submit to the Reserve Bank a written plan to strengthen board oversight of the management and operations of the consolidated operation; (iii) the Company will not declare or pay any dividends without the prior written approval of the Reserve Bank and the Director of the Division of Banking Supervision and Regulation of the Board of Governors of the Federal Reserve System; (iv) the Company and its non-bank subsidiaries will not make any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities without the prior approval of the Reserve Bank and the Director of the Division of Banking Supervision and Regulation of the Board of Governors of the Federal Reserve System; (v) the Company and its nonbank subsidiaries will not, directly or indirectly, incur, increase, or guarantee any debt without the prior written approval of the Reserve Bank; (vi) the Company will not, directly or indirectly, purchase or redeem any shares of its stock without the prior written approval of the Reserve Bank; (vii) the Company will, within 60 days of the Federal Reserve Agreement, submit to the Reserve Bank an acceptable written capital plan to maintain sufficient capital at the Company on a consolidated basis, which plan will at a minimum address: regulatory requirements for the Company and the Banks, the adequacy of the Banks’ capital taking into account the volume of classified credits, the allowance for loan and lease losses, current and projected asset growth, and projected retained earnings; the source and timing of additional funds necessary to fulfill the consolidated organization’s and the Banks’ future capital requirements; supervisory requests

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for additional capital at the Banks or the requirements of any supervisory action imposed on the Banks by federal or state regulators; and applicable legal requirements that the Company serve as a source of strength to the Banks; (viii) the Company will, within 60 days of the Federal Reserve Agreement, submit to the Reserve Bank cash flow projections for 2010 showing planned sources and uses of cash for debt service, operating expenses, and other purposes, and will submit similar cash flow projections for each subsequent calendar year at least one month prior to the beginning of such year; (ix) the Company will comply with applicable legal notice provisions in advance of appointing any new director or senior executive officer or changing the responsibilities of any senior executive officer such that the officer would assume a different senior executive officer position, and comply with restrictions on indemnification and severance payments imposed by the Federal Deposit Insurance Act; and (x) the Company’s board of directors will, within 45 days after the end of each quarter, submit progress reports to the Reserve Bank detailing the form and manner of all actions taken to secure compliance with the Agreement and the results thereof, together with a parent company-level balance sheet, income statement, and, as applicable, report of changes in shareholders’ equity.

The Federal Reserve Agreement will remain in effect and enforceable until stayed, modified, terminated or suspended by the Reserve Bank. Royal Bancshares has submitted all progress reports and responses required under the Federal Reserve Agreement as of the date of this Report.

Note 3. Investment Securities

The carrying value and fair value of investment securities at June 30, 2010 are as follows:

			Included in Accumulated Other
			Comprehensive Income (AOCI)
					Gross unrealized losses
								Non-credit
			Gross					related
As of June 30, 2010	Amortized		unrealized		Non-OTTI			OTTI in
(In thousands)	cost		gains		in AOCI			AOCI			Fair value
Investment securities available-for-sale
Mortgage-backed securities-residential	$	18,535	$	714	$	—		$	—		$	19,249
U.S. government agencies		1,125		2		—			—			1,127
Preferred stocks		2,335		—		—			—			2,335
Common stocks		381		142		(16	)		—			507
Collateralized mortgage obligations:
Issued or guaranteed by U.S. government agencies		260,363		4,221		(844	)		—			263,740
Non-agency		16,853		110		(349	)		(714	)		15,900
Corporate bonds		1,020		6		(7	)		—			1,019
Trust preferred securities		23,809		3,322		—			(182	)		26,949
Other securities		7,841		152		—			—			7,993
Total available for sale	$	332,262	$	8,669	$	(1,216	)	$	(896	)	$	338,819

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The carrying value and fair value of investment securities at December 31, 2009 are as follows:

			Included in Accumulated Other
			Comprehensive Loss (AOCL)
					Gross Unrealized Losses
								Non-credit
			Gross					related
As of December 31, 2009	Amortized		unrealized		Non-OTTI			OTTI in
(In thousands)	cost		gains		in AOCL			AOCL			Fair value
Investment securities available-for-sale
Mortgage-backed securities-residential	$	21,393	$	234	$	(26	)	$	—		$	21,601
U.S. government agencies		1,150		3		(2	)		—			1,151
Preferred stocks		2,500		—		(270	)		—			2,230
Common stocks		381		71		(8	)		—			444
Collateralized mortgage obligations:
Issued or guaranteed by U.S. government agencies		316,911		2,871		(1,281	)		—			318,501
Non-agency		23,010		145		(875	)		(1,082	)		21,198
Collateralized debt obligations		24,825		—		—			—			24,825
Corporate bonds		7,911		9		(423	)		(630	)		6,867
Trust preferred securities		32,926		2,064		(177	)		(678	)		34,135
Other securities		7,892		8		(133	)		—			7,767
Total available for sale	$	438,899	$	5,405	$	(3,195	)	$	(2,390	)	$	438,719

The amortized cost and fair value of investment securities at June 30, 2010, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	As of June 30, 2010
	Amortized
(In thousands)	cost		Fair value
Within 1 year	$	620	$	622
After 1 but within 5 years		1,525		1,524
After 5 but within 10 years		—		—
After 10 years		23,809		26,949
Mortgage-backed securities-residential		18,535		19,249
Collateralized mortgage obligations:
Issued or guaranteed by U.S. government agencies		260,363		263,740
Non-agency		16,853		15,900
Total available for sale debt securities		321,705		327,984
No contractual maturity		10,557		10,835
Total available for sale securities	$	332,262	$	338,819

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The following table summarizes gross realized gains and losses realized on the sale of securities recognized in earnings in the periods indicated:

	For the three months						For the six months
	ended June 30,						ended June 30,
(In thousands)	2010			2009			2010			2009
Gross realized gains	$	604		$	201		$	857		$	533
Gross realized losses		(182	)		(275	)		(269	)		(821	)
	$	422		$	(74	)	$	588		$	(288	)

The Company evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis. The Company assesses whether OTTI is present when the fair value of a security is less than its amortized cost. All investment securities are evaluated for OTTI under FASB ASC Topic 320, “Investments-Debt & Equity Securities” (“ASC Topic 320”). The non-agency collateralized mortgage obligations that are rated below AA are evaluated under FASB ASC Topic 320 Subtopic 40, “Beneficial Interests in Securitized Financial Assets” under FASB ASC Topic 325, “Investments-Other”. In determining whether OTTI exists, management considers numerous factors, including but not limited to: (1) the length of time and the extent to which the fair value is less than the amortized cost, (2) the Company’s intent to hold or sell the security, (3) the financial condition and results of the issuer including changes in capital, (4) the credit rating of the issuer, (5) analysts earnings estimate, (6) industry trends specific to the security, and (7) timing of debt maturity and status of debt payments.

Under ASC Topic 320, OTTI is considered to have occurred with respect to debt securities (1) if an entity intends to sell the security; (2) if it is more likely than not an entity will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of the expected cash flows is not sufficient to recover the entire amortized cost basis. In addition, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell or will more likely than not be required to sell the security. If an entity intends to sell the security or will be required to sell the security, the OTTI shall be recognized in earnings equal to the entire difference between the fair value and the amortized cost basis at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before the recovery of its amortized cost basis, the OTTI shall be separated into two amounts, the credit-related loss and the noncredit-related loss. The credit-related loss is based on the present value of the expected cash flows and is recognized in earnings. The noncredit-related loss is based on other factors such as illiquidity and is recognized in other comprehensive income.

The following table summarizes other-than-temporary impairment losses on securities recognized in earnings in the periods indicated:

	For the three months				For the six months
	ended June 30,				ended June 30,
(In thousands)	2010		2009		2010		2009
Preferred stocks	$	165	$	—	$	165	$	1,117
Common stocks		—		1,213		—		4,334
Collateralized mortgage obligations:
Non-agency		—		459		—		459
Corporate bonds		—		1,353		58		1,353
Trust preferred securities		—		1,865		55		1,865
Other securities		—		215		63		215
	$	165	$	5,105	$	341	$	9,343

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The following table presents a roll-forward of the balance of credit-related impairment losses on debt securities held at June 30, 2010 for which a portion of an other-than-temporary impairment was recognized in other comprehensive income:

	Six months ended
(In thousands)	June 30, 2010
Balance at January 1, 2010	$	1,896
Reductions for securities sold during the period (realized)		(573	)
Reductions for securities for which the amount previously recognized in other comprehensive income was recognized in earnings because the Company intends to sell the security		(113	)
Balance at June 30, 2010	$	1,210

The tables below indicate the length of time individual securities have been in a continuous unrealized loss position at June 30, 2010 and December 31, 2009:

	Less than 12 months					12 months or longer					Total
			Gross					Gross					Gross
June 30, 2010			unrealized					unrealized					unrealized
(In thousands)	Fair value		losses			Fair value		losses			Fair value		losses
Investment securities available for sale
Common stocks	$	131	$	(15	)	$	5	$	(1	)	$	136	$	(16	)
Collateralized mortgage obligations:
Issued or guaranteed by U.S. government agencies		74,443		(844	)		—		—			74,443		(844	)
Non-agency		1,177		(4	)		8,579		(1,059	)		9,756		(1,063	)
Corporate bonds		92		(7	)		—		—			92		(7	)
Trust preferred securities		—		—			1,565		(182	)		1,565		(182	)
Total available for sale	$	75,843	$	(870	)	$	10,149	$	(1,242	)	$	85,992	$	(2,112	)

	Less than 12 months					12 months or longer					Total
			Gross					Gross					Gross
December 31, 2009			unrealized					unrealized					unrealized
(In thousands)	Fair value		losses			Fair value		losses			Fair value		losses
Investment securities available for sale
Mortgage-backed securities-residential	$	11,922	$	(26	)	$	—	$	—		$	11,922	$	(26	)
U.S. government agencies		398		(2	)		—		—			398		(2	)
Preferred stocks		—		—			2,230		(270	)		2,230		(270	)
Common stocks		41		(8	)		—		—			41		(8	)
Collateralized mortgage obligations:
Issued or guaranteed by U.S. government agencies		111,661		(1,281	)		—		—			111,661		(1,281	)
Non-agency		—		—			12,487		(1,957	)		12,487		(1,957	)
Corporate bonds		—		—			5,602		(1,053	)		5,602		(1,053	)
Trust preferred securities		—		—			12,630		(855	)		12,630		(855	)
Other securities		—		—			1,158		(133	)		1,158		(133	)
Total available for sale	$	124,022	$	(1,317	)	$	34,107	$	(4,268	)	$	158,129	$	(5,585	)

The AFS portfolio had gross unrealized losses of $2.1 million at June 30, 2010, which recovered from gross unrealized losses of $5.6 million at December 31, 2009. The improvement in gross unrealized losses is related to the overall improvement in the fair values of the securities in the Company’s investment portfolio slightly offset by $341,000 in impairment charges, including $165,000 on a preferred stock and $113,000 on two bonds the Company decided to sell before recovery of its cost basis. In determining the Company’s intent not to sell and that it is more likely than not that the Company will not be required to sell the investments before recovery of its amortized cost basis, management considers the following factors: current liquidity and availability of other non-pledged assets that

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permits the investment to be held for an extended period of time but not necessarily until maturity, capital planning, and any specific investment committee goals or guidelines related to the disposition of specific investments.

Preferred stock: As of June 30, 2010, the Company had one preferred stock holding of a financial institution with a total fair value of $2.3 million. During the second quarter the Company decided to sell the stock and recorded an impairment charge of $165,000. Management evaluated analysts’ near term earnings estimates and recent stock price recovery in relation to the severity and duration of the unrealized loss. While the stock was rated below investment grade, and the stock price had seen a significant price recovery since the second quarter of 2009, the price began to decline again during the second quarter. The Company decided to sell the stock to minimize the loss.

In the first quarter of 2009, the Company recorded an other-than-temporary impairment charge of $1.1 million on one preferred stock which was subsequently sold during the third quarter of 2009.

Common stocks: As of June 30, 2010, the Company had three common stocks of financial institutions with a total fair value of $136,000 and an unrealized loss of $16,000, or 10.4% of its aggregate cost. The Company recorded an OTTI charge to earnings of $225,000 related to two of these common stocks during the second quarter of 2009. Because the Company does not intend to sell this stock before recovery of its cost basis and will not more likely than not be required to sell this stock before recovery of its cost basis, it does not consider the unrealized loss to be other-than-temporary at June 30, 2010.

For all debt security types discussed below the fair value is based on prices provided by brokers and safekeeping custodians with the exception of trust preferred securities which are described below.

U.S. government issued or sponsored collateralized mortgage obligations (“Agency CMOs”): As of June 30, 2010, the Company had 20 Agency CMOs with a fair value of $74.4 million and gross unrealized losses of $844,000, or 1.1% of their aggregate cost. All of these Agency CMOs have been in an unrealized loss position for less than twelve months. The unrealized loss is attributable to a combination of factors, including relative changes in interest rates since the time of purchase. The contractual cash flows for these securities are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. Based on its assessment of these factors, management believes that the unrealized losses on these debt securities are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. The Company does not intend to sell these securities before recovery of their cost basis and will not more likely than not be required to sell these securities before recovery of their cost basis. Therefore, management has determined that these securities are not other-than-temporarily impaired at June 30, 2010.

Non-agency collateralized mortgage obligations (“Non-agency CMOs”): As of June 30, 2010, the Company had five non-agency CMOs with a fair value of $9.8 million and gross unrealized losses of $1.1 million, or 9.8% of their aggregate cost. Three of the non-agency CMO bonds were in an unrealized loss position for more than twelve months and accounted for $1.1 million, or 99.6% of the gross unrealized loss. During the second quarter of 2009, the Company concluded that two of these three bonds were other-than-temporarily impaired and recognized in earnings the credit-related loss of $459,000. The Company evaluated the impairment to determine if it could expect to recover the entire amortized cost basis of the non-agency CMO bonds by considering numerous factors including credit default rates, Veteran’s Administration support, conditional prepayment rates, current and expected loss severities, delinquency rates, and geographic concentrations. Two of the bonds are below investment grade and the third bond is rated A.

Management utilized discounted cash flow analysis as required under ASC Topic 320 and ASC Topic 325 to determine the credit component of the unrealized loss for the three bonds that have been in an unrealized loss position for more than twelve months. As a result, management concluded that there was no additional credit-related loss on the two bonds that were previously deemed other-than-temporarily impaired. In addition there was no credit-related loss on the third bond. Management expects to fully collect the amortized cost basis of all five bonds. The Company does not intend to sell the non-agency CMOs and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis. Therefore, the Company does not consider the other three bonds to be other-than-temporarily impaired as of June 30, 2010. The total gross unrealized loss of $1.1 million recognized in comprehensive income is comprised of the $714,000 in noncredit-

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related losses on the two bonds deemed other-than-temporarily impaired and $349,000 in unrealized losses on the three bonds not considered other-than-temporarily impaired.

Corporate bonds: As of June 30, 2010, the Company had one corporate bond with a fair value of $92,000 and a gross unrealized loss of $7,000, or 7.5% of the aggregate cost. This corporate bond has been in an unrealized loss position for less than one month and was downgraded to A in the second quarter of 2010. The Company does not intend to sell the bond and it is not more likely than not that the Company will be required to sell the bond before recovery of its amortized cost basis. Therefore, the Company does not consider the bond to be other-than-temporarily impaired as of June 30, 2010.

During the second quarter of 2010, the Company sold a corporate bond and recorded a loss of $125,000. During the first quarter of 2010, the Company decided to sell this corporate bond mainly due to the downgrade of the credit rating of the bond’s issuer, which is a finance company. An impairment charge of $58,000 was recorded in the first quarter of 2010. The unrealized loss on this bond at December 31, 2009 was $423,000.

During the first quarter of 2010, the Company sold a corporate bond that was deemed other-than-temporarily impaired during the second quarter of 2009. The Company recorded an $87,000 loss when the bond was sold. The Company sold the bond because the credit rating of the bond issuer had been downgraded and the price had improved. The unrealized loss on this bond at December 31, 2009 was $630,000.

Trust preferred securities: At June 30, 2010, the Company had eight trust preferred securities issued by six individual name companies (reflecting, where applicable the impact of mergers and acquisitions of issuers subsequent to original purchase) in the financial services/banking industry. The valuations of trust preferred securities were based upon the fair market values of active trades for one of the securities and ASC Topic 320 using cash flow analysis for the remaining seven securities. Contractual cash flows and a market rate of return were used to derive fair value for each of these securities. Factors that affected the market rate of return included (1) any uncertainty about the amount and timing of the cash flows, (2) the credit risk, (3) liquidity of the instrument, and (4) observable yields from trading data and bid/ask indications. Credit risk spreads and liquidity premiums were analyzed to derive the appropriate discount rate. As of June 30, 2010, the Company had one trust preferred security with a fair value of $1.6 million and gross unrealized losses of $182,000, or 10.5% of its aggregate cost. This trust preferred security has been in an unrealized loss position for longer than twelve months, is not rated, and was deemed other-than-temporarily impaired at June 30, 2009.

The unrealized loss in the trust preferred security reflects the credit concerns related to the financial institution that issued this long term financial obligation. The recent financial losses and reductions of capital coupled with bank failures and the overall market uncertainty within the financial services industry has resulted in a lower value. Management applied a discounted cash flow analysis based upon the liquidity risk premiums and the recent corporate spreads for similar securities to arrive at the credit risk component of the unrealized loss as required by ASC Topic 320. As a result, there was no additional credit-related loss on the bond. The total gross unrealized loss of $182,000 recognized in comprehensive income is the noncredit-related loss on the security.

During the second quarter of 2010, the Company completed the sale of one trust preferred security that was deemed other-than-temporarily impaired during the second quarter of 2009 and recorded a loss of $8,000. The Company decided to sell the security during the first quarter of 2010 and recorded an impairment charge of $55,000. During the first quarter of 2010 the Company completed the sale of two trust preferred securities deemed other-than-temporarily impaired at June 30, 2009 and recorded total gains of $124,000.

Other securities: As of June 30, 2010, the Company had eight investments in real estate and SBA funds. As of June 30, 2010, one of the private equity real estate funds has a fair value of $237,000. During the first quarter of 2010, after reviewing the fund’s recent financials, asset values, and its near-term projections, management concluded that the fund was other-than-temporarily impaired and recorded an impairment charge of $63,000. There was no additional impairment during the second quarter of 2010

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The Company has two investments in private equity global commercial real estate investment funds with a total fair value of $914,000 at June 30, 2010. These funds were deemed other-than-temporarily impaired during 2009. There was no additional impairment in 2010.

The Company will continue to monitor these investments to determine if the discounted cash flow analysis, continued negative trends, market valuations or credit defaults result in impairment that is other than temporary.

Note 4. Loans and Leases

	June 30,			December 31,
(In thousands)	2010			2009
Commercial and industrial	$	90,368		$	104,063
Construction		50,527			52,196
Land Development		62,264			66,878
Real Estate — residential		34,185			48,498
Real Estate — residential-mezzanine		—			2,480
Real Estate — non-residential		265,236			277,234
Real Estate — multi-family		15,582			22,017
Tax certificates		74,651			73,106
Leases		41,308			39,097
Other		1,481			2,173
Total gross loans	$	635,602		$	687,742
Deferred fees, net		(642	)		(878	)
Total loans and leases	$	634,960		$	686,864

The Company grants commercial and real estate loans, including construction and land development loans primarily in the greater Philadelphia metropolitan area as well as selected locations throughout the mid-Atlantic region. The Company also has participated with other financial institutions in selected construction and land development loans outside our geographic area. The Company has a concentration of credit risk in commercial real estate, construction and land development loans at June 30, 2010. A substantial portion of its debtors’ ability to honor their contracts is dependent upon the housing sector specifically and the economy in general.

The Company classifies its leases as capital leases, in accordance with FASB ASC Topic 840, “Leases”. The difference between the Company’s gross investment in the lease and the cost or carrying amount of the leased property, if different, is recorded as unearned income, which is amortized to income over the lease term by the interest method.

The Company’s policy for income recognition on restructured loans is to recognize income on currently performing restructured loans under the accrual method. As of June 30, 2010, the Company did not have any restructured loans.

The Company identifies a loan as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement. The Company does not accrue interest income on impaired loans. Excess proceeds received over the principal amounts due on impaired loans are recognized as income on a cash basis.

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The following is a summary of information pertaining to impaired loans:

	June 30,		December 31,
(In thousands)	2010		2009
Impaired loans with a valuation allowance	$	13,835	$	46,670
Impaired loans without a valuation allowance		60,602		27,009
Total impaired loans	$	74,437	$	73,679
Valuation allowance related to impaired loans	$	3,171	$	10,958

Non-accrual and impaired loans were $74.4 million at June 30, 2010, compared to $73.7 million at December 31, 2009, a slight net increase of $700,000. The $700,000 increase was primarily the result of $33.5 million in additions offset by $14.5 million in charge-offs, a $9.8 million reduction in existing non-accrual loan balances through payments or loans becoming current and placed back on accrual and $8.4 million transferred to other real estate owned. If interest had been accrued, such income would have been approximately $1.6 million and $3.1 million for the three and six months ended June 30, 2010, respectively. The Company has no troubled debt restructured loans or loans past due 90 days or more on which it has continued to accrue interest during the quarter. The $60.6 million in impaired loans without a valuation allowance reflects total charge-offs of $17.6 million, of which $7.5 million occurred in the second quarter of 2010. The $7.8 million decline in the valuation allowance was related to $10.2 million in loan charge-offs of specific reserves offset by $2.4 million in valuation allowances on five new and six previous non-accrual relationships.

Total cash collected on impaired loans during the six months ended June 30, 2010 and June 30, 2009 was $11.1 million and $12.6 million respectively, of which $10.9 million and $11.1 million was credited to the principal balance outstanding on such loans, respectively.

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Note 5. Allowance for Loan and Lease Losses

Changes in the allowance for loan and lease losses were as follows:

	Three months ended						Six months ended
	June 30,						June 30,
(In thousands)	2010			2009			2010			2009
Balance at beginning period	$	28,661		$	27,269		$	30,331		$	28,908
Charge-offs by loan type
Commercial and industrial		(2,152	)		(239	)		(4,183	)		(254	)
Construction and land development		(5,604	)		(4,357	)		(5,659	)		(4,357	)
Construction and land development — mezzanine		—			(298	)		—			(298	)
Real Estate — residential		—			(153	)		—			(153	)
Real Estate — residential — mezzanine		(1,018	)		—			(2,480	)		—
Real Estate — non-residential		(1,156	)		(665	)		(1,156	)		(3,834	)
Real estate — non-residential real estate — mezzanine		—			—			—			(1,132	)
Real Estate — multifamily		(457	)		—			(457	)		—
Leases		(427	)		(157	)		(529	)		(310	)
Tax certificates		(9	)		—			(10	)		—
Total charge-offs		(10,823	)		(5,869	)		(14,474	)		(10,338	)
Recoveries by loan type
Commercial and industrial		68			1			68			3
Construction and land development		105			—			105			—
Real Estate — residential		228			2			245			33
Real Estate — non-residential		196			—			207			—
Leases		1			15			51			15
Other		37			—			37			—
Total recoveries		635			18			713			51
Net charge offs		(10,188	)		(5,851	)		(13,761	)		(10,287	)
Provision for loan and lease losses		4,290			6,956			6,193			9,753
Balance at the end of period	$	22,763		$	28,374		$	22,763		$	28,374

Loan and lease charge-offs were $3.7 million and $10.8 million during the first and second quarters of 2010, respectively. These charge-offs were primarily attributed to construction and land development, commercial, and residential real estate mezzanine loans. Of the $10.8 million in charge-offs for the three months ended June 30, 2010, $7.8 million were related to specific reserves.

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Note 6. Other Real Estate Owned

Other real estate owned (“OREO”) increased $478,000 from $30.3 million at December 31, 2009 to $30.8 million at June 30, 2010. Set forth below is a table which details the changes in OREO from December 31, 2009 to June 30, 2010.

	2010
(In thousands)	First Quarter			Second Quarter
Beginning balance	$	30,317		$	25,781
Capital improvements		—			697
Net proceeds from sales		(4,391	)		(3,403	)
Net gain on sales		157			174
Assets acquired on non-accrual loans		—			8,421
Other		500			85
Impairment charge		(802	)		(960	)
Ending balance	$	25,781		$	30,795

During the second quarter of 2010, the Company received a deed in lieu of foreclosure for a rental community consisting of 182 dwelling units which was collateral for a $16.4 million participation loan. The Company is entitled to 52%, of the collateral and transferred $7.9 million to OREO after recording a $456,000 charge-off for which $361,000 had previously been reserved in the allowance for loan and lease losses in accordance with ASC Topic 310. Also during the second quarter the Company sold collateral associated with four different projects. The first sale is related to a condominium project in Raleigh, North Carolina that the Company foreclosed on during the fourth quarter of 2008. The Company sold three units during the second quarter of 2010 and now has five remaining units to be sold of the original 51 units. The Company received net proceeds of $339,000 and recorded a loss of $46,000 as a result of the sale of these units. The second sale is related to a condominium project in Wildwood, New Jersey that the Company foreclosed on during the fourth quarter of 2009. During the second quarter of 2010, the Company completed the renovations to the project and held an auction of 28 units. At June 30, 2010, the Company had settled on ten of the condominium units and received net proceeds of $1.5 million which equaled the carrying cost including improvements. The third sale is related to a commercial building that was the collateral for a loan transferred to OREO during the second quarter of 2009. The Company received net proceeds of $970,000 and recorded a gain of $25,000 as a result of the sale of this commercial property. The last sale was related to 3 homes and 14 residential lots located in North Carolina and South Carolina that the Company foreclosed on during the second quarter of 2010. Collectively the collateral was valued at $456,000 when transferred to OREO. During the second quarter the Company sold one home and one lot. The Company received net proceeds of $130,000 and recorded a gain of $6,000 as a result of the home and lot sale. In addition to the sales mentioned above the Company sold five properties acquired through the tax lien portfolio. The Company received proceeds of $427,000 and recorded gains of $189,000.

During the second quarter of 2010 the Company recorded impairment charges of $960,000 which were primarily related to an apartment building in Luzerne County, Pennsylvania foreclosed on in the second quarter of 2009 and tax liens. After performing an impairment analysis using an updated appraisal on the apartment building, the Company recorded an $862,000 impairment charge which was caused by the need for repairs in order to obtain certificates of occupancy on a number of rental units. The Company recorded impairment charges of $85,000 related to three properties acquired through the tax lien portfolio.

During the first quarter of 2010, the Company sold collateral related to three loans. During the first quarter of 2010, the Company closed on 19 of the condominium units in Raleigh, North Carolina for net proceeds of $2.4 million and recorded a $62,000 loss as a result of the sale of these units. The second sale during the first quarter was a commercial building that was collateral for a loan transferred to OREO in the third quarter of 2009. The Company received net proceeds of $652,000 and recorded a loss of $67,000 as a result of the sale of this commercial building. The third sale during the first quarter was a residential building that was collateral for a loan transferred to OREO in the fourth quarter of 2009. The Company received net proceeds of $1.2 million and recorded a $216,000 gain as a result of the sale of this residential building. During the first quarter of 2010, the Company recorded an

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impairment charge of $802,000 related to three lots in Ocean City, Maryland which were transferred to OREO in the first quarter of 2009.

Note 7. Deposits

The Company’s deposit composition as of June 30, 2010 and December 31, 2009 is presented below:

	June 30,		December 31,
(In thousands)	2010		2009
Demand	$	62,302	$	63,168
NOW		43,305		45,248
Money Market		161,776		168,893
Savings		15,779		15,336
Time deposits (over $100)		132,328		141,652
Time deposits (under $100)		232,247		240,557
Brokered deposits		144,090		206,901
Total deposits	$	791,827	$	881,755

Under the Orders as described in “Note 2 — Regulatory Orders” to the Consolidated Financial Statements, Royal Bank is required to reduce its level of brokered deposits. During the first two quarters of 2010, Royal Bank redeemed $62.8 million in brokered deposits.

Note 8. Borrowings and Subordinated Debentures

1. Advances from the Federal Home Loan Bank

Royal Bank has a $150 million line of credit with the FHLB of which $22.0 million was outstanding as of June 30, 2010. Total advances from the FHLB, including the $22.0 million above, were $191.4 million at June 30, 2010 compared to $209.5 million at December 31, 2009. The FHLB advances and the line of credit are collateralized by FHLB stock, government agencies and mortgage-backed securities, residential loans, and commercial real estate loans. The available borrowing capacity is based on qualified collateral. During the first quarter of 2010, Royal Bank was notified by the FHLB that Royal Bank was being placed on an over collateralized delivery requirement of 105%. The FHLB’s decision was based primarily upon the level of Royal Bank’s non-performing assets and net loss for 2009. The available amount for future borrowings will be based on the amount of collateral to be pledged.

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Presented below are the Company’s FHLB borrowings allocated by the year in which they mature with their corresponding weighted average rates:

	As of June 30,					As of December 31,
	2010					2009
(Dollars in thousands)	Amount		Rate			Amount		Rate
Advances maturing in
2010	$	99,500		4.19	%	$	114,500		4.41	%
2011		—		—			—		—
2012		30,000		4.32	%		30,000		4.32	%
2013		50,000		2.64	%		50,000		2.64	%
Amortizing advance, due April 2012, requiring monthly principal and interest of $558,400		11,887		3.46	%		15,001		3.46	%
Total FHLB borrowings	$	191,387				$	209,501

Under the Orders as described in “Note 2 — Regulatory Orders” to the Consolidated Financial Statements, Royal Bank is required to reduce its level of FHLB advances and paid back $15.0 million at the end of the first quarter of 2010.

2. Other borrowings

The Company has a note payable with PNC Bank (“PNC”) at June 30, 2010 in the amount of $4.5 million compared to $4.7 million at December 31, 2009. The note’s maturity date is August 25, 2016. The interest rate is a variable rate using rate index of one month LIBOR + 15 basis points and adjusts monthly. The interest rate at June 30, 2010 was 0.50%.

At June 30, 2010 and December 31, 2009, the Company had additional borrowings of $40.0 million from PNC which will mature on January 7, 2018. These borrowings are secured by government agencies and mortgage-backed securities. These borrowings have a weighted average interest rate of 3.65%.

3. Subordinated debentures

The Company has outstanding $25.0 million of Trust Preferred Securities issued through two Delaware trust affiliates, Royal Bancshares Capital Trust I (“Trust I”) and Royal Bancshares Capital Trust II (“Trust II”) (collectively, the “Trusts”). The Company issued an aggregate principal amount of $12.9 million of floating rate junior subordinated debt securities to Trust I, which debt securities bear an interest rate of 2.69% at June 30, 2010, and reset quarterly at 3-month LIBOR plus 2.15%, and an aggregate principal amount of $12.9 million of fixed/floating rate junior subordinated deferrable interest to Trust II, which debt securities had an initial interest rate of 5.80% until December 31, 2009 and now resets quarterly at 3-month LIBOR plus 2.15%. The interest rate at June 30, 2010 was 2.69%.

Each of Trust I and Trust II issued an aggregate principal amount of $12.5 million of capital securities bearing fixed and/or fixed/floating interest rates corresponding to the debt securities held by each trust to an unaffiliated investment vehicle and an aggregate principal amount of $387,000 of common securities bearing fixed and/or fixed/floating interest rates corresponding to the debt securities held by each trust to the Company. The Company has fully and unconditionally guaranteed all of the obligations of the Trusts, including any distributions and payments on liquidation or redemption of the capital securities.

On August 13, 2009, the Company’s board of directors determined to suspend interest payments on the trust preferred securities. Under the Federal Reserve Agreement as described in “Note 2 — Regulatory Orders” to the Consolidated Financial Statements, the Company and its non-bank subsidiaries may not make any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities without the prior written approval of the Reserve Bank and the Director of the Division of Banking Supervision and Regulation of the Board

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of Governors of the Federal Reserve System. As of June 30, 2010 the trust preferred interest payment in arrears was $833,000 and has been recorded in interest expense and accrued interest payable.

Note 9. 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:

	June 30,		December 31,
(In thousands)	2010		2009
Financial instruments whose contract amounts represent credit risk:
Open-end lines of credit	$	35,153	$	44,829
Commitments to extend credit		3,725		1,630
Standby letters of credit and financial guarantees written		2,914		3,477

Litigation

From time to time, the Company is a party to routine legal proceedings within the normal course of business. Such routine legal proceedings in the aggregate are believed by management to be immaterial to the Company’s financial condition or results of operations.

Royal Bank holds a 60% equity interest in each of Crusader Servicing Corporation (“CSC”) and Royal Tax Lien Services, LLC (“RTL”). CSC and RTL acquire, through public auction, delinquent tax liens in various jurisdictions thereby assuming a superior lien position to most other lien holders, including mortgage lien holders. As previously discussed in the Company’s form 10-K for the year ended December 31, 2008, on March 4, 2009, each of CSC and RTL received a grand jury subpoena issued by the U.S. District Court for New Jersey upon application of the Antitrust Division of the U.S. Department of Justice (“DOJ”). The subpoena seeks certain documents and information relating to an ongoing investigation being conducted by the DOJ. Royal Bank has been advised that neither CSC nor RTL are targets of the DOJ investigation, but they are subjects of the investigation. Royal Bank, CSC and RTL are cooperating in the investigation.

Note 10. Shareholders’ Equity

1. Preferred Stock

On February 20, 2009, as part of the Capital Purchase Program (“CPP”) established by the United States Department of Treasury (“Treasury”), the Company issued to Treasury 30,407 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, without par value per share (the “Series A Preferred Stock”), and a liquidation preference of $1,000 per share. In conjunction with the purchase of the Series A Preferred Stock, Treasury received a warrant to purchase 1,104,370 shares of the Company’s Class A common stock. The aggregate purchase price for the Series A Preferred Stock and warrant was $30.4 million in cash. The Series A Preferred Stock qualifies as Tier 1 capital and pays cumulative dividends at a rate of 5% per annum for the first five years, and 9% per annum thereafter. The Series A Preferred Stock may generally be redeemed by the Company at any time following consultation with its primary banking regulators. The warrant issued to Treasury has a 10-year term and is immediately exercisable upon its issuance, with an exercise price, subject to anti-dilution adjustments, equal to $4.13 per share of the common stock. The Company utilized the extra capital provided by the CPP funds to support its efforts to prudently and transparently provide lending and liquidity while also balancing the goal to remain well-capitalized.

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2. Common Stock

The Company’s Class A common stock trades on the NASDAQ Global Market under the symbol RBPAA. There is no market for the Company’s Class B common stock. The Class B shares may not be transferred in any manner except to the holder’s immediate family. Class B shares may be converted to Class A shares at the rate of 1.15 to 1. Class B common stock is entitled to one vote for each Class A share and ten votes for each Class B share held. Holders of either class of common stock are entitled to conversion equivalent per share dividends when declared.

3. Payment of Dividends

Under the Pennsylvania Business Corporation Law, the Company may pay dividends only if it is solvent and would not be rendered insolvent by the dividend payment. There are also restrictions set forth in the Pennsylvania Banking Code of 1965 (the “Code”) and in the Federal Deposit Insurance Act (“FDIA”) concerning the payment of dividends by the Company. Under the Code, no dividends may be paid except from “accumulated net earnings” (generally retained earnings). Under the FDIA, no dividend may be paid if a bank is in arrears in the payment of any insurance assessment due to the Federal Deposit Insurance Corporation (“FDIC”). In addition, dividends paid by Royal Bank and Royal Asian to the Company would be prohibited if the effect thereof would cause the Banks’ capital to be reduced below applicable minimum capital requirements.

On August 13, 2009, the Company’s board of directors determined to suspend regular quarterly cash dividends on the $30.4 million in Series A Preferred Stock. The Company’s board of directors took this action in consultation with the Federal Reserve Bank of Philadelphia as required by recent regulatory policy guidance. The Company currently has sufficient capital and liquidity to pay the scheduled dividends on the preferred stock; however, the Company believes this decision will better support the capital position of Royal Bank, a wholly owned subsidiary of the Company. As of June 30, 2010, the Series A Preferred stock dividend in arrears is $1.6 million which is comprised of $1.5 million in dividends and $43,000 in interest which have not been recognized in the consolidated financial statements. In the event the Company fails to pay dividends on the Series A Preferred Stock for a total of at least six quarterly dividend periods (whether or not consecutive), the Treasury will have the right to appoint two directors to our board of directors until all accrued but unpaid dividends have been paid

At June 30, 2010, as a result of significant losses within Royal Bank, the Company had negative retained earnings and therefore would not have been able to declare and pay any cash dividends. Under the Orders as described in “Note 2 — Regulatory Orders” to the Consolidated Financial Statements, Royal Bank must receive prior approval from the FDIC and the Department before declaring and paying a dividend to the Company. Under the Federal Reserve Agreement as described in “Note 2 — Regulatory Orders” to the Consolidated Financial Statements, the Company may not declare or pay any dividends without the prior written approval of the Reserve Bank and the Director of the Division of Banking Supervision and Regulation of the Board of Governors of the Federal Reserve System.

Additionally, as a result of the CPP completed between the Treasury and the Company on February 20, 2009, the Company is required to receive Treasury’s approval for any increases in the dividend above the amount of the last regular quarterly common stock dividend paid prior to October 14, 2008 and any repurchases of Company common stock. These restrictions on the payment of dividends and the repurchases of common stock by the Company became effective immediately upon closing and remain in effect until the earlier date of the third anniversary of the closing date of the preferred shares and the date of the redemption of the preferred shares.

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Note 11. Regulatory Capital Requirements

As of June 30, 2010, the Banks met all regulatory requirements for classification as well capitalized under the regulatory framework for prompt corrective action. Under the Orders as described in “Note 2 — Regulatory Orders” to the Consolidated Financial Statements, Royal Bank is required to maintain a minimum Tier 1 leverage ratio of 8% and a Total risk-based capital ratio of 12% during the term of the Orders. As shown in the table below, Royal Bank met those requirements at June 30, 2010.

	As of June 30, 2010
											To be well capitalized
						For capital					capitalized under prompt
	Actual					adequacy purposes					corrective action provision
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital (to risk-weighted assets)
Company (consolidated)	$	135,713		16.69	%	$	65,042		8.00	%		N/A		N/A
Royal Bank		106,709		14.57	%		58,602		8.00	%	$	73,252		10.00	%
Royal Asian		13,152		17.72	%		5,936		8.00	%		7,420		10.00	%
Tier I capital (to risk-weighted assets)
Company (consolidated)	$	125,395		15.42	%	$	32,521		4.00	%		N/A		N/A
Royal Bank		97,418		13.30	%		29,301		4.00	%	$	43,951		6.00	%
Royal Asian		12,202		16.44	%		2,968		4.00	%		4,452		6.00	%
Tier I capital (to average assets, leverage)
Company (consolidated)	$	125,395		10.38	%	$	48,315		4.00	%		N/A		N/A
Royal Bank		97,418		8.83	%		44,109		4.00	%	$	55,136		5.00	%
Royal Asian		12,202		12.90	%		3,783		4.00	%		4,729		5.00	%

Note 12. 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. 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 and six month periods ended June 30, 2010 and 2009 included the following components:

	Three months ended				Six months ended
	June 30,				June 30,
(In thousands)	2010		2009		2010		2009
Service cost	$	75	$	126	$	151	$	252
Interest cost		155		141		311		282
Amortization of prior service cost		22		23		44		45
Amortization of actuarial loss		14		7		27		14
Net periodic benefit cost	$	266	$	297	$	533	$	593

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Note 13. Stock Compensation Plans

Outside Directors’ Stock Option Plan

The Company previously adopted a non-qualified Outside Directors’ Stock Option Plan (the “Directors’ Plan”). Under the terms of the Directors’ Plan, 250,000 shares of Class A stock were authorized for grants. Each director was entitled to a grant of an option to purchase 1,500 shares of stock annually, which are exercisable one year after the grant date and must be exercised within ten years of the grant. 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 Directors’ Plan for the six months ended June 30, 2010.

				Weighted		Weighted
				Average		Average		Average
				Exercise		Remaining		Intrinsic
	Options			Price		Term (yrs)		Value (1)
Options outstanding at December 31, 2009		90,197		$	19.15		3.6	$	—
Exercised		—			—
Forfeited		(5,742	)		11.72
Expired		(8,455	)		18.31
Options outstanding at June 30, 2010		76,000		$	19.81		3.4	$	—
Options exercisable at June 30, 2010		76,000		$	19.81		3.4	$	—

(1) The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had they exercised their options on June 30, 2010. The intrinsic value varies based on the changes in the market value in the Company’s stock.

Employee Stock Option Plan and Appreciation Right Plan

The Company previously 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 were awarded additional compensation in the form of options to purchase under the Employee Plan, up to 1.8 million shares of the Company’s Class A common stock (but not in excess of 19% of outstanding shares). At the time a stock option is granted, a stock appreciation right for an identical number of shares may also be granted. The option price is equal to the fair market value at the date of the grant. The options are exercisable at 20% per year beginning one year after the date of grant and must be exercised within ten years of the grant. The ability to issue new grants under the plan has expired. See the discussion below concerning the 2007 Long- Term Incentive Plan.

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The following table presents the activity related to the Employee Plan for the six months ended June 30, 2010.

				Weighted		Weighted
				Average		Average		Average
				Exercise		Remaining		Intrinsic
	Options			Price		Term (yrs)		Value (1)
Options outstanding at December 31, 2009		401,626		$	20.09		4.2	$	—
Granted		—			—
Exercised		—			—
Forfeited		(15,300	)		14.60
Expired		—			—
Options outstanding at June 30, 2010		386,326		$	20.31		3.8	$	—
Options exercisable at June 30, 2010		370,708		$	20.24		3.7	$	—

(1) The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had they exercised their options on June 30, 2010. The intrinsic value varies based on the changes in the market value in the Company’s stock.

Long-Term Incentive Plan

Under the 2007 Long-Term Incentive Plan, 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 (of which 250,000 shares may be issued as restricted 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, 2010, 172,390 stock options and 18,682 shares of restricted stock from this plan have been granted. For the stock options, the option strike price is equal to the fair market value at the date of the grant. For employees, the stock 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. For outside directors, the stock options vest 100% one year from the grant date and must be exercised within ten years of the grant date. The restricted stock is granted with an estimated fair value equal to the market value of the Company’s closing stock price on the date of the grant. Restricted stock will vest three years from the grant date, if the Company achieves specific goals set by the Compensation Committee and approved by the board of directors. These goals include a three year average return on assets compared to peers, a three year average return on equity compared to peers and a minimum return on both assets and equity over the three year period. All shares of restricted stock were forfeited in the first quarter of 2010 due to the Company’s losses in 2009 and 2008.

The following table presents the activity related to stock options granted under the 2007 Long-Term Incentive Plan for the six months ended June 30, 2010.

				Weighted		Weighted
				Average		Average		Average
				Exercise		Remaining		Intrinsic
	Options			Price		Term (yrs)		Value (1)
Options outstanding at December 31, 2009		135,312		$	10.19		8.2	$	—
Granted		—			—
Exercised		—			—
Forfeited		(13,450	)		12.33
Expired		—			—
Options outstanding at June 30, 2010		121,862		$	9.76		7.8	$	—
Options exercisable at June 30, 2010		49,405		$	12.34		7.5	$	—

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(1) The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had they exercised their options on June 30, 2010. The intrinsic value varies based on the changes in the market value in the Company’s stock.

For all Company plans as of June 30, 2010, there were 88,075 unvested stock options and unrecognized compensation cost of $237,000 which will be expensed within three years.

Note 14. Loss Per Common Share

The Company follows the provisions of FASB ASC Topic 260, “Earnings per Share” (“ASC Topic 260”). Basic earnings per share (“EPS”) excludes dilution and is computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. The Company has two classes of common stock currently outstanding. The classes are A and B, of which one share of Class B is convertible into 1.15 shares of Class A. 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. For the three months and six months ended June 30, 2010, 593,377 and 608,281 options to purchase shares of common stock, respectively, were anti-dilutive in the computation of diluted EPS, as exercise price exceeded average market price and as a result of the net loss for the three months and six months ended June 30, 2010. For the three months and six months ended June 30, 2009, 657,978 and 788,237 options to purchase shares of common stock, respectively, were anti-dilutive in the computation of diluted EPS, as exercise price exceeded average market price and as a result of the net loss for the three months and six months ended June 30, 2009. Additionally 30,407 warrants were also anti-dilutive for all periods presented below.

Basic and diluted EPS are calculated as follows:

	Three months ended June 30, 2010
	Loss			Average shares		Per share
(In thousands, except for per share data)	(numerator)			(denominator)		Amount
Basic and Diluted EPS
Loss available to common shareholders	$	(5,029	)		13,257	$	(0.38	)

	Three months ended June 30, 2009
	Income			Average shares		Per share
(In thousands, except for per share data)	(numerator)			(denominator)		Amount
Basic and Diluted EPS
Loss available to common shareholders	$	(12,538	)		13,257	$	(0.95	)

	Six months ended June 30, 2010
	Loss			Average shares		Per share
(In thousands, except for per share data)	(numerator)			(denominator)		Amount
Basic and Diluted EPS
Loss available to common shareholders	$	(6,592	)		13,257	$	(0.50	)

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	Six months ended June 30, 2009
	Loss			Average shares		Per share
(In thousands, except for per share data)	(numerator)			(denominator)		Amount
Basic and Diluted EPS
Loss available to common shareholders	$	(19,506	)		13,257	$	(1.47	)

See “Note 13 — Stock Compensation Plans” to the Consolidated Financial Statements for a discussion on the Company’s stock option and restricted stock plans.

Note 15. Comprehensive Income

FASB ASC Topic 220, “Comprehensive Income” (“ASC Topic 220”), requires the reporting of all changes in equity during the reporting period except investments from and distributions to shareholders. Net income (loss) is a component of comprehensive income (loss) with all other components referred to in the aggregate as other comprehensive income. Unrealized gains and losses on AFS securities is an example of an other comprehensive income component.

	Six months ended June 30, 2010
				Tax
	Before tax			expense			Net of tax
(In thousands)	amount			(benefit)			amount
Unrealized gains on investment securities:
Unrealized holding gains arising during period	$	5,490		$	1,819		$	3,671
Reduction in deferred tax valuation allowance related to preferred and common stock		—			(92	)		92
Non-credit loss portion of other-than-temporary impairments		1,494			523			971
Less adjustment for impaired investments		(341	)		(119	)		(222	)
Less reclassification adjustment for gains realized in net loss		588			209			379
Unrealized gains on investment securities		6,737			2,344			4,577
Unrecognized benefit obligation expense:
Less reclassification adjustment for amortization		(71	)		(25	)		(46	)
Other comprehensive income, net	$	6,808		$	2,369		$	4,623

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	Six months ended June 30, 2009
				Tax
	Before tax			expense			Net of tax
	amount			(benefit)			amount
Unrealized losses on investment securities:
Unrealized holding gains arising during period	$	18,011		$	5,979		$	12,032
Reduction in deferred tax valuation allowance related to preferred and common stock		—			2,076			(2,076	)
Non-credit loss portion of other-than-temporary impairments		(7,563	)		(2,646	)		(4,917	)
Less adjustment for impaired debt, preferred and common stock securities		(9,343	)		(3,270	)		(6,073	)
Less reclassification adjustment for losses realized in net loss		(288	)		(101	)		(187	)
Unrealized losses on investment securities		20,079			4,628			15,451
Unrecognized benefit obligation expense:
Less reclassification adjustment for amortization		(14	)		(5	)		(9	)
Other comprehensive income, net	$	20,093		$	4,633		$	15,460

Note 16. Fair Value of Financial Instruments

Under FASB ASC Topic 820 “Fair Value Measurements and Disclosures” (“ASC Topic 820”), fair values are based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When available, management uses quoted market prices to determine fair value. If quoted prices are not available, fair value is based upon valuation techniques such as matrix pricing or other models that use, where possible, current market-based or independently sourced market parameters, such as interest rates. If observable market-based inputs are not available, the Company uses unobservable inputs to determine appropriate valuation adjustments using discounted cash flow methodologies.

In April 2009, the FASB issued guidance under ASC Topic 820 for estimating fair value when the volume and level of activity for an asset or liability has significantly declined and for identifying circumstances when a transaction is not orderly. ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC Topic 820 are as follows:

Level 1:	Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2:	Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability. Includes debt securities with quoted prices that are traded less frequently then exchange-traded instruments. Valuation techniques include matrix pricing which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.
Level 3:	Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

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Items Measured on a Recurring Basis

The Company’s available for sale investment securities are recorded at fair value on a recurring basis.

Fair value for Level 1 securities are determined by obtaining quoted market prices on nationally recognized securities exchanges. Level 1 securities include obligations of U.S. government-sponsored agencies, preferred and common stocks, and four trust preferred securities which are actively traded.

Level 2 securities include debt securities with quoted prices, which are traded less frequently than exchange-traded instruments, whose value is determined using matrix pricing with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. The prices were obtained from third party vendors. This category generally includes mortgage-backed securities and CMOs issued by U.S. government and government-sponsored agencies, non-agency CMOs, and corporate bonds.

In 2009, the Company engaged third parties to assist in valuing Level 3 securities which include seven trust preferred securities and in prior periods one collateralized debt obligation (“CDO”). The fair value for the trust preferred securities were derived by using contractual cash flows and a market rate of return for each of these securities. Factors that affected the market rate of return included (1) any uncertainty about the amount and timing of the cash flows, (2) the credit risk, (3) liquidity of the instrument, and (4) observable yields from trading data and bid/ask indications. Credit risk spreads and liquidity premiums were analyzed to derive the appropriate discount rate. The CDO valuation was determined using a copula method, which is a type of market standard valuation modeling for structured credit derivative products that is dependent on the correlated default events of the obligors within the underlying collateral pool, corporate bond spreads, and the timing of the maturity of the CDO to arrive at indicative pricing. The analysis did not look at indicators of defaults but instead it analyzed what would happen to the principal if actual defaults occurred. The analysis used a 0% recovery rate. In addition, management used two independent third parties to validate the fair value received.

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at June 30, 2010 and December 31, 2009 are as follows:

Balances as of June 30, 2010	Fair Value Measurements Using
(In thousands)	Level 1		Level 2		Level 3		Fair Value
Assets
Investment securities available-for-sale
Mortgage-backed securities-residential	$	—	$	19,249	$	—	$	19,249
U.S. government agencies		1,127		—		—		1,127
Preferred stocks		2,335		—		—		2,335
Common stocks		507		—		—		507
Collateralized mortgage obligations:
Issued or guaranteed by U.S. government agencies		—		263,740		—		263,740
Non-agency		—		15,900		—		15,900
Corporate bonds		—		1,019		—		1,019
Trust preferred securities		3,458		—		23,491		26,949
Other securities		—		—		7,993		7,993
Total available for sale	$	7,427	$	299,908	$	31,484	$	338,819

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Balances as of December 31, 2009	Fair Value Measurements Using
(In thousands)	Level 1		Level 2		Level 3		Fair Value
Assets
Investment securities available-for-sale
Mortgage-backed securities-residential	$	—	$	21,601	$	—	$	21,601
U.S. government agencies		1,151		—		—		1,151
Preferred stocks		2,230		—		—		2,230
Common stocks		444		—		—		444
Collateralized mortgage obligations:
Issued or guaranteed by U.S. government agencies		—		318,501		—		318,501
Non-agency		—		21,198		—		21,198
Collateralized debt obligations		—		—		24,825		24,825
Corporate bonds		—		6,867		—		6,867
Trust preferred securities		11,895		—		22,240		34,135
Other securities		—		—		7,767		7,767
Total available for sale	$	15,720	$	368,167	$	54,832	$	438,719

The following table presents additional information about assets measured at fair value on a recurring basis and for which the Company has utilized Level 3 inputs to determine fair value:

	Investment Securities
(In thousands)	Available for Sale
Beginning balance December 31, 2009	$	54,832
Total gains/(losses) — (realized/unrealized):
Included in earnings		(63	)
Included in other comprehensive income		1,532
Purchases, issuances, and settlements		(24,817	)
Transfers in and/or out of Level 3		—
Ending balance June 30, 2010	$	31,484

Items Measured on a Nonrecurring Basis

Non-accrual loans are evaluated for impairment on an individual basis under FASB ASC Topic 310 “Receivables”. 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. Loans held for sale are carried at the lower of cost or fair value. Other real estate owned (“OREO”) is carried at the lower of cost or fair value. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

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For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at June 30, 2010 and December 31, 2009 are as follows:

Balances as of June 30, 2010	Fair Value Measurements Using
(In thousands)	Level 1		Level 2		Level 3		Fair Value
Assets
Impaired loans	$	—	$	—	$	10,664	$	10,664
Other real estate owned		—		—		12,393		12,393

Balances as of December 31, 2009	Fair Value Measurements Using
(In thousands)	Level 1		Level 2		Level 3		Fair Value
Assets
Impaired loans	$	—	$	—	$	35,712		$35,712
Other real estate owned		—		—		30,317		30,317
Loans and leases held for sale		—		—		2,254		2,254

The table below states the fair value of the Company’s financial instruments at June 30, 2010 and December 31, 2009. The methodologies for estimating the fair value of financial instruments that are measured on a recurring or nonrecurring basis are discussed above. The methodologies for other financial instruments are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

	At June 30, 2010				At December 31, 2009
	Carrying		Estimated		Carrying		Estimated
(In thousands)	amount		fair value		amount		fair value
Financial Assets:
Cash and cash equivalents	$	114,831	$	114,831	$	58,298	$	58,298
Investment securities available for sale		338,819		338,819		438,719		438,719
Federal Home Loan Bank stock		10,952		10,952		10,952		10,952
Loans, net		612,197		611,538		656,533		652,716
Accrued interest receivable		15,985		15,985		14,942		14,942
Financial Liabilities:
Demand deposits		62,302		62,302		63,168		63,168
NOW and money markets		205,081		205,081		214,141		214,141
Savings		15,779		15,779		15,336		15,336
Time deposits		508,665		501,585		589,110		578,824
Short-term borrowings		99,500		99,500		114,500		114,500
Long-term borrowings		136,339		128,979		139,675		131,093
Subordinated debt		25,774		16,341		25,774		12,617
Obligations from equity investments		727		727		3,652		3,652
Accrued interest payable		8,339		8,339		6,150		6,150

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Note 17. Real Estate Owned via Equity Investment

The Company, together with third party real estate development companies, had formed variable interest entities (VIEs) to construct various real estate development projects. These VIEs account for acquisition, development and construction costs of the real estate development projects in accordance with FASB ASC Topic 970, “Real Estate-General”, and account for capitalized interest on those projects in accordance with FASB ASC Topic 835, “Interest". Due to the present economic conditions, management has made a decision to curtail new equity investments.

In accordance with FASB ASC Topic 976, “Real Estate-Retail Land” (“ASC Topic 976”), the full accrual method is used by the VIEs to recognize profit on real estate sales. Profits on the sales of this real estate are recorded by the VIEs when cash in excess of the amount of the original investment is received, and calculation of same is made in accordance with the terms of the partnership agreement. Neither the VIEs nor the Company are obligated to perform significant activities after the sale to earn profits, and there is no continuing involvement with the property. The usual risks and rewards of ownership in the transaction have passed to the acquirer.

At June 30, 2010, the Company had one VIE which is consolidated into the Company’s financial statements. This VIE met the requirements for consolidation under FASB ASC Topic 810, “Consolidation” (“ASC Topic 810”) based on Royal Investments America being the primary financial beneficiary. In June 2009, the FASB issued ASU No. 2009-17 “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities” (“ASU 2009-17”) which updates ASC Topic 810. The purpose of ASU 2009-17 is to improve financial reporting by enterprises involved with variable interest entities. The FASB undertook this project to address (1) the effects on certain provisions in ASC Topic 860 as a result of the elimination of the qualifying special-purpose entity concept in ASC Topic 860, and (2) constituent concerns about the application of certain key provisions of ASC Topic 810, including those in which the accounting and disclosures do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. ASU 2009-17 became effective on January 1, 2010. Earlier application was prohibited. The adoption of ASU 2009-17 had no impact on the Company’s consolidated financial statements.

Consolidation of this VIE was determined based on the amount invested by Royal Investments America compared to the Company’s partners. In September 2005, the Company, together with a real estate development company, formed a limited partnership. Royal Investments America is a limited partner in the partnership (the “Partnership”). The Partnership was formed to convert an apartment complex into condominiums. The development company is the general partner of the Partnership. The Company invested 66% of the initial capital contribution, or $2.5 million, with the development company investing the remaining equity of $1.3 million. The Company is entitled to earn a preferred return on the $2.5 million capital contribution. In addition, the Company made two mezzanine loans totaling $9.2 million at market terms and interest rates. As shown on the consolidated balance sheet of the Company as of June 30, 2010 (which includes activity through May 31, 2010 for the VIE), the Partnership also had $727,000 outstanding of senior debt with another bank. The remainder of the senior debt that is shown on the consolidated balance sheet of the Company was paid off in June. Upon the repayment of the mezzanine loan interest and principal and the initial capital contributions and preferred return, the Company and the development company will both receive 50% of the remaining distribution, if any.

On August 13, 2009, the Company received a Senior Loan Default Notice from the Senior Lender as a result of the Partnership not making the required repayment by July 9, 2009. The Company signed a forbearance agreement and an intercreditor agreement between the Company and the Senior Lender on October 23, 2009 which extended the loan until December 9, 2010. On October 25, 2009, the Senior Lender filed for bankruptcy protection, which has not impacted the relationship between the Partnership and the Senior Lender. As part of the agreement to extend the loan for 14 months, the Senior Lender required the Partnership to provide additional funds to cover current and potential future cash requirements for capital improvements, operating expenses and marketing costs. Through June 30, 2010, Royal Bank has loaned $1.4 million to the Partnership and is obligated to fund up to $2.7 million if required for the remaining costs associated with capital improvements, operating and marketing expenses. This loan has begun to be repaid from the cash flows since the Senior Lender has now been paid in full. The outstanding balance along with any additional advances to the Partnership will be repaid in full prior to any other payments to partners.

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In accordance with ASC Topic 360, the Partnership assesses the recoverability of fixed assets based on estimated future operating cash flows. The Company had recognized $10.0 million in impairment charges related to this asset through December 31, 2008. No further impairment of this asset occurred in 2009 and 2010. The measurement and recognition of the impairment was based on estimated future discounted operating cash flows.

At June 30, 2010, the Partnership had total assets of $13.0 million of which $10.7 million is real estate as reflected on the consolidated balance sheet and total borrowings of $11.4 million, of which $10.7 million relates to the Company’s loans discussed above. None of the third party borrowings are guaranteed by the Company. The Company has made an investment of $13.1 million in this Partnership ($2.5 million capital contribution and $10.6 million of loans). The impairments mentioned above have contributed to an overall reduction in the Company’s investment. At June 30, 2010, the remaining amount of the investment in and receivables due from the Partnership totaled $10.1 million.

Note 18. Investment in Real Estate Joint Ventures

The Company has one investment in a real estate joint venture and accounts for it in accordance with ASC Topic 310 and FASB ASC Topic 976, “Real Estate-Retail Land” (“ASC Topic 976”) because the Company is not a party to an operating agreement and has no legal ownership of the entity that owns the real estate. The real estate joint venture is an investment in an Ohio marina project in which the Company has a subordinate debt position. During the second quarter of 2010, the Company fully impaired the investment and recorded a $2.5 million charge to earnings. The impairment was the result of a lower collateral value due to the significant reduction in the cash flows being generated from the property. Partially offsetting the $2.5 million impairment charge was a $968,000 recovery on another investment in a real estate in joint venture which had been written down in 2007.

Note 19. Segment Information

FASB ASC Topic 280, “Segment Reporting” (“ASC Topic 280”) established standards for public business enterprises to report information about operating segments in their annual financial statements and requires that those enterprises report selected information about operating segments in subsequent interim financial reports issued to shareholders. It also established standards for related disclosure about products and services, geographic areas, and major customers. Operating segments are components of an enterprise, which are evaluated regularly by the chief operating decision makers in deciding how to allocate and assess resources and performance. The Company’s chief operating decision makers are the Chief Executive Officer and the President. The Company has identified its reportable operating segments as “Community Banking”, “Tax Liens” and “Equity Investments”. The Company has one operating segment that does not meet the quantitative thresholds for requiring disclosure, but has different characteristics than the Community Banking, Tax Liens and Equity Investments segments, RBA Leasing (“Leasing” in the segment table below). The Tax Liens segment includes Crusader Servicing Corporation and Royal Tax Lien Services, LLC (collectively the “Tax Lien Operation”); and the Equity Investments segment is a wholly owned subsidiary of Royal Bank, Royal Investments America, that previously made equity investments in real estate and had extended mezzanine loans to real estate projects. At June 30, 2010 and 2009, one such equity investment in real estate meets the requirements for consolidation under ASC Topic 810 based on Royal Investments America being the primary financial beneficiary, and therefore the Company is reporting this investment on a consolidated basis as a Variable Interest Entity (“VIE”). This was determined based on the amount invested by Royal Investments America compared to its partners. The VIE is included below in the Equity Investment category. For additional discussion on the VIE, please refer to “Note 17- Real Estate Owned via Equity Investment” to the Consolidated Financial Statements.

Community banking

The Company’s Community Banking segment which includes Royal Bank and Royal Asian (“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 cash needed to make loans with retail deposits and other borrowings and to manage interest rate and credit risk. While the Banks make very few consumer loans, cash needed to make such loans would be funded similarly to commercial loans.

- 35 -

Tax lien operation

The Company’s Tax Lien Operation consists of purchasing delinquent tax certificates from local municipalities at auction 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

In September 2005, the Company, together with a real estate development company, formed a limited partnership. The Company is a limited partner in the partnership (“Partnership”). The Partnership was formed to convert an apartment complex into condominiums. The development company is the general partner of the Partnership. The Company invested 66% of the initial capital contribution, or $2.5 million, with the development company investing the remaining equity of $1.3 million. The Company is entitled to earn a preferred return on the $2.5 million capital contribution. In addition, the Company made two mezzanine loans totaling $9.2 million at market terms and interest rates. As of June 30, 2010, the Partnership also had $727,000 outstanding of senior debt with another bank. Through June 30, 2010, Royal Bank has loaned $1.4 million to the Partnership and is obligated to fund up to $2.7 million if required for the remaining costs associated with capital improvements, operating and marketing expenses. Upon the repayment of the mezzanine loan interest and principal and the initial capital contributions and preferred return, the Company and the development company will both receive 50% of the remaining distribution, if any. The Company is not obligated to pay the senior debt.

In accordance with the FASB ASC Topic 360, “Property, Plant and Equipment” (“ASC Topic 360”), the Partnership assesses for impairment by evaluating the recoverability of the condominiums based on estimated future operating cash flows. The Company had previously recognized $10.0 million in impairment ($1.5 million in 2008 and $8.5 million in 2007). There was no further impairment in 2010. The measurement and recognition of the impairment was based on estimated future discounted operating cash flows. The Company’s investment in this entity is further discussed in “Note 17 - Real Estate Owned via Equity Investment” to the Consolidated Financial Statements.

Lease segment

RBA Leasing is a small ticket leasing company. It originates small ticket leases through its internal sales staff and through independent brokers located throughout its business area. In general, RBA Leasing will portfolio individual small ticket leases in amounts of up to $250,000. Leases originated in amounts in excess of that are sold for a profit to other leasing companies.

The following tables present selected financial information for reportable business segments for the three and six month periods ended June 30, 2010 and 2009.

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	Three months ended June 30, 2010
	Community			Tax Lien		Equity
(In thousands)	Banking			Operation		Investment			Leasing			Consolidated
Total assets	$	1,032,722		$	104,956	$	6,120		$	39,680		$	1,183,478
Total deposits	$	791,827		$	—	$	—		$	—		$	791,827
Interest income	$	11,878		$	2,373	$	—		$	922		$	15,173
Interest expense		5,654			868		5			312			6,839
Net interest income (expense)	$	6,224		$	1,505	$	(5	)	$	610		$	8,334
Provision for loan and lease losses		3,718			10		—			562			4,290
Total other income		1,118			219		335			47			1,718
Impairment -real estate joint ventures		1,552			—		—			—			1,552
Total other expenses		7,498			598		95			298			8,489
Income tax (benefit) expense		(583	)		489		82			11			—
Net (loss) income	$	(4,844	)	$	626	$	153		$	(214	)	$	(4,279	)
Noncontrolling interest	$	(23	)	$	250	$	118		$	(86	)	$	259
Net (loss) income attributable to Royal Bancshares	$	(4,821	)	$	375	$	35		$	(128	)	$	(4,538	)

	Three months ended June 30, 2009
	Community			Tax Lien		Equity
(In thousands)	Banking			Operation		Investment			Leasing			Consolidated
Total assets	$	1,164,425		$	108,336	$	16,581		$	31,303		$	1,320,645
Total deposits	$	876,689		$	—	$	—		$	—		$	876,689
Interest income	$	13,449		$	2,410	$	—		$	711		$	16,570
Interest expense		8,376			934		63			308			9,681
Net interest income (expense)	$	5,073		$	1,476	$	(63	)	$	403		$	6,889
Provision for loan and lease losses		6,105			567		—			284			6,956
Total other (loss) income		(4,206	)		120		568			114			(3,404	)
Total other expenses		7,179			807		222			111			8,319
Income tax (benefit) expense		(256	)		115		99			42			—
Net (loss) income	$	(12,160	)	$	106	$	184		$	80		$	(11,790	)
Noncontrolling interest	$	85		$	42	$	142		$	(5	)	$	264
Net (loss) income attributable to Royal Bancshares	$	(12,245	)	$	64	$	42		$	85		$	(12,054	)

	Six months ended June 30, 2010
	Community			Tax Lien		Equity
(In thousands)	Banking			Operation		Investment			Leasing		Consolidated
Total assets	$	1,032,722		$	104,956	$	6,120		$	39,680	$	1,183,478
Total deposits	$	791,827		$	—	$	—		$	—	$	791,827
Interest income	$	23,810		$	5,137	$	—		$	1,849	$	30,796
Interest expense		12,025			1,783		19			615		14,442
Net interest income (expense)	$	11,785		$	3,353	$	(19	)	$	1,234	$	16,354
Provision for loan and lease losses		5,396			60		—			737		6,193
Total other income		2,189			289		428			117		3,023
Impairment -real estate joint ventures		1,552			—		—			—		1,552
Total other expenses		14,938			1,084		265			255		16,542
Income tax (benefit) expense		(1,335	)		1,054		51			231		—
Net (loss) income	$	(6,576	)	$	1,444	$	94		$	128	$	(4,910	)
Noncontrolling interest	$	—		$	578	$	72		$	51	$	701
Net (loss) income attributable to Royal Bancshares	$	(6,576	)	$	866	$	22		$	77	$	(5,611	)

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	Six months ended June 30, 2009
	Community			Tax Lien		Equity
(In thousands)	Banking			Operation		Investment			Leasing		Consolidated
Total assets	$	1,164,425		$	108,336	$	16,581		$	31,303	$	1,320,645
Total deposits	$	876,689		$	—	$	—		$	—	$	876,689
Interest income	$	26,644		$	4,914	$	—		$	1,366	$	32,924
Interest expense		16,399			1,862		103			602		18,966
Net interest income (expense)	$	10,245		$	3,052	$	(103	)	$	764	$	13,958
Provision for loan and lease losses		8,636			636		—			481		9,753
Total other income		(8,043	)		146		698			211		(6,988	)
Total other expenses		13,378			1,568		384			214		15,544
Income tax (benefit) expense		(554	)		383		74			98		—
Net (loss) income	$	(19,257	)	$	611	$	137		$	182	$	(18,327	)
Noncontrolling interest	$	122		$	245	$	105		$	8	$	480
Net (loss) income attributable to Royal Bancshares	$	(19,379	)	$	367	$	32		$	174	$	(18,807	)

Interest income earned by the Community Banking segment related to the Tax Lien Operation was approximately $868,000 and $934,000 for the three month periods ended June 30, 2010 and 2009, respectively and $1.8 million and $1.9 million for the six months ended June 30, 2010 and 2009, respectively.

Interest income earned by the Community Banking segment related to the Leasing Segment was approximately $312,000 and $308,000 for the three month periods ended June 30, 2010 and 2009, respectively and $615,000 and $602,000 for the six months ended June 30, 2010 and 2009, respectively.

Note 20. Federal Home Loan Bank Stock

As a member of the Federal Home Loan Bank of Pittsburgh (“FHLB”), the Company is required to purchase and hold stock in the FHLB to satisfy membership and borrowing requirements. The stock can only be sold to the FHLB or to another member institution, and all sales of FHLB stock must be at par. As a result of these restrictions, there is no active market for the FHLB stock. As of June 30, 2010 and December 31, 2009, FHLB stock totaled $11.0 million.

In December 2008, the FHLB voluntarily suspended dividend payments on its stock, as well as the repurchase of excess stock from members. The FHLB cited a significant reduction in the level of core earnings resulting from lower short-term interest rates, the increased cost of liquidity, and constrained access to the debt markets at attractive rates and maturities as the main reasons for the decision to suspend dividends and the repurchase of excess capital stock. The FHLB last paid a dividend in the third quarter of 2008.

FHLB stock is held as a long-term investment and its value is determined based on the ultimate recoverability of the par value. The Company evaluates impairment quarterly. The decision of whether impairment exists is a matter of judgment that reflects management’s view of the FHLB’s long-term performance, which includes factors such as the following: (1) its operating performance, (2) the severity and duration of declines in the fair value of its net assets related to its capital stock amount, (3) its liquidity position, and (4) the impact of legislative and regulatory changes on the FHLB. On July 29, 2010, the FHLB filed an 8-K to report their results for the quarter ended June 30, 2010. For the second quarter of 2010, the FHLB had a net loss of $68.2 million compared to net income of $32.1 million for the quarter ended June 30, 2009. The $100.3 million decline in quarterly net income was due to OTTI credit losses of $110.7 million on private-label mortgage-backed securities which increased $71.4 million from the second quarter of 2009. For the first six months of 2010 the net loss was $58.3 million compared to net income of $8.5 million for the comparable period in 2009 primarily due to the higher OTTI credit-related losses. At June 30, 2010, total regulatory capital was $4.4 billion. The FHLB was in compliance with its risk-based, total and leverage capital requirements at June 30, 2010. The FHLB has the capacity to issue additional debt if necessary to raise cash. If needed, the FHLB also has the ability to secure funding available to GSEs through the U.S. Treasury.

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Based on the capital adequacy and the liquidity position of the FHLB, management believes that the par value of its investment in FHLB stock will be recovered. Accordingly, there is no other-than-temporary impairment related to the carrying amount of the Company’s FHLB stock as of June 30, 2010. Further deterioration of the FHLB’s capital levels may require the Company to deem its restricted investment in FHLB stock to be other-than-temporarily impaired.

Note 21. Reclassifications

Certain items in the 2009 consolidated financial statements and accompanying notes have been reclassified to conform to the current year’s presentation format. There was no effect on net loss for the periods presented herein as a result of reclassification.

Note 22. Subsequent Events

In connection with a recent bank regulatory examination, the FDIC notified the Company verbally that based upon its interpretation of the Consolidated Reports of Condition and Income (the “Call Report”) instructions and under regulatory accounting principles that revenue from Royal Bank’s tax lien business should be recognized on a cash basis, not an accrual basis. The Company does not presently believe that the change in the manner of revenue recognition for Royal Bank under the FDIC’s interpretation of the Call Report instructions will affect the manner of revenue recognition for the Company on a consolidated basis under generally accepted accounting principles. However, a change in the manner of revenue recognition for the tax lien business for regulatory accounting purposes will affect Royal Bank’s capital ratios in future periods. Royal Bank has not received the Report of Examination from the FDIC as of the date of this filing.

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 and six month periods ended June 30, 2010 and 2009. 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, 2009, included in the Company’s Form 10-K for the year ended December 31, 2009.

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, the Company 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 the Company 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; the possibility that we will be unable to comply with the conditions imposed upon us in the regulatory orders issued by the FDIC, Pennsylvania Department of Banking in July 2009, and the agreement with the Federal Reserve Bank of Philadelphia dated March 10, 2010, which could result in the imposition of further restrictions on our operations; interest rate fluctuations; business conditions in the banking industry; the regulatory environment: the nature, extent, and timing of governmental actions and reforms, including the rules of participation for the Troubled Asset Relief Program voluntary Capital Purchase Plan under the Emergency Economic Stabilization Act of 2008, which may be changed unilaterally and retroactively by legislative or regulatory actions and the potential effects from the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act; rapidly changing technology and evolving banking industry

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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. These statements speak only as of the date of this report, even if subsequently made available by the Company on its website, or otherwise. 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 to 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 consolidated 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 consolidated financial statements and the accompanying notes. These estimates and assumptions are based on information available as of the date of the consolidated financial statements; therefore, actual results could differ from those estimates.

Note 1 to the Company’s Consolidated Financial Statements (included in Item 8 of the Form 10-K for the year ended December 31, 2009) lists significant accounting policies used in the development and presentation of the Company’s consolidated 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 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, “Consolidation” (“ASC Topic 810”). 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. As disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, we have identified other-than-temporary impairment on investments securities, accounting for allowance for loan and leases losses, and deferred tax assets as among the most critical accounting policies and estimates. These critical accounting policies and estimates 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.

Financial Highlights and Business Results

On June 29, 1995, pursuant to the plan of reorganization approved by the shareholders of Royal Bank America, formerly Royal Bank of Pennsylvania (“Royal Bank”), all of the outstanding shares of common stock of Royal Bank were acquired by Royal Bancshares and were exchanged on a one-for-one basis for common stock of Royal Bancshares. On July 17, 2006, Royal Asian Bank (“Royal Asian”) was chartered by the Commonwealth of Pennsylvania Department of Banking and commenced operation as a Pennsylvania state-chartered bank. Prior to obtaining a separate charter, the business of Royal Asian was operated as a division of Royal Bank. The principal activities of the Company is supervising Royal Bank and Royal Asian, collectively referred to as the Banks, which engage in a general banking business principally in Montgomery, Chester, Bucks, Philadelphia and Berks counties in Pennsylvania and in Northern and Southern New Jersey and Delaware. The Company also has a wholly owned non-bank subsidiary, Royal Investments of Delaware, Inc., which is engaged in investment activities.

At June 30, 2010, the Company had consolidated total assets of approximately $1.2 billion, total deposits of approximately $791.8 million and shareholders’ equity of approximately $104.0 million. The Company had net interest income of $8.3 million and $16.4 million, respectively, for the three and six month periods ended June 30, 2010, reflecting increases of $1.4 million, or 20.1%, and $2.4 million, or 17.2%, respectively, from the comparable periods of 2009. The year over year increase in net interest income was attributed primarily to lower funding costs as maturing brokered deposits and FHLB advances were redeemed with lower yielding cash and investment securities and the re-pricing of maturing retail certificates of deposit resulted in lower rates paid on deposits. In addition, the Company recorded a $905,000 non-recurring adjustment to net interest income related to the correction

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of previously reversed income on a participation loan. In November 2006 the Company placed a participation loan in which the Company was the lead bank into non-accrual status. Operationally the base note was correctly placed on non-accrual however the participation note was not placed on non-accrual. This error resulted in the participant’s share of the interest income being deducted causing understatements in accrued interest receivable and in interest income. The Company applied the guidance in accordance with the SEC’s Staff Accounting Bulletin (“SAB”) No. 99 “Materiality” (“SAB 99”) and section N “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” of “Topic 1, Financial Statements” of SAB No. 108 in determining whether or not the prior period misstatements were material. After applying the iron curtain and rollover methods and considering all relevant quantitative and qualitative factors, the Company concluded that the judgment of a reasonable person relying on prior period reports would not be influenced by the inclusion or correction of this misstatement within those prior periods and the current period. Therefore the misstatement was deemed immaterial in both the prior and current periods.

The Company recorded a net loss for the quarter ended June 30, 2010 of $4.5 million compared to a net loss of $12.1 million reported for the quarter ended June 30, 2009, while the net loss for the six months ended June 30, 2010 was $5.6 million compared to a net loss of $18.8 million for the comparable period of 2009. The year-over-year favorable change in the net loss for the current quarter was primarily associated with an increase in net interest income of $1.4 million due to lower funding costs and a one-time adjustment, a reduction in the allowance for loan losses of $2.7 million, and an improvement of $4.9 million in impairment losses on available for sale securities. These improvements were partially offset by an increase in other expenses of $1.7 million mainly related to an impairment of $2.5 million for real estate owned via joint ventures, which was the entire investment in an Ohio marina project.

The year over year improvement in the net loss for the six month period ended June 30, 2010 compared to the same period in 2009 was primarily attributed to an increase of $2.4 million in net interest income due to lower funding costs, a reduction of $9.0 in impairment losses on available for sale securities, and a $3.6 million decrease in the provision for loan and lease losses. The improvements year over year were partially offset by an increase in other expenses of $2.6 million mainly associated with impairment of $2.5 million for real estate owned via joint ventures as previously noted.

The chief sources of revenue for the Company are interest income from extending loans and interest income from investing in security instruments, mostly through its subsidiaries Royal Bank and Royal Asian. Both Royal Bank and Royal Asian principally generate commercial real estate loans secured by first mortgage liens. These types of loans make up 38.4% and 71.3% of the loan portfolios of Royal Bank and Royal Asian at June 30, 2010, respectively. Additionally, Royal Bank and Royal Asian offer construction loans, including construction loans for commercial real estate projects and for residential home development. At June 30, 2010, construction loans comprised 7.8% and 9.5%, respectively, of the Royal Bank and Royal Asian loan portfolios. Land development loans at June 30, 2010 comprised 10.9% and 0% of the loan portfolios of Royal Bank and Royal Asian, respectively. Construction loans and land development loans can have more risk associated with them, especially when a weakened economy, such as we are experiencing now, adversely impacts the commercial rental or home sales market. In the past, the Company and Royal Bank offered mezzanine loans, which are typically inherently more risky, higher rewarding, loans that were often secured by subordinate lien positions with loan to value ratios typically between 75% and 95% of collateral value. During the fourth quarter of 2007, management of the Company made a decision to curtail mezzanine lending due to the elevation of risk and at June 30, 2010, the Company no longer had any mezzanine loans outstanding within the loan portfolio. Net earnings of the Company are largely dependent on taking in deposits at competitive market rates, and then redeploying those deposited funds into loans and investments in securities at rates higher than those paid to the depositors to earn an interest rate spread. Please see the “Net Interest Margin” section in “Managements Discussion and Analysis of Financial Condition and Results of Operation” below for additional information on interest yield and cost.

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Consolidated Net Loss

The Company recorded a net loss of $4.5 million for the second quarter of 2010 compared to a net loss of $12.1 million for the comparable quarter of 2009. The improvement in the net loss year-over-year for the current quarter was primarily associated with an increase in net interest income of $1.4 million due to lower funding costs and the one-time adjustment to interest income of $905,000 mentioned previously, a reduction in the allowance for loan losses of $2.7 million, and an improvement of $4.9 million in impairment losses on available for sale securities. These improvements were partially offset by an increase in other expenses of $1.7 million mainly related to impairment of $2.5 million, which was equivalent to the entire investment, on real estate owned via joint ventures for a marina project in the state of Ohio due to a significant decline in the project’s value. The re-pricing of maturing retail deposits and the redemption of higher cost brokered deposits and FHLB advances with lower yielding cash and investment securities contributed to the lower funding costs and an improved margin. The lower loan loss provision for the second quarter resulted from lower loan balances associated with payoffs, pay downs, charge-offs, and the transfer of loans to OREO, as well as a lower level of specific reserves in the current quarter relative to the comparable quarter of 2009 for impairment analyses on non-performing loans in accordance with ASC Topic 310, “Receivables”. The reduction of investment impairment losses resulted from the restructuring of the investment portfolio during the past year. As a consequence of the continued weak housing market, the high unemployment rate and the weaker economy, the Company continued to experience a weakening in the performance of real estate related loans but did experience a significant improvement in impairment losses on investment securities. Impaired and non-accrual loans are reviewed in the “Credit Risk Management” section of this report while the impaired investment securities are discussed in the “Investment Securities” section under “Financial Condition”. Losses per share for basic and diluted were both $0.38 for the second quarter of 2010, as compared to basic and diluted losses per share of $0.95 for the same quarter of 2009.

For the six months ended June 30, 2010, the net loss amounted to $5.6 million compared to net loss of $18.8 million for the comparable period of 2009. This improvement was primarily attributable to a $2.4 million increase in net interest income mainly due to lower funding costs, a $3.6 million improvement in the provision for loan losses, and a $9.0 million reduction in investment impairment. These improvements were partially offset by an increase in other expenses of $2.6 million mainly related to an impairment of $2.5 million on real estate owned via joint ventures, which was equivalent to the entire investment for an Ohio marina project due to a significant decline in the project’s value. In addition, OREO impairment increased $1.2 million year over year for the first half of 2010 due to updated appraisals, which resulted in lower valuations on OREO properties. As previously noted, as a consequence of the continued weak housing market, high unemployment and the weaker economy, the Company continued to experience a weakening in the performance of real estate related loans. Impaired and non-accrual loans are reviewed in the “Credit Risk Management” section of this report while the impaired investment securities are discussed in the “Investment Securities” section under “Financial Condition”. Basic and diluted losses per share were both $0.50 for the first six months of 2010, while basic and diluted losses per share were both $1.47 for the first six months of 2009.

Interest Income

Total interest income for the second quarter of 2010 amounted to $15.2 million representing a decline of $1.4 million, or 8.4%, from the comparable quarter of 2009. Average interest earning assets of $1.1 billion in the second quarter of 2010 declined $104.4 million, or 8.6%, from $1.2 billion in the second quarter of 2009. The decrease in interest income was driven by the decline in earning assets, which was partially offset by a one-time adjustment of $905,000 in interest income as described in the “Financial Highlights and Business Results” section in “Managements Discussion and Analysis of Financial Condition and Results of Operation”. Average loan balances of $656.5 million in the second quarter of 2010 decreased $62.2 million, or 8.7%, year over year. The success of the small business lending efforts during the past few quarters and the growth of leases were more than offset by loan prepayments, loan pay downs, charge-offs, and transfers to OREO. In addition commercial real estate and construction lending have been extremely limited during the past 15 months. Average investment securities decreased $37.6 million, or 8.6%, to $399.7 million at the end of second quarter of 2010 due to the sale of investment securities for the purpose of redeeming the maturing brokered CDs as required under the Orders. Average cash equivalents for the three months ended June 30, 2010, amounted to $54.1 million and remained at a higher than normal level in order to maintain sufficient liquidity for future maturing liabilities.

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For the second quarter of 2010, the yield on average interest earning assets of 5.48% increased 1 basis point from the level recorded during the comparable quarter of 2009. The slight increase was comprised of year over year declines of 12 and 105 basis points for cash equivalents (0.28% versus 0.40%) and investment securities (3.82% versus 4.87%), respectively, which were entirely offset by a 67 basis point increase in loan yields (6.92% versus 6.25%). The yield on loans benefitted from a favorable one-time adjustment previously noted. Without the one-time adjustment the yield on loans would have been 6.37%. Lower market interest rates, the sale and maturity of higher yielding corporate bonds and the replacement of lower yielding government agency securities has significantly impacted the yield on investment securities during the past year. In addition the yield on average loans continues to be negatively impacted by the level of non-accrual loans during the past year. During the second quarter of 2010, interest lost on non-accrual loans was $1.6 million.

For the six months ended June 30, 2010, total interest income amounted to $30.8 million resulting in a decline of $2.1 million, or 6.5%. Average interest earning assets were $1.1 billion for the first six months of 2010 compared to $1.2 billion for the comparable 2009 period resulting in a decline of $43.1 million, or 3.6%. As with the second quarter results, the decrease was driven by a decline in earning assets, which was again partially offset by the one-time interest income adjustment previously noted. For the six month results, a 16 basis point decline in the yield on interest earning assets, primarily due to the decline in the investment portfolio also contributed to the overall reduction. Average loan balances of $667.0 million in the first half of 2010 decreased $52.2 million, or 7.3%, year over year. The decline was again attributable to loan prepayments, loan pay downs, charge-offs and transfers to OREO, which more than offset growth in small business lending and leases. Average investment securities of $418.9 million decreased $6.4 million, or 1.5%, from the first six months of 2009 due to sales of securities for the redemption of maturing brokered CDs. Average cash equivalents for the six months ended June 30, 2010 of $53.9 million increased $15.5 million, or 40.4%, in order to increase liquidity in anticipation of future maturing liabilities in the second half of 2010.

The yield on average interest earning assets for the six months ended June 30, 2010 of 5.45% declined by 16 basis points from 5.61% for the comparable period of 2009. The 16 basis point reduction was comprised of year over year declines of 18 and 90 basis points for cash equivalents (0.27% versus 0.45%) and investment securities (3.98% versus 4.88%), respectively, which were partially offset by a 48 basis point increase on the yield on loans (6.79% versus 6.32%). Again the one-time adjustment for interest income on loans of $905,000 contributed to the increase. Without the one-time adjustment the yield on loans would have been 6.53%. Lower yields on earning assets, primarily investment securities, reflects the lower market interest rates, the sale and maturity of higher yielding corporate bonds and the replacement with lower yielding government agency investment securities. In addition the yield on average loans continues to be negatively impacted by the level of non-accrual loans. During the first six months of 2010, interest lost on non-accrual loans was $3.1 million. Excluding the one-time adjustment the yield on average earning assets would have been 5.15% and 5.30% for the three and six months ended June 30, 2010, respectively.

Interest Expense

Interest expense decreased $2.8 million, or 29.0%, to $6.8 million for the quarter ended June 30, 2010 from the comparable quarter of 2009. The improvement in interest expense resulted from average interest bearing liabilities declining $90.8 million, or 8.3%, to $1.0 billion for the second quarter of 2010 versus the comparable period of 2009. Moreover, the decline in interest rates paid for Now and money market accounts, time deposits and borrowings, mainly FHLB advances, also significantly contributed to the lower level of interest expense year over year. As a result of the decline in market interest rates during the past two years maturing retail time deposits have re-priced at lower rates and Now and money market rates have been lowered to reflect current competitive market rates while brokered deposits and FHLB advances with rates generally much higher than current market have been redeemed. Average balances for interest bearing deposits of $741.3 million for the second quarter of 2010 have decreased $55.0 million, or 6.9%, from the level of the comparable quarter of 2009. The decline was primarily related to the redemption of $82.7 million in maturing brokered CDs during the past four quarters as required under the Orders. Average balances for borrowings, mostly FHLB advances, amounted to $262.7 million for the second quarter of 2010, reflecting a decline of $35.8 million, or 12.0%, from the comparable period of 2009. Management has reduced the reliance on FHLB advances due to the suspension of the FHLB dividend at year end 2008 and the current requirement of 105% collateral delivery status for FHLB advances.

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The yield on average interest bearing liabilities was 2.73% for the second quarter of 2010 down 79 basis points from 3.52% for the second quarter of 2009. The average interest rate paid on average interest bearing deposits for the second quarter of 2010 was 2.42% resulting in a decline of 92 basis points from the level of 3.34% during the comparable quarter of 2009. The rates paid on time deposits and Now and money market accounts declined 84 and 85 basis points, respectively, year over year. The rate paid on average borrowings for the second quarter of 2010 was 3.61%, which resulted in a decline of 40 basis points from the rate paid in the second quarter of 2009.

For the six months ended June 30, 2010, interest expense of $14.4 million decreased $4.4 million, or 23.5%, from the comparable period in 2009. The decline in interest expense for the first half of 2010 was due to a $26.1 million, or 2.5%, decline in average interest bearing liabilities relative to the comparable six month period of 2009 and a 77 basis point decline in the rates paid on interest bearing liabilities year over year. Average interest bearing deposits for the first half of 2010 increased $2.4 million, or 0.3%, year over year. This was mainly comprised of time deposits decreasing $15.5 million, or 2.8%, and average NOW and money markets increasing $17.0 million, or 8.8%, year over year. Consistent with the current quarter’s results, the re-pricing of retail time deposits and redemption of brokered deposits resulted in significant reductions on interest rates paid on deposits year over year. As a result time deposits with an average rate paid of 3.12% declined 85 basis points while the average rate paid on Now and money market rates declined 94 basis points relative to the comparable six months of 2009. The average rate paid on borrowings, primarily comprised of FHLB advances, amounted to 3.68% for the first six months of 2010 as compared to 4.03% (35 basis point decline) for the similar period of 2009.

Net Interest Margin

During late 2008 and most of 2009 the Company experienced a significant drop in the yields on assets, loans in particular, without a corresponding decline in rates paid on interest bearing liabilities. During the fourth quarter of 2009 and the first two quarters of 2010 a significant decline in interest rates paid on interest bearing liabilities has contributed to an improvement in the net interest margin. The net interest margin for the second quarter of 2010 of 3.01% increased 71 basis points from the comparable quarter of 2009. The primary reason for the improvement in the net interest margin from 2009 to 2010 was the re-pricing of matured retail time deposits mainly during the past nine months, the redemption of mostly higher cost brokered deposits and FHLB advances with lower yielding cash and investment securities and the lowered rates on other selected retail accounts. The yield on interest earning assets of 5.48% increased 1 basis point year over year as the non-recurring adjustment of $905,000 in the current quarter was primarily responsible for a 67 basis point improvement in the loan yield year over year, which offset the 105 basis point decline in investment securities. The significant decline in the investment yields in the current quarter relative to the prior period of 2009 was caused by sales of higher yielding, corporate bonds during the past year coupled with the replacement of lower yielding government agency investment securities for principal prepayments on higher yielding cash flowing government agency investments.

The net interest margin of 2.90% for the six month period ended June 30, 2010, improved 50 basis points from 2.40% in the comparable period of 2009. The factors improving the net interest margin for the six month period were similar to those that affected the net interest margin during the second quarter. Interest rates paid on total interest bearing liabilities for the six month period ended June 30, 2010 declined 77 basis points to 2.81% from the prior year’s comparable period. This was comprised of a decline of 94 basis points for Now and money market accounts, a decline of 85 basis points for time deposits and a decline of 35 basis points for borrowings. Consistent with the current quarter’s improvement, lower pricing of select retail accounts, re-pricing of retail deposits and the redemption of brokered deposits and FHLB advances accounted for the favorable change. The yield on loans increased 47 basis points to 6.79% for the six month period in 2010 from 6.32% for the same period in 2009, the yield on investment securities declined 90 basis points to 3.98% for the six month period in 2010 from 4.88% for the same period in 2009, and the yield in cash and cash equivalents declined 18 basis points. Excluding the one-time adjustment the net interest margin would have been 2.69% and 2.75% for the three and six months ended June 30, 2010, respectively.

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 real estate owned via equity investment. 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-

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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, 2010							June 30, 2009
	Average							Average
(In thousands, except percentages)	Balance		Interest		Yield			Balance		Interest		Yield
Cash equivalents	$	54,101	$	38		0.28	%	$	58,628	$	58		0.40	%
Investments securities		399,697		3,804		3.82	%		437,290		5,308		4.87	%
Loans		656,472		11,331		6.92	%		718,707		11,204		6.25	%
Total interest earning assets		1,110,270		15,173		5.48	%		1,214,625		16,570		5.47	%
Non-earning assets		94,209							72,634
Total average assets	$	1,204,479						$	1,287,259
Interest-bearing deposits
NOW and money markets	$	208,043		531		1.02	%	$	191,263		892		1.87	%
Savings		15,865		23		0.58	%		14,491		20		0.55	%
Time deposits		517,407		3,918		3.04	%		590,587		5,720		3.88	%
Total interest bearing deposits		741,315		4,472		2.42	%		796,341		6,632		3.34	%
Borrowings		262,710		2,362		3.61	%		298,519		2,986		4.01	%
Total interest bearing liabilities		1,004,025		6,834		2.73	%		1,094,860		9,618		3.52	%
Non-interest bearing deposits		61,059							60,908
Other liabilities		33,790							20,919
Shareholders’ equity		105,605							110,572
Total average liabilities and equity	$	1,204,479						$	1,287,259
Net interest margin			$	8,339		3.01	%			$	6,952		2.30	%

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	For the six months ended							For the six months ended
	June 30, 2010							June 30, 2009
	Average							Average
(In thousands, except percentages)	Balance		Interest		Yield			Balance		Interest		Yield
Cash equivalents	$	53,900	$	73		0.27	%	$	38,392	$	86		0.45	%
Investments securities		418,935		8,273		3.98	%		425,328		10,289		4.88	%
Loans		667,007		22,450		6.79	%		719,237		22,549		6.32	%
Total interest earning assets		1,139,842		30,796		5.45	%		1,182,957		32,924		5.61	%
Non-earning assets		92,225							61,848
Total average assets	$	1,232,067						$	1,244,805
Interest-bearing deposits
NOW and money markets	$	210,517		1,093		1.05	%	$	193,498		1,909		1.99	%
Savings		15,639		45		0.58	%		14,767		41		0.56	%
Time deposits		539,859		8,341		3.12	%		555,314		10,934		3.97	%
Total interest bearing deposits		766,015		9,479		2.50	%		763,579		12,884		3.40	%
Borrowings		270,832		4,944		3.68	%		299,318		5,979		4.03	%
Total interest bearing liabilities		1,036,847		14,423		2.81	%		1,062,897		18,863		3.58	%
Non-interest bearing deposits		62,234							57,326
Other liabilities		27,363							20,566
Shareholders’ equity		105,623							104,016
Total average liabilities and equity	$	1,232,067						$	1,244,805
Net interest margin			$	16,373		2.90	%			$	14,061		2.40	%

Rate Volume Analysis

The following tables 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 real estate owned via equity investment, for the three and six month periods ended June 30, 2010, as compared to the respective period in 2009, into amounts attributable to both rates and volume variances.

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	For the three months ended									For the six months ended
				June 30,									June 30,
				2010 vs. 2009									2010 vs. 2009
	Increase (decrease)									Increase (decrease)
(In thousands)	Volume			Rate			Total			Volume			Rate			Total
Interest income
Interest-bearing deposits	$	(3	)	$	(17	)	$	(20	)	$	20		$	(33	)	$	(13	)
Federal funds sold		—			—			—			—			—			—
Total short term earning assets	$	(3	)	$	(17	)	$	(20	)	$	20		$	(33	)	$	(13	)
Investments securities
Held to maturity		—			—			—			—			—			—
Available for sale		(467	)		(1,037	)		(1,504	)		(130	)		(1,886	)		(2,016	)
Total investments	$	(467	)	$	(1,037	)	$	(1,504	)	$	(130	)	$	(1,886	)	$	(2,016	)
Loans
Commercial demand loans	$	(868	)	$	1,255		$	387		$	(1,604	)	$	1,287		$	(317	)
Commercial mortgages		(40	)		(235	)		(275	)		31			(477	)		(446	)
Residential and home equity		(26	)		(26	)		(52	)		(49	)		(50	)		(99	)
Leases receivables		216			(28	)		188			510			(106	)		404
Tax certificates		159			(166	)		(7	)		423			(132	)		291
Other loans		3			(2	)		1			3			(4	)		(1	)
Loan fees		(115	)		—			(115	)		69			—			69
Total loans	$	(671	)	$	798		$	127		$	(617	)	$	518		$	(99	)
Total increase (decrease) in interest income	$	(1,141	)	$	(256	)	$	(1,397	)	$	(727	)	$	(1,401	)	$	(2,128	)
Interest expense
Deposits
NOW and money market	$	72		$	(433	)	$	(361	)	$	155		$	(971	)	$	(816	)
Savings		2			—			2			3			1			4
Time deposits		(652	)		(1,149	)		(1,801	)		(247	)		(2,346	)		(2,593	)
Total deposits	$	(578	)	$	(1,582	)	$	(2,160	)	$	(89	)	$	(3,316	)	$	(3,405	)
Trust preferred		(339	)		(150	)		(489	)		(339	)		(309	)		(648	)
Borrowings		—			(135	)		(135	)		(203	)		(184	)		(387	)
Total increase (decrease) in interest expense	$	(917	)	$	(1,867	)	$	(2,784	)	$	(631	)	$	(3,809	)	$	(4,440	)
Total decrease in net interest income	$	(224	)	$	1,611		$	1,387		$	(96	)	$	2,408		$	2,312

Credit Risk Management

The Company’s loan and lease portfolio (the “credit portfolio”) is subject to varying degrees of credit risk. The Company maintains an allowance for loan and lease losses (the “allowance”) to absorb possible losses in the loan and lease portfolio. The allowance is based on the review and evaluation of the loan and lease portfolio, along with ongoing, quarterly assessments of the probable losses inherent in that portfolio. The allowance represents an estimation made pursuant to FASB ASC Topic 450, “Contingencies” (“ASC Topic 450”) or FASB ASC Topic 310, “Receivables” (“ASC Topic 310”). The adequacy of the allowance is determined through evaluation of the credit portfolio, and involves consideration of a number of factors, as outlined below, to establish a prudent level. Determination of the allowance is inherently subjective and requires significant estimates, including estimated losses on pools of homogeneous loans and leases based on historical loss experience and consideration of current economic trends, which may be susceptible to significant change. Loans and leases deemed uncollectible are charged against the allowance, while recoveries are credited to the allowance. Management adjusts the level of the allowance through the provision for loan and lease losses, which is recorded as a current period expense. The Company’s systematic methodology for assessing the appropriateness of the allowance includes: (1) general reserves reflecting historical loss rates by loan type, (2) specific reserves for risk-rated credits based on probable

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losses on an individual or portfolio basis and (3) qualitative reserves based upon current economic conditions and other risk factors.

The general allowance is based upon historical loss rates using a three-year rolling average of the historical loss experienced. The qualitative factors used to adjust the historical loss experience address various risk characteristics of the Company’s loan and lease portfolio include evaluating: (1) trends in delinquencies and other non-performing loans, (2) changes in the risk profile related to large loans in the portfolio, (3) changes in the growth trends of categories of loans comprising the loan and lease portfolio, (4) concentrations of loans and leases to specific industry segments, and (5) changes in economic conditions on both a local and national level (6) quality of loan review and board oversight, (7) changes in lending policies and procedures and (8) changes in lending staff.

The specific reserves are determined utilizing standards required under ASC Topic 310. Non-accrual loans are evaluated for impairment on an individual basis considering current collateral values (current appraisals or rent rolls for income producing properties), all known relevant factors that may affect loan collectability, and risks inherent in different kinds of lending (such as source of repayment, quality of borrower and concentration of credit quality). Once a loan is determined to be impaired it will be deducted from the portfolio and the net remaining balance will be used in the general and qualitative analysis.

A loan is considered impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement. Analysis resulting in specific allowances, including those on loans identified for evaluation of impairment, includes consideration of the borrower’s overall financial condition, resources and payment record, support available from financial guarantors and the sufficiency of collateral. For such loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan are lower than the carrying value of that loan. These factors are combined to estimate the probability and severity of inherent losses. Then a specific allowance is established based on the Company’s calculation of the potential loss in individual loans. Additional allowances may also be established in special circumstances involving a particular group of credits or portfolio when management becomes aware that losses incurred may exceed those determined by application of the risk factors.

The amount of the allowance is reviewed and approved by the Chief Operating Officer (“COO”), Chief Financial Officer (“CFO”) and Chief Accounting Officer (“CAO”) on at least a quarterly basis. The provision for loan and lease losses was $4.3 million and $6.2 million for the three and six months ended June 30, 2010, respectively, compared to $7.0 million and $9.8 million for the comparable periods in 2009. The deteriorating commercial real estate market coupled with the weak residential real estate market has negatively impacted construction loans throughout the banking industry. This weak sales market has affected land development, construction and real estate loans of the Company. The Company has considered these economic conditions in its methodologies used in setting the allowance for loan and lease losses.

The allowance for loan and lease losses declined $7.5 million from $30.3 million at December 31, 2009 to $22.8 million at June 30, 2010. The decrease was primarily attributable to $14.5 million in charge-offs of impaired loans recorded in the first two quarters of 2010 of which $10.2 million had previously been included in the specific reserves. The allowance for loan and lease losses was 3.58% of total loans and leases at June 30, 2010 and 4.42% at December 31, 2009.

Management believes that the allowance for loan and lease loss is adequate at June 30, 2010. However, its determination requires significant judgment, and estimates of probable losses inherent in the credit portfolio can vary significantly from the amounts actually observed. While management uses available information to recognize probable losses, future changes to the allowance may be necessary based on changes in the credits comprising the portfolio and changes in the financial condition of borrowers, such as may result from changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the credit portfolio and the allowance. Such review may result in additional provisions based on their judgment of information available at the time of each examination. During 2010, there were changes in estimation methods or assumptions that affected the allowance methodology. These changes included changes to the period used for the historical loss calculation; increasing the qualitative risk factors as a result of deteriorating economic conditions on both a local and national level and the risk factor associated with classified assets.

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Changes in the allowance for loan and lease losses were as follows:

	For the three			For the six
	months ended			months ended			For the year ended
(In thousands)	June 30, 2010			June 30, 2010			December 31, 2009
Balance at beginning period	$	28,661		$	30,331		$	28,908
Charge-offs
Commercial and industrial		(2,152	)		(4,183	)		(258	)
Construction and land development		(5,604	)		(5,659	)		(6,231	)
Construction and land development — mezzanine		—			—			(2,756	)
Real Estate — residential		—			—			(1,361	)
Real Estate — residential — mezzanine		(1,018	)		(2,480	)		—
Real Estate — non-residential		(1,156	)		(1,156	)		(7,404	)
Real estate — non-residential real estate — mezzanine		—			—			(1,132	)
Real Estate — multifamily		(457	)		(457	)		—
Leases		(427	)		(529	)		(676	)
Tax certificates		(9	)		(10	)		—
Total charge-offs		(10,823	)		(14,474	)		(19,818	)
Recoveries
Commercial and industrial		68			68			15
Construction and land development		105			105			—
Real Estate — residential		228			245			190
Real Estate — non-residential		196			207			431
Leases		1			51			—
Other		37			37			—
Total recoveries		635			713			636
Net charge offs		(10,188	)		(13,761	)		(19,182	)
Provision for loan and lease losses		4,290			6,193			20,605
Balance at the end of period	$	22,763		$	22,763		$	30,331

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An analysis of the allowance for loan and lease losses by loan type is set forth below:

	June 30, 2010					December 31, 2009
			Percent of					Percent of
			outstanding					outstanding
			loans in each					loans in each
	Allowance		category to			Allowance		category to
(In thousands, except percentages)	amount		total loans			amount		total loans
Commercial and industrial	$	3,787		14.2	%	$	6,542		15.1	%
Construction		2,238		7.9	%		4,713		7.6	%
Land Development		3,659		9.8	%		3,182		9.7	%
Real Estate — residential		835		5.4	%		2,762		7.1	%
Real Estate — residential — mezzanine		—		0.0	%		1,000		0.4	%
Real Estate — non-residential		9,104		41.7	%		9,824		40.3	%
Real Estate — multi-family		752		2.5	%		215		3.2	%
Tax certificates		344		11.7	%		290		10.6	%
Lease financing		2,016		6.5	%		1,757		5.7	%
Other		20		0.2	%		25		0.3	%
Unallocated		8		—			21		—
Total	$	22,763		100.0	%	$	30,331		100.0	%

The Company’s nonperforming assets are set forth below:

	June 30,			December 31,
(Amounts in thousands)	2010			2009
Non-accrual and impaired loans (1)	$	74,437		$	73,679
Other real estate owned		30,795			30,317
Total nonperforming assets	$	105,232		$	103,996
Nonperforming assets to total assets		8.89	%		8.04	%
Nonperforming loans to total loans		11.72	%		10.73	%
Allowance for loan and lease loss to non-accrual loans		30.58	%		41.17	%
Total Loans	$	634,960		$	686,864
Total Assets	$	1,183,478		$	1,292,726
Allowance for loan and lease losses (“ALLL”)	$	22,763		$	30,331
ALLL / Loans & Leases		3.58	%		4.42	%

⁽¹⁾ Generally, a loan is placed on non-accruing status when it has been delinquent for a period of 90 days or more.

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The composition of non-accrual loans is as follows:

	June 30, 2010
			Specific
(In thousands)	Loan balance		reserves
Construction	$	25,474	$	731
Land development		17,183		1,012
Real Estate-non-residential		17,906		1,249
Commercial & industrial		6,683		—
Residential real estate		4,541		73
Leasing		599		109
Tax certificates		2,051		—
Total	$	74,437	$	3,174

Non-accrual loan activity for the first and second quarters of 2010 is set forth below:

			1st Quarter Activity
	Balance at				Payments and
	December 31,				other						Transfer to		Balance at
(In thousands)	2009		Additions		decreases			Charge-offs			OREO		March 31, 2010
Construction	$	18,316	$	2,130	$	(1,543	)	$	(55	)	$	—	$	18,848
Land development		5,908		7,480		(2,857	)		—			—		10,531
Real Estate-non-residential		19,584		3		(420	)		—			—		19,167
Commercial & industrial		11,779		236		(637	)		(2,031	)		—		9,347
Residential real estate		12,445		1,190		(427	)		—			—		13,208
Residential real estate — mezzanine		2,480		—		—			(1,463	)		—		1,017
Multi-family		—		8,311		—			—			—		8,311
Leasing		627		466		—			(179	)		—		914
Tax certificates		2,540		—		(221	)		—			—		2,319
Total	$	73,679	$	19,816	$	(6,105	)	$	(3,728	)	$	—	$	83,662

			2nd Quarter Activity
					Payments and
	Balance at March				other									Transfer to			Balance at
(In thousands)	31, 2010		Additions		decreases			Reclassed			Charge-offs			OREO			June 30, 2010
Construction	$	18,848	$	137	$	(1,932	)	$	12,540		$	(4,119	)	$	—		$	25,474
Land development		10,531		7,910		(73	)		300			(1,485	)		—			17,183
Real Estate-non-residential		19,167		5,192		(1,250	)		(4,000	)		(1,156	)		(47	)		17,906
Commercial & industrial		9,347		96		(109	)		—			(2,152	)		(499	)		6,683
Residential real estate		13,208		187		(14	)		(8,840	)		—			—			4,541
Residential real estate — mezzanine		1,017		—		—			—			(1,017	)		—			—
Multi-family		8,311		21		—			—			(457	)		(7,875	)		—
Leasing		914		112		—			—			(427	)		—			599
Tax certificates		2,319		10		(268	)		—			(10	)		—			2,051
Total	$	83,662	$	13,665	$	(3,646	)	$	—		$	(10,823	)	$	(8,421	)	$	74,437

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The following is a detailed list of the significant additions to non-accrual loans during the first quarter of 2010:

• A project for a student housing rental apartment complex comprised of twelve 2-story townhouse type buildings located in Shippensburg, Pennsylvania became non-accrual during the first quarter of 2010. The project consists of 182 units. Approximately 65% of the apartments are currently leased. The current principal balance is $16.1 million of which 48% has been sold to one local bank. Royal Bank is the lead bank. During the second quarter of 2010, Royal Bank received a deed in lieu of foreclosure and, after recording a charge-off of $456,000, transferred the collateral to other real estate owned.

• A $12.5 million acquisition and development loan to a regional real estate developer to fund environmental remediation, site improvement and soft costs activities on parcels in King of Prussia, Pennsylvania became non-accrual during the first quarter of 2010. The project has final land development approvals for two office buildings with an approved floor area ratio of 300,790 square feet. The current commitment and outstanding loan balance is $8.8 million of which Royal Bank holds $4.9 million and the remaining $3.9 million has been sold to a participating bank. In March 2010, the Company entered into a forbearance agreement with the borrower which will enable the borrower to maintain control of this asset for up to two years if conditions are met including the payment of interest from the borrower’s equity funds six months in advance and if the borrower continues to manage the site and fund the project’s operating expenses. The plan is to maintain the project until the market conditions and capital markets normalize so that vertical construction financing once again becomes available to repay the loan. A current appraisal did not indicate impairment in accordance with ASC Topic 310.

• Three loans totaling $2.6 million to fund acquisition and soft development costs to develop a 100,000 square foot retail project located in Richland, Pennsylvania became non-accrual during the first quarter of 2010. The loan has matured by its terms. There is a signed land lease for a 10,000 square foot stand alone retail store to a national drug store chain which can be developed separate from the remaining 90,000 square foot planned for an in-line shopping center. The Company is currently negotiating a restructure of these loans. A current appraisal indicated impairment in accordance with ASC Topic 310 and the Company established a specific reserve of $416,000 for this lending relationship. During the second quarter the Company recorded a $150,000 charge-off on the loans in anticipation of a third quarter paydown.

• A $1.3 million construction project in Maryland, in which the Company is a participant, became non-accrual during the first quarter of 2010. The project consists of 120.7 acres of which 86.5 acres are zoned for agricultural use. The borrower was unable to obtain county approval to have the land use reclassed to general commercial. The borrower is pursuing annexation through the town but the process will take time. As a result the current appraisal indicated impairment in accordance with ASC Topic 310 and the Company established a specific reserve of $728,000 for this loan.

The following is a detailed list of the significant additions to non-accrual loans during the second quarter of 2010:

• A $5.9 million loan which was originally used for purchase money acquisition and to fund ongoing predevelopment activity associated with a residential project in Philadelphia, Pennsylvania became non-accrual during the second quarter of 2010. The project consists of interconnected buildings containing 73,050 square feet of gross area. After acquisition, the Borrowers’ original plan was for the development of a 157,000 SF, 97 unit condo project. The Borrowers pursued and received approvals as well as made substantial progress in the engineering and design. This was to be ground-up construction requiring some demolition of the existing structure. Last year the sponsors made the decision to reposition the project to apartments given the downturn in the for-sale residential market. Ultimately, the economic climate and the deterioration of the sponsors’ financial condition led to a default in payment which has resulted in a foreclosure action being commenced. During the second quarter the Company recorded a $979,000 charge-off against the principal balance of the loan. The current outstanding loan balance is $4.9 million and the Company established a specific reserve of $764,000 in accordance with ASC Topic 310.

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• A $4.5 million non-residential real estate loan became non-accrual during the second quarter of 2010. The project consists of an 81 room hotel located in the Pocono Mountains, Pennsylvania. Amenities include free continental breakfast, free wireless high-speed internet, an indoor heated pool, exercise room, and banquet facilities. In 2009, the project went through a 49 room renovation as per its franchise agreement. As a result of deteriorating economic conditions, the loan was placed in default as a result of non-payment. The Company is in the process of finalizing a forbearance agreement. A current appraisal did not indicate impairment in accordance with ASC Topic 310.

• A $1.6 million construction loan in Maryland which is collateralized by two commercial building lots became non-accrual during the second quarter of 2010. Both lots are approved and site improvements have been completed. The loan has matured and the borrower has failed to put forth a realistic forbearance proposal. The Company has commenced foreclosure and confessed judgment against the guarantor. The Company recorded a $76,000 charge-off against the loan during the second quarter of 2010.

Despite payments and improvements of $9.8 million and charge-offs of $14.6 million, non-accrual and impaired loans increased $700,000 from $73.7 million at December 31, 2009 to $74.4 million at June 30, 2010 due to additions of $33.5 million. The Company does not accrue interest income on impaired loans. If interest had been accrued, such income would have been approximately $1.6 million and $3.1 million for the three and six months ended June 30, 2010. Excess proceeds received over the principal amounts due on impaired loans are recognized as income on a cash basis. The Company has no troubled debt restructured loans or loans past due 90 days or more on which it has continued to accrue interest during the quarter.

The following is a summary of information pertaining to impaired loans:

	June 30,		December 31,
(In thousands)	2010		2009
Impaired loans with a valuation allowance	$	13,835	$	46,670
Impaired loans without a valuation allowance		60,602		27,009
Total impaired loans	$	74,437	$	73,679
Valuation allowance related to impaired loans	$	3,171	$	10,958

	June 30,
(In thousands)	2010		2009
Average investment in impaired loans	$	74,058	$	80,494
Interest income recognized on impaired loans	$	202	$	960
Interest income recognized on a cash basis on impaired loans	$	202	$	960

The $60.6 million in impaired loans without a valuation allowance reflects total charge-offs of $17.6 million, of which $7.5 million occurred in the second quarter of 2010. The $7.8 million decline in the valuation allowance was related to $10.2 million in loan charge-offs of specific reserves offset by $2.4 million in valuation allowances on five new and six previous non-accrual relationships. Total cash collected on impaired loans for the three months and six months ended June 30, 2010 was $4.6 million and $11.1 million, respectively.

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Other Real Estate Owned

Other real estate owned (“OREO”) increased $478,000 from $30.3 million at December 31, 2009 to $30.8 million at June 30, 2010. Set forth below is a table which details the changes in OREO from December 31, 2009 to June 30, 2010.

	2010
(In thousands)	First Quarter			Second Quarter
Beginning balance	$	30,317		$	25,781
Capital improvements		—			697
Net proceeds from sales		(4,391	)		(3,403	)
Net gain on sales		157			174
Assets acquired on non-accrual loans		—			8,421
Other		500			85
Impairment charge		(802	)		(960	)
Ending balance	$	25,781		$	30,795

During the second quarter of 2010, the Company received a deed in lieu of foreclosure for a rental community consisting of 182 dwelling units which was collateral for a $16.4 million participation loan. The Company is entitled to 52% of the collateral and transferred $7.9 million to OREO after recording a $456,000 charge-off for which $361,000 had previously been reserved in the allowance for loan and lease losses in accordance with ASC Topic 310. Also during the second quarter the Company sold collateral associated with four different projects. The first sale is related to a condominium project in Raleigh, North Carolina that the Company foreclosed on during the fourth quarter of 2008. The Company sold three units during the second quarter of 2010 and now has five remaining units to be sold of the original 51 units. The Company received net proceeds of $339,000 and recorded a loss of $46,000 as a result of the sale of those units. The second sale is related to a condominium project in Wildwood, New Jersey that the Company foreclosed on during the fourth quarter of 2009. During the second quarter of 2010, the Company completed the renovations to the project and held an auction of 28 units. At June 30, 2010, the Company had settled on ten of the condominium units and received net proceeds of $1.5 million which equaled the carrying cost including improvements. The third sale is related to a commercial building that was the collateral for a loan transferred to OREO during the second quarter of 2009. The Company received net proceeds of $970,000 and recorded a gain of $25,000 as a result of the sale of this commercial property. The last sale was related to 3 homes and 14 residential lots located in North Carolina and South Carolina that the Company foreclosed on during the second quarter of 2010. Collectively the collateral was valued at $456,000 when transferred to OREO. During the second quarter the Company sold one home and one lot. The Company received net proceeds of $130,000 and recorded a gain of $6,000. In addition to the sales mentioned above the Company sold five properties acquired through the tax lien portfolio. The Company received proceeds of $427,000 and recorded gains of $189,000.

During the second quarter of 2010 the Company recorded impairment charges of $960,000 which were primarily related to an apartment building in Luzerne County, Pennsylvania foreclosed on in the second quarter of 2009 and tax liens. After performing an impairment analysis using an updated appraisal on the apartment building, the Company recorded an $862,000 impairment charge which was caused by the need for repairs in order to obtain certificates of occupancy on a number of rental units. The Company recorded impairment charges of $85,000 related to three properties acquired through the tax lien portfolio.

During the first quarter of 2010, the Company sold collateral related to three loans. The first sale is related to a five building condominium project in Raleigh, North Carolina that the Company foreclosed on during the fourth quarter of 2008. In 2009, the Company completed the construction of two buildings. In the fourth quarter of 2009, the Company held an auction of the 51 completed condominiums. During the first quarter of 2010, the Company closed on 19 of the units for net proceeds of $2.4 million and recorded a $62,000 loss as a result of the sale of these units. The Company closed on 24 of the units in 2009. The second sale during the first quarter was a commercial building that was collateral for a loan transferred to OREO in the third quarter of 2009. The Company received net proceeds of $652,000 and recorded a loss of $67,000 as a result of the sale of this commercial building. The third sale during

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the first quarter was a residential building that was collateral for a loan transferred to OREO in the fourth quarter of 2009. The Company received net proceeds of $1.2 million and recorded a $216,000 gain as a result of the sale of this residential building. During the first quarter of 2010, the Company recorded an impairment charge of $802,000 related to three lots in Ocean City, Maryland which were transferred to OREO in the first quarter of 2009.

Credit Classification Process

The loan review function is outsourced to a third party vendor which applies the Company’s loan rating system to specific credits. The Company uses a nine point grading risk classification system commonly used in the financial services industry. The riskier classifications include Watch, Special Mention, Substandard, Doubtful and Loss. Upon completion of a loan review, a copy of any review receiving an adverse classification by the reviewer is presented to the Loan Review Committee for discussion. Minutes outlining in detail the Committee’s findings and recommendations are issued after each meeting for follow-up by individual loan officers. The Committee is comprised of the voting members of the Officers’ Loan Committee. The Chief Credit Officer is the primary bank officer dealing with the third party vendor during the reviews.

All loans are subject to initial loan review. Additional review is undertaken with respect to loans providing potentially greater exposure. This is accomplished by reviewing annually:

• 100% of construction loans regardless of loan size;

• 100% of loans/relationships with balances of $1 million or greater;

• 50% of loans with balances from $500,000 up to $1 million;

• 25% of loans with balances from $250,000 to $499,999;

• 5% of loans with balances up to $250,000; and

• Loans requested specifically by the Company’s management

Loans on the Company’s Special Assets Committee list are also subject to loan review even though they are receiving the daily attention of the assigned officer and monthly attention of the Special Assets Committee. A watch list is maintained and reviewed at each meeting of the Loan Review Committee. Loans are added to the watch list, even though current or less than 30 days delinquent if they exhibit elements of substandard creditworthiness. The watch list contains a statement for each loan as to why it merits special attention, and this list is distributed to the board of directors on a monthly basis. Loans may be removed from the watch list if the Loan Review Committee determines that exception items have been resolved or creditworthiness has improved. Additionally, if loans become serious collection matters and are listed on the Company’s monthly delinquent loan or Special Assets Committee lists, they may be removed from the watch list. The Company’s CCIC Committee (Classified, Charge-off and Impairment Committee) reviews all classified assets within the Banks and is responsible for decisions related to their classification, impairment and charge-offs. The Committee, which is comprised of the President, Vice Chairman, Chief Credit Officer, Chief Lending Officer and Chief Risk Officer, meets as required and provides regular updated reports to the board of directors.

All loans, at the time of presentation to the appropriate loan committee, are given an initial loan “risk” rating by the CCO. From time to time, and at the general direction of any of the various loan committees, the ratings may be changed based on the findings of that committee. Items considered in assigning ratings include the financial strength of the borrower and/or guarantors, the type of collateral, the collateral lien position, the type of loan and loan structure, any potential risk inherent in the specific loan type, higher than normal monitoring of the loan or any other factor deemed appropriate by any of the various committees for changing the rating of the loan. Any such change in rating is reflected in the minutes of that committee.

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Potential Problem Loans

Potential problem loans are loans not currently classified as non-performing loans, but for which management has doubts as to the borrowers’ ability to comply with present repayment terms. The loans are usually delinquent more than 30 days but less than 90 days. Potential problem loans amounted to approximately $23.1 million and $21.4 million at June 30, 2010 and December 31, 2009, respectively. Commercial loans, non-residential real estate loans, and multi-family loans comprise $14.7 million, $4.9 million, and $2.0 million, respectively, of the potential problem loans outstanding at June 30, 2010. Of the $14.7 million in potential problem commercial loans, $10.0 million is related to a hotel/timeshare project located in Las Vegas, Nevada. During the first quarter of 2010, a nationally recognized hotel and casino operator acquired this project’s operating partner. Commercial and non-residential real estate loans have continued to weaken due to projects impacted by low tenant commitments, cash flow issues, and the sluggish economy. As a result of the regulatory order issued by the FDIC in July 2009, disclosed under “Regulatory Orders”, the Company’s board of directors will approve all advances for additional funds on potential problem loans.

Other Income (Loss)

For the second quarter of 2010 other income was $1.7 million compared to other loss of $3.4 million for the comparable period in 2009. The $5.1 million increase in other income quarter over quarter was primarily a result of a $4.9 million decline in impairment losses on available for sale securities ($5.1 million loss in 2009 compared to a $165,000 loss in 2010). Also contributing to the $5.1 million increase for the comparable quarters was a $503,000 increase in net gains on the sales of available for sale securities ($429,000 gain in 2010 versus a $74,000 loss in 2009), and a $100,000 increase in gains on the sales of other real estate owned. Partially offsetting these increases was a decrease in income from bank owned life insurance of $256,000 as a result of the surrender of a majority of the Company’s bank owned life insurance during the third quarter of 2009 and a decline of $153,000 in gains on the sales of loans and leases.

For the six months ended June 30, 2010, other income amounted to $3.0 million compared to other loss of $7.0 million for comparable period of 2009, an increase of $10.0 million. The $10.0 million improvement was primarily attributable to a decrease of $9.0 million in OTTI charges on AFS securities ($341,000 during 2010 compared to $9.3 million during the first six months of 2009). Also contributing to the increase year over year was an $876,000 increase in net gains on the sales of available for sale securities ($588,000 gain in 2010 versus a $288,000 loss in 2009), a $351,000 increase in gains on the sale of loans and leases and a $294,000 increase in gains on the sales of other real estate owned ($331,000 in 2010 versus $37,000 in 2009). These increases were partially offset by a decline in income from bank owned life insurance of $505,000 as a result of the surrender of a majority of the Company’s bank owned life insurance during the third quarter of 2009 that was previously mentioned.

Other Expense

Non-interest expense for the second quarter of 2010 amounted to $10.0 million resulting in an increase of $1.7 million, or 20.7%, from the comparable quarter of 2009. The increase was primarily attributable to impairment on investments in real estate joint ventures of $1.6 million. During the second quarter of 2010, the Company recorded a $2.5 million impairment on a real estate joint venture in which the Company had a subordinate debt position. The impairment was for the entire amount of the investment and was the result of a reduction in the collateral value as a consequence of a significant decline in the cash flows being generated from the property. Partially offsetting the $2.5 million impairment was a recovery of $968,000 from an investment in a real estate joint venture that was previously written off in 2007. OREO impairments increased $960,000 primarily as a result of a new appraisals being obtained during the quarter and the resulting decline in property valuations. Partially offsetting these increases was a $530,000 decrease in loan collection expenses, which was partially timing related, and a $270,000 decrease in salaries and employee benefits primarily related to a decline in headcount.

For the six months ended June 30, 2010 non-interest expense of $18.1 million amounted to an increase of $2.6 million, or 16.4%, above the level of the comparable period of 2009. The increase was primarily attributable to a the $1.6 million impairment on a real estate joint ventures which was mentioned above, a $1.2 million increase in OREO impairments as a result of new appraisals being obtained during the first six months of 2010, and a $564,000

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increase in FDIC Insurance and state assessments. The increase in FDIC Insurance and Pennsylvania Department of Banking assessments was primarily related to an increased assessment rate for the FDIC expense for Royal Bank and Royal Asian due to increased assessment rates overall to fund the FDIC insurance shortfall and a decline in the regulatory rating from the FDIC resulting in another rate increase. Partially offsetting these increases was a $425,000 decrease in salaries and employee benefits primarily due to a decline in headcount and a $166,000 decrease in director fees related to a reduction in the number of directors, fewer meetings year over year and the elimination of inside directors’ fees.

Income Taxes

Total income tax expense for the second quarter of 2010 and the comparable quarter of 2009 was $0. The Company did not record a tax benefit despite the net loss in the second quarter of 2010 since it concluded at December 31, 2008 that it was more likely than not that the Company would not generate sufficient future taxable income to realize all of the deferred tax assets. The Company established a valuation allowance against deferred tax assets as of December 31, 2008 in the amount of $15.5 million. During 2009, the Company established an additional valuation allowance of $10.2 million, which was the result of the net operating loss for 2009 and the portion of the future tax benefit that more than likely will not be utilized in the future. The valuation allowance for deferred tax assets at June 30, 2010, totaled $25.7 million. Management’s conclusion was based on consideration of the relative weight of the available evidence and the uncertainty of future market conditions on results of operations. The effective tax rate for the second quarters of both 2010 and 2009 was 0%.

Total income tax expense for the six months end June 30, 2010 and June 30, 2009 was $0. The Company did not record a tax benefit despite the net loss for the six month period ended June 30, 2010 since it concluded at December 31, 2008 that it was more likely than not that the Company would not generate sufficient future taxable income to realize all of the deferred tax assets. As mentioned above, the Company established a valuation allowance against deferred tax assets as of December 31, 2008 in the amount of $15.5 million, subsequently added an additional valuation allowance of $10.2 million in 2009, resulting from an operating loss and the portion of the future tax benefit that more than likely will not be utilized in the future. The valuation allowance for deferred tax assets at June 30, 2010, totaled $25.7 million. Management’s conclusion was based on consideration of the relative weight of the available evidence and the uncertainty of future market conditions on results of operations. The effective tax rate for the first six months of 2010 and 2009 was 0%.

Results of Operations by Business Segments

The Company has identified its reportable operating segments as “Community Banking”, “Tax Liens” and “Equity Investments”. The Company has one operating segment that does not meet the quantitative thresholds for requiring disclosure, but have different characteristics than the Community Banking, Tax Liens and Equity Investments segments, and from each other, RBA Leasing (“Leasing” in the segment table below). For a description of the different business segments refer to “Note 18 — Segment Information” to the Consolidated Financial Statements.

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	Three months ended June 30, 2010
	Community			Tax Lien		Equity
(In thousands)	Banking			Operation		Investment			Leasing			Consolidated
Total assets	$	1,032,722		$	104,956	$	6,120		$	39,680		$	1,183,478
Total deposits	$	791,827		$	—	$	—		$	—		$	791,827
Interest income	$	11,878		$	2,373	$	—		$	922		$	15,173
Interest expense		5,654			868		5			312			6,839
Net interest income (expense)	$	6,224		$	1,505	$	(5	)	$	610		$	8,334
Provision for loan and lease losses		3,718			10		—			562			4,290
Total other income		1,118			219		335			47			1,718
Impairment -real estate joint ventures		1,552			—		—			—			1,552
Total other expenses		7,498			598		95			298			8,489
Income tax (benefit) expense		(583	)		489		82			11			—
Net (loss) income	$	(4,844	)	$	626	$	153		$	(214	)	$	(4,279	)
Noncontrolling interest	$	(23	)	$	250	$	118		$	(86	)	$	259
Net (loss) income attributable to Royal Bancshares	$	(4,821	)	$	375	$	35		$	(128	)	$	(4,538	)

	Three months ended June 30, 2009
	Community			Tax Lien		Equity
(In thousands)	Banking			Operation		Investment			Leasing			Consolidated
Total assets	$	1,164,425		$	108,336	$	16,581		$	31,303		$	1,320,645
Total deposits	$	876,689		$	—	$	—		$	—		$	876,689
Interest income	$	13,449		$	2,410	$	—		$	711		$	16,570
Interest expense		8,376			934		63			308			9,681
Net interest income (expense)	$	5,073		$	1,476	$	(63	)	$	403		$	6,889
Provision for loan and lease losses		6,105			567		—			284			6,956
Total other (loss) income		(4,206	)		120		568			114			(3,404	)
Total other expenses		7,179			807		222			111			8,319
Income tax (benefit) expense		(256	)		115		99			42			—
Net (loss) income	$	(12,160	)	$	106	$	184		$	80		$	(11,790	)
Noncontrolling interest	$	85		$	42	$	142		$	(5	)	$	264
Net (loss) income attributable to Royal Bancshares	$	(12,245	)	$	64	$	42		$	85		$	(12,054	)

	Six months ended June 30, 2010
	Community			Tax Lien		Equity
(In thousands)	Banking			Operation		Investment			Leasing		Consolidated
Total assets	$	1,032,722		$	104,956	$	6,120		$	39,680	$	1,183,478
Total deposits	$	791,827		$	—	$	—		$	—	$	791,827
Interest income	$	23,810		$	5,137	$	—		$	1,849	$	30,796
Interest expense		12,025			1,783		19			615		14,442
Net interest income (expense)	$	11,785		$	3,353	$	(19	)	$	1,234	$	16,354
Provision for loan and lease losses		5,396			60		—			737		6,193
Total other income		2,189			289		428			117		3,023
Impairment -real estate joint ventures		1,552			—		—			—		1,552
Total other expenses		14,938			1,084		265			255		16,542
Income tax (benefit) expense		(1,335	)		1,054		51			231		—
Net (loss) income	$	(6,576	)	$	1,444	$	94		$	128	$	(4,910	)
Noncontrolling interest	$	—		$	578	$	72		$	51	$	701
Net (loss) income attributable to Royal Bancshares	$	(6,576	)	$	866	$	22		$	77	$	(5,611	)

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	Six months ended June 30, 2009
	Community			Tax Lien		Equity
(In thousands)	Banking			Operation		Investment			Leasing		Consolidated
Total assets	$	1,164,425		$	108,336	$	16,581		$	31,303	$	1,320,645
Total deposits	$	876,689		$	—	$	—		$	—	$	876,689
Interest income	$	26,644		$	4,914	$	—		$	1,366	$	32,924
Interest expense		16,399			1,862		103			602		18,966
Net interest income (expense)	$	10,245		$	3,052	$	(103	)	$	764	$	13,958
Provision for loan and lease losses		8,636			636		—			481		9,753
Total other income		(8,043	)		146		698			211		(6,988	)
Total other expenses		13,378			1,568		384			214		15,544
Income tax (benefit) expense		(554	)		383		74			98		—
Net (loss) income	$	(19,257	)	$	611	$	137		$	182	$	(18,327	)
Noncontrolling interest	$	122		$	245	$	105		$	8	$	480
Net (loss) income attributable to Royal Bancshares	$	(19,379	)	$	367	$	32		$	174	$	(18,807	)

Community Bank Segment

Royal Bank America

Royal Bank was incorporated in the Commonwealth of Pennsylvania on July 30, 1963, was chartered by the Commonwealth of Pennsylvania Department of Banking and commenced operation as a Pennsylvania state-chartered bank on October 22, 1963. Royal Bank is the successor of the Bank of King of Prussia, the principal ownership of which was acquired by the Tabas family in 1980. The deposits of Royal Bank are insured by the Federal Deposit Insurance Corporation (the “FDIC”). During the fourth quarter of 2006, Royal Bank formed a subsidiary, Royal Tax Lien Services, LLC, to purchase and service delinquent tax liens. Royal Bank owns 60% of the subsidiary. On October 17, 2008, Royal Bank established RBA Property LLC, a wholly owned subsidiary. RBA Property was formed to hold other real estate owned acquired through foreclosure of collateral associated with non-performing loans. On December 1, 2008, Royal Bank established Narberth Property Acquisition LLC, a wholly owned subsidiary. Narberth Property Acquisition was formed to hold other real estate owned acquired through foreclosure of collateral associated with non-accrual loans. On November 4, 2009, Royal Bank established Rio Marina LLC, a wholly owned subsidiary, to hold other real estate owned acquired through foreclosure of collateral associated with non-performing loans.

Royal Bank derives its income principally from interest charged on loans, interest earned on investment securities, and fees received in connection with the origination of loans and other services. Royal Bank’s principal expenses are interest expense on deposits and operating expenses. Operating revenues, deposit growth, investment maturities, loan sales and the repayment of outstanding loans provide the majority of funds for activities.

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

Service Area: Royal Bank’s primary service area includes Pennsylvania, primarily Montgomery, Chester, Bucks, Delaware, Berks and Philadelphia counties, and New Jersey. This area includes residential areas and industrial and commercial businesses of the type usually found within a major metropolitan area. Royal Bank serves this area from fifteen branches located throughout Montgomery, Philadelphia and Berks counties and New Jersey. Royal Bank also considers New York, Maryland, and Delaware as a part of its service area for certain products and services. In the past, Royal Bank had frequently conducted business with clients located outside of its service area. Royal Bank has loans in twenty-six states via loan originations and/or participations with other lenders who have

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broad experience in those respective markets. Royal Bank’s headquarters are located at 732 Montgomery Avenue, Narberth, Pennsylvania.

Competition: The financial services industry in our service area is extremely competitive. Competitors within our service area include banks and bank holding companies with greater resources. Many competitors have substantially higher legal lending limits. In addition, savings banks, savings and loan associations, credit unions, money market and other mutual funds, mortgage companies, leasing companies, finance companies and other financial services companies offer products and services similar to those offered by Royal Bank, on competitive terms.

Employees: Royal Bank employed approximately 156 people on a full-time equivalent basis as of June 30, 2010.

Deposits: At June 30, 2010, total deposits of Royal Bank were distributed among demand deposits (8%), money market deposit, savings and Super Now accounts (30%) and time deposits (62%). At June 30, 2010, deposits decreased $99.3 million to $723.1 million, from year-end 2009, or 12.1%, primarily due to a $76.2 million decrease in time deposits along with a $23.2 million decrease in money market deposit and Super Now accounts. The decrease in time deposits was mainly due to the maturity of brokered deposits in the amount of $62.8 million. Included in Royal Bank’s deposits are approximately $12.6 million of intercompany deposits that are eliminated through consolidation.

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

Lending: At June 30, 2010, Royal Bank, including its subsidiaries, had a total net loan portfolio of $550.6 million, representing 51% of total assets. The loan portfolio is categorized into commercial demand, commercial mortgages, residential mortgages (including home equity lines of credit), construction, real estate tax liens, asset based loans, small business leases and installment loans. At June 30, 2010, loans decreased $48.0 million from year end 2009 due to pay downs, one large pay off of $8.2 million, transfers to OREO and charge-offs which were partially offset by new originations.

Business results: Total interest income of Royal Bank for the quarter ended June 30, 2010 was $13.9 million compared to $15.1 million for the quarter ended June 30, 2009, a decrease of 7.5%. Total interest income for the first six months of 2010 was $28.3 million compared to $29.7 million for the same period in 2009. The decline in interest income for both the quarter and year to date was primarily attributed to a lower yield on investment securities. Interest expense was $6.4 million for the quarter ended June 30, 2010, compared to $8.7 million for the quarter ended June 30, 2009, a decrease of 26%. Interest expense for the first six months of 2010 was $13.6 million compared to $17.1 million for the same period in 2009. Royal Bank recorded a net loss for the quarter ended June 30, 2010 of $4.4 million compared to a net loss of $9.5 million for the quarter ended June 30, 2009. The reduction in the loss is mainly due to $0 in impairments on AFS investment securities and $4.5 million in provision for loan and lease losses in the second quarter of 2010 compared to $3.9 million and $5.9 million for the second quarter of 2009, respectively. Partially offsetting the improvement in the net loss was $1.6 million in impairment on investments in real estate joint ventures as described in “Other Expense” of “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Royal Bank recorded a net loss of $4.2 million for the first half of 2010 compared to a net loss of $11.8 million for the first half of 2009. The improvement in net loss was largely due to similar factors that affected the second quarter earnings. Total assets of Royal Bank were $1.1 billion at June 30, 2010 and $1.2 billion at December 31, 2009. The above amounts reflect the consolidation totals for Royal Bank and its subsidiaries. The subsidiaries included in these amounts are Royal Investments America, Royal Real Estate, Royal Bank America Leasing, Royal Tax Lien Services, Crusader Servicing Corporation, RBA Property LLC, Narberth Property Acquisitions, and Rio Marina LLC.

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Royal Asian Bank

Royal Asian was incorporated in the Commonwealth of Pennsylvania on October 4, 2005, and was chartered by the Commonwealth of Pennsylvania Department of Banking and commenced operation as a Pennsylvania state-chartered bank on July 17, 2006. Royal Asian is an insured bank by the Federal Deposit Insurance Corporation (the “FDIC”). Royal Asian derives its income principally from interest charged on loans and fees received in connection with the other services. Royal Asian’s principal expenses are interest expense on deposits and operating expenses. Operating revenues, deposit growth, and the repayment of outstanding loans provide the majority of funds for activities. During the third quarter of 2010, the Company filed an application with the FDIC and the Commonwealth of Pennsylvania Department of Banking for approval of the merger of Royal Asian with and into Royal Bank, with Royal Bank surviving. The merger is expected to be approved in the third quarter of 2010. The decision to merge the Company’s subsidiary banks resulted primarily from the termination of the stock purchase agreement relating to the sale of Royal Asian that was executed in 2009. The Company terminated the stock purchase agreement because the buyer was unable to comply with certain financing provisions under the agreement.

Service Area: Royal Asian’s primary service area includes Philadelphia County in Pennsylvania, northern New Jersey, and New York City. The service area includes residential areas and industrial and commercial businesses of the type usually found within a major metropolitan area. Royal Asian serves this area from five branches located throughout Philadelphia, northern New Jersey, and New York City. Royal Asian also considers Maryland and Delaware as a part of its service area for certain products and services. Occasionally, Royal Asian has conducted business with clients located outside of its service area.

Royal Asian conducts business operations as a commercial bank offering checking accounts, savings and time deposits, and loans, including residential mortgages, home equity and SBA loans. Royal Asian also offers collections, internet banking, safe deposit boxes and bill payment along with other customary bank services (excluding trust) to its customers. Drive-up, ATM, and night depository facilities are available. Certain international services are offered via a SWIFT machine which provides international access to transfer information through a secured web based system. This system is for informational purposes only and no funds are transferred through SWIFT. Services may be added or deleted from time to time. The services offered and the business of Royal Asian is not subject to significant seasonal fluctuations. Royal Asian through its affiliation with Royal Bank is a member of the Federal Reserve FedLine Wire Transfer System.

Competition: The financial services industry in our service area is extremely competitive. Competitors within our service area include banks and bank holding companies with greater resources. Many competitors have substantially higher legal lending limits. In addition, savings banks, savings and loan associations, credit unions, money market and other mutual funds, mortgage companies, leasing companies, finance companies and other financial services companies offer products and services similar to those offered by Royal Asian, on competitive terms.

Employees: Royal Asian employed approximately 25 people on a full-time equivalent basis as of June 30, 2010.

Deposits: At June 30, 2010, total deposits of Royal Asian were distributed among demand deposits (9%), money market deposit, savings and Super Now accounts (15%) and time deposits (76%). At June 30, 2010, total deposits were $81.3 million, which amounted to a decrease of $8.0 million, or 8.9%, from the level at December 31, 2009.

Lending: Royal Asian had a total net loan portfolio of $61.6 million, representing 65% of total assets at June 30, 2010, a decline of $3.1 million, or 4.8%, from the level at December 31, 2009. The loan portfolio is comprised of commercial demand, commercial mortgages, construction, and installment loans.

Business results: Net interest income of Royal Asian for the quarter ended June 30, 2010, amounted to $754,000 which was an increase of $232,000 from the comparable quarter of 2009. Net interest income for the first six months of 2010 was $1.5 million compared to net interest income of $1.3 million for the same period in 2009. For the quarter ended June 30, 2010, Royal Asian recorded net income of $139,000 compared to a net loss of $415,000 in the second quarter of 2009. For the first half of 2010, Royal Asian recorded a net loss of $856,000 compared to a

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net loss of $474,000 for the first half of 2009. Total assets of Royal Asian amounted to $94.5 million at June 30, 2010 compared to $102.4 million at December 31, 2009.

Royal Investments of Delaware

On June 30, 1995, the Company established a special purpose Delaware investment company, Royal Investments of Delaware (“RID”), as a wholly owned subsidiary. Legal headquarters are at 1105 N. Market Street, Suite 1300, Wilmington, Delaware. RID buys, holds and sells investment securities.

Business results: Total interest income of RID for the quarter ended June 30, 2010, of $216,000 declined 38.3% from $350,000 for the quarter ended June 30, 2009. For the first six months of 2010 total interest income amounted to $427,000 resulting in a 36.2% decrease from $669,000 during the first six months of 2009. For the quarter ended June 30, 2010, RID reported net income of $20,000, compared to net loss of $1.2 million for the quarter ended June 30, 2009 primarily due to $1.3 million of impairments on available for sale securities being recorded in 2009 versus $165,000 during 2010. For the first half of 2010, RID reported a net loss of $1,000 versus a net loss of $5.5 million in the comparable period of 2009. The year over year improvement for the first half was primarily related to impairment of investment securities of $165,000 in 2010 versus $5.7 million in 2009. At June 30, 2010, total assets of RID were $30.7 million, of which $1.5 million was held in cash and cash equivalents and $7.3 million was held in investment securities. The amounts shown above include the activity related to RID’s wholly owned subsidiary Royal Preferred LLC. Royal Bank previously extended loans to RID, secured by securities and as per the provisions of Regulation W. RID paid the loan in full during the third quarter of 2009 and therefore at June 30, 2010 no loans were outstanding.

Royal Captive Insurance Company

On November 21, 2007, the Company established Royal Captive Insurance Company, a wholly owned subsidiary. Royal Captive Insurance was formed to insure commercial property and comprehensive umbrella liability for the Company and its affiliates. At June 30, 2010 total assets of Royal Captive Insurance were $2.6 million.

Royal Preferred LLC

On June 16, 2006, the Company, through its wholly owned subsidiary RID, established Royal Preferred LLC as a wholly owned subsidiary. Royal Preferred LLC was formed to purchase a subordinated debenture from Royal Bank America. At June 30, 2010, Royal Preferred LLC had total assets of approximately $21 million.

Royal Bancshares Capital Trust I and II

On October 27, 2004, the Company formed two Delaware trust affiliates, Royal Bancshares Capital Trust I and Royal Bancshares Capital Trust II, in connection with the sale of an aggregate of $25.0 million of a private placement of trust preferred securities. The interest rates for the debt securities associated with the Trusts at June 30, 2010 amounted to 2.69%.

On August 13, 2009, the Company’s board of directors determined to suspend interest payments on the trust preferred securities. The Company’s board of directors took this action in consultation with the Federal Reserve Bank of Philadelphia as required by regulatory policy guidance. The Federal Reserve Agreement entered into in May 2010 prohibits any distributions on trust preferred securities without the prior approval of the Federal Reserve Bank of Philadelphia and the Director of the Division of Banking Supervision and Regulation of the Board of Governors of the Federal Reserve System. As of June 30, 2010, the trust preferred interest payment in arrears was $833,000 and has been recorded in interest expense and accrued interest payable.

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Tax Lien Operations

Crusader Servicing Corporation

The Company, through its wholly owned subsidiary Royal Bank, holds a 60% ownership interest in Crusader Servicing Corporation (“CSC”). Legal headquarters are at 732 Montgomery Avenue, Narberth, Pennsylvania. CSC acquires, through auction, delinquent property tax liens in various jurisdictions, assuming a lien position that is generally superior to any mortgage liens on the property, and obtaining certain foreclosure rights as defined by local statute. Due to a change in CSC management, Royal Bank and other shareholders, constituting a majority of CSC shareholders, voted to liquidate CSC under an orderly, long term plan adopted by CSC management. Royal Bank will continue acquiring tax liens through its newly formed subsidiary, Royal Tax Lien Services, LLC. At June 30, 2010, total assets of CSC were $14.5 million. Included in total assets is $2.1 million for the Strategic Municipal Investments (“SMI”) portfolio, which is comprised of residential, commercial, and land tax liens, primarily in Alabama. In 2005, CSC entered into a partnership with Strategic Municipal Investments (“SMI”), ultimately acquiring a 50% ownership interest in SMI. In connection with acquiring this ownership interest, CSC extended financing to SMI in the approximate amount of $18.0 million, which was used by SMI to purchase a tax lien portfolio at a discount. As a result of the recent deterioration in residential, commercial and land values principally in Alabama, management concluded based on an analysis of the portfolio in the fourth quarter of 2008 that the loan was impaired by approximately $2.5 million. During 2009, the loan was impaired by an additional $500,000. CSC charged-off $3.0 million related to this loan in 2009. There was no additional impairment in 2010. The outstanding SMI loan balance was $2.1 million at June 30, 2010 compared to $2.5 million at December 31, 2009.

Business results: Net interest income of CSC for the quarter ended June 30, 2010, amounted to $101,000 which resulted in a decline of $95,000, from the comparable quarter of 2009. Net interest income for the first half of 2010 decreased $218,000 from $490,000 for the first half of 2009 to $272,000 due to the liquidation of the portfolio. Net income for CSC for the three and six months ended June 30, 2010, was $64,000 and $45,000, respectively, compared to a net loss of $331,000 and $369,000, respectively, for the comparable periods of 2009. The improvement in net income for the three and six months ended June 30, 2010 was largely driven by the reduction in provision for lien losses. At June 30, 2010, total assets of CSC were $14.5 million, of which $14.0 million was held in tax liens. The allowance for lien loss was $149,000 at June 30, 2010.

Royal Bank has extended loans to CSC at market interest rates, secured by the tax lien portfolio of CSC and in accordance with the provisions of Regulation W. At June 30, 2010, the amount due Royal Bank from CSC was $12.7 million.

Royal Tax Lien Services, LLC

On November 17, 2006, the Company, through its wholly owned subsidiary Royal Bank, formed Royal Tax Lien Services, LLC (“RTL”). Royal Bank holds a 60% ownership interest in RTL. Legal headquarters are 732 Montgomery Avenue, Narberth, Pennsylvania. RTL was formed to purchase and service delinquent tax certificates. RTL typically acquires delinquent property tax liens through public auctions in various jurisdictions, assuming a lien position that is generally superior to any mortgage liens that are on the property, and obtaining certain foreclosure rights as defined by local statute.

Business results: Net interest income of RTL of $1.4 million for the quarter ended June 30, 2010, increased $125,000, or 9.7%, for the comparable quarter of 2009 largely due to increased interest on certificates and penalty income year over year associated with an increase in the average tax liens outstanding. For the first half of 2010, net interest income of $3.1 million increased $519,000, or 20.3%, above the comparable period of 2009 due to the growth in tax liens year over year. Net income for RTL of $562,000 for the quarter ended June 30, 2010 increased $125,000, or 28.6%, from the comparable quarter of 2009 due to an increase in tax liens year over year. For the six months ended 2010 net income for RTL of $1.4 million amounted to an increase of $418,000, or 42.7%, above the comparable period of 2009 again due to the growth in average tax liens outstanding for RTL over the past year. At June 30, 2010, total assets of RTL were $90.4 million, of which the majority was held in tax liens as compared to total assets at December 31, 2009 of $88.9 million, of which the majority was held in tax liens.

Royal Bank has extended loans to RTL at market interest rates, secured by the tax lien portfolio of RTL and in accordance with the provisions of Regulation W. At June 30, 2010, the amount due Royal Bank from RTL was $85.9 million.

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Equity Investments Segment

Royal Investments America

On June 23, 2003, the Company, through its wholly owned subsidiary Royal Bank, established Royal Investments America, LLC (“RIA”) as a wholly owned subsidiary. Legal headquarters are at 732 Montgomery Avenue, Narberth, Pennsylvania. RIA was formed to invest in equity real estate ventures subject to limitations imposed by the FDIC and Pennsylvania Department of Banking by regulation.

Business results: At June 30, 2010 and December 31, 2009, total assets of RIA prior to consolidation under ASC Topic 810 were $6.3 million and $8.6 million, respectively. For the quarter ended June 30, 2010, RIA had a net loss of $2.1 million compared to net income of $118,000 for the comparable period of 2009 while the net loss for the first half of 2010 amounted to $2.2 million compared to net income of $79,000 for the comparable six months of 2009. The loss for the three and six months ended June 30, 2010 was attributable to a $2.5 million impairment recorded on a real estate joint venture during the second quarter of 2010 as a result of a significant reduction in the cash flows being generated from the property which has resulted in a reduction in the collateral value.

Royal Bank had previously extended loans to RIA at market interest rates, secured by the loan portfolio of RIA and in accordance with the provisions of Regulation W. At June 30, 2010, there were no outstanding loans from Royal Bank to RIA.

Leasing Segment

Royal Bank America Leasing, LP

On July 25, 2005, the Company, through its wholly owned subsidiary Royal Bank, formed Royal Bank America Leasing, LP (“Royal Leasing”). Royal Bank holds a 60% ownership interest in Royal Leasing. Legal headquarters are 550 Township Line Road, Blue Bell, Pennsylvania. Royal Leasing was formed to originate small business leases. Royal Leasing originates small ticket leases through its internal sales staff and through independent brokers located throughout its business area. In general, Royal Leasing will portfolio individual small ticket leases in amounts of up to $250,000. Leases originated in amounts in excess of that are sold for a profit to other leasing companies. On occasion, Royal Bank will purchase municipal leases originated by Royal Leasing for its own portfolio. These purchases are at market based on pricing and terms that Royal Leasing would expect to receive from unrelated third-parties. From time to time Royal Leasing will sell small lease portfolios to third-parties and will, on occasion, purchase lease portfolios from other originators. During the first six months of 2010 and 2009, neither sales nor purchases of lease portfolios were material.

Business results: At June 30, 2010, total assets of Royal Leasing were $39.7 million, including $39.3 million in net leases, as compared to $37.8 million in assets at December 31, 2009. During the quarter ended June 30, 2010, Royal Leasing had net interest income of $610,000, an increase of $207,000 from the comparable period of 2009; provision for lease losses of $562,000 versus $284,000 in the comparable quarter of 2009; non-interest income of $47,000 as compared to $114,000 in the second quarter of 2009; and non-interest expense of $298,000 versus $111,000 for the second quarter of 2009. Royal Leasing recorded a net loss of $214,000 for the three months ended June 30, 2010 compared to net income of $80,000 for the comparable period in 2009. For the first half of 2010, Royal Leasing recorded net income of $128,000 compared to net losses of $182,000 for the comparable period of 2009.

Royal Bank has extended loans to RBA Leasing at market interest rates, secured by the lease portfolio of RBA Leasing and as per the provisions of Regulation W. At June 30, 2010, the amount due Royal Bank from RBA Leasing was $38.6 million.

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FINANCIAL CONDITION

Consolidated Assets

Total consolidated assets at June 30, 2010 were $1.2 billion, a decrease of $109.2 million, or 8.5%, from December 31, 2009. This decrease was attributed to a reduction of $99.9 million in AFS investments due primarily to the sales of investment securities and a $44.3 million decrease in net loans and leases partially offset by an increase of $56.5 million in cash and cash equivalents.

Cash and Cash Equivalents

Total cash and cash equivalents increased $56.5 million to $114.8 million at June 30, 2010 from $58.3 million at December 31, 2009, due to the sales of investment securities to pay off additional maturing brokered CDs and FHLB advances early in the third quarter of 2010.

Investment Securities

Total investment securities declined $99.9 million, or 22.8%, to $338.8 million at June 30, 2010, from the level at December 31, 2009. The decrease was primarily due to the sale of debt securities to reduce the credit risk within the investment portfolio and provide funds for the payoff of maturing brokered CDs and FHLB advances. The sale of these investments was partially offset by the purchase of liquid, cash-flowing mortgage backed securities and U. S. government agency CMOs. FHLB stock was $11.0 million at June 30, 2010 and December 31, 2009.

Effective April 1, 2009, the Company adopted new provisions under ASC Topic 320 specific to OTTI. Under the new guidance which applies to existing and new debt securities, OTTI is considered to have occurred (1) if an entity intends to sell the security; (2) if it is more likely than not an entity will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of the expected cash flows is not sufficient to recover the entire amortized cost basis. In addition, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell or will more likely than not be required to sell the security. If an entity intends to sell the security or will be required to sell the security, the OTTI is recognized in earnings equal to the entire difference between the fair value and the amortized cost basis at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before the recovery of its amortized cost basis, the OTTI is separated into two amounts, the credit related loss and the loss related to other factors. The credit related loss is based on the present value of the expected cash flows and is recognized in earnings. The noncredit-related loss is based on other factors such as illiquidity and is recognized in other comprehensive income.

The AFS portfolio had gross unrealized losses of $2.1 million at June 30, 2010, which recovered from gross unrealized losses of $5.6 million at December 31, 2009. During the second quarter and the first six months of 2010, the Company recorded OTTI charges to earnings of $165,000 and $341,000, respectively related to a financial institution’s preferred stock, a private equity investment, a corporate bond and a trust preferred security. For the six months ended June 30, 2010, gross unrealized losses have improved for preferred stock, collateralized mortgage obligations, corporate bonds, and trust preferred securities due to increased fair market values of the investments, sales of investment securities, and modest impairment charges that occurred during the first two quarters of 2010. Management expects full collection of cash flows on the unimpaired investments within the AFS portfolio. The AFS portfolio had a net unrealized gain of $6.6 million at June 30, 2010 compared to a net unrealized loss of $180,000 at December 31, 2010.

Investment securities within the AFS portfolio are marked to market quarterly and any resulting gains or losses are recorded in other comprehensive income, net of taxes, within the equity section of the balance sheet as shown in “Note 15 — Comprehensive Income” to the Consolidated Financial Statements. When a loss is deemed to be other than temporary but the Company does not intend to sell the security and it is not more likely than not that the Company will have to sell the security before recovery of its cost basis, the Company will recognize the credit component of an OTTI charge in earnings and the remaining portion in other comprehensive income.

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The Company will continue to monitor these investments to determine if the continued negative trends, market valuations or credit defaults result in impairment that is other than temporary.

Loans and Leases

Total loans and leases decreased $54.2 million, or 7.9%, from the $689.1 million level (which includes loan and leases held for sale) at December 31, 2009 to $635.0 million at June 30, 2010. The decline was attributed mainly to balances being paid down, one large loan payoff of $8.2 million, charge-offs of $14.5 million, and transfers to OREO of $8.4 million. The Company has become more selective in approving construction loans as well as commercial real estate loans given the existing loan concentration coupled with the current extremely weak housing market and commercial real estate market. As a result, the Company has shifted its lending focus to generating small business loans and owner occupied commercial real estate.

The following table represents loan balances by type:

	June 30,			December 31,
(In thousands)	2010			2009
Commercial and industrial	$	90,368		$	104,063
Construction		50,527			52,196
Land Development		62,264			66,878
Real Estate — residential		34,185			48,498
Real Estate — residential-mezzanine		—			2,480
Real Estate — non-residential		265,236			277,234
Real Estate — multi-family		15,582			22,017
Tax certificates		74,651			73,106
Leases		41,308			39,097
Other		1,481			2,173
Total gross loans and leases	$	635,602		$	687,742
Deferred fees, net		(642	)		(878	)
Total loans and leases	$	634,960		$	686,864

Deposits

Total deposits, which are the primary source of funds, have decreased $89.9 million, or 10.2%, to $791.8 million at June 30, 2010, from December 31, 2009. The decline in deposits was primarily associated with an $80.4 million decrease in certificates of deposit, primarily brokered CDs, which decreased $62.8 million as a result of the redemption of brokered CDs that matured during the first two quarters of 2010. Retail time deposits decreased $17.6 million from year end 2009. Now, money market, and demand deposit accounts also declined by $9.9 million, or 3.6%. The Company has redeemed $62.8 million in brokered CDs in the last six months as required under the regulatory Orders to reduce our reliance on non-core deposits.

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The following table represents ending deposit balances by type:

	June 30,		December 31,
(In thousands)	2010		2009
Demand (non-interest bearing)	$	62,302	$	63,168
NOW		43,305		45,248
Money Markets		161,776		168,893
Savings		15,779		15,336
Time deposits (over $100)		132,328		141,652
Time deposits (under $100)		232,247		240,557
Brokered deposits		144,090		206,901
Total deposits	$	791,827	$	881,755

Borrowings

Total borrowings, which include short and long-term borrowings, have decreased $18.3 million, or 7.2%, to $235.8 million at June 30, 2010, from $254.2 million at December 31, 2009. This reduction is attributed to the payoff of a $15.0 million FHLB advance during the first quarter of 2010 and the monthly payments on the amortizing borrowings. Management decided not to incur additional borrowings because of the FHLB 105% collateral delivery requirement applicable to Royal Bank, the FHLB’s suspension of its cash dividend and the requirement under the regulatory orders to reduce level of non-core funding.

Obligations Related to Equity Investments in Real Estate

The Company consolidated into its balance sheet $727,000 and $3.7 million of debt at June 30, 2010 and December 31, 2009, respectively, related to a real estate equity investment of which none is guaranteed by the Company. The reduction was due to sales of units during the past quarter.

Shareholders’ Equity

Consolidated shareholders’ equity decreased $309,000, or 0.3%, to $104.0 million at June 30, 2010 from $104.3 million at December 31, 2009. The slight reduction was mainly associated with the net loss of $5.6 million mostly offset by an improvement of $4.6 million in other comprehensive loss at June 30, 2010. On February 20, 2009, the Company received approximately $30.4 million via the issuance of preferred stock under the Troubled Assets Relief Program (“TARP”) Capital Purchase Plan (“CPP”) established by the U.S. Treasury. Refer to the “Capital Adequacy” section for more information on the TARP funds.

CAPITAL ADEQUACY

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

Quantitative measures established by regulations to ensure capital adequacy require the Company and the Banks to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). As

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of June 30, 2010, management believes that the Banks meet all capital adequacy requirements to which they are subject.

On July 15, 2009, Royal Bank agreed to enter into a Consent Order with each of the Federal Deposit Insurance Corporation and the Commonwealth of Pennsylvania Department of Banking. As a result of these Orders, Royal Bank is required to maintain a minimum Tier 1 leverage ratio of 8% and a Total risk-based capital ratio of 12% during the term of the Orders. As shown in the table below, Royal Bank met these requirements at June 30, 2010 and December 31, 2009.

The table below provides a comparison of the Company, Royal Bank, and Royal Asian’s risk-based capital ratios and leverage ratios for June 30, 2010 and December 31, 2009:

	As of June 30, 2010
											To be well capitalized
						For capital					capitalized under prompt
	Actual					adequacy purposes					corrective action provision
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital (to risk-weighted assets)
Company (consolidated)	$	135,713		16.69	%	$	65,042		8.00	%		N/A		N/A
Royal Bank		106,709		14.57	%		58,602		8.00	%	$	73,252		10.00	%
Royal Asian		13,152		17.72	%		5,936		8.00	%		7,420		10.00	%
Tier I capital (to risk-weighted assets)
Company (consolidated)	$	125,395		15.42	%	$	32,521		4.00	%		N/A		N/A
Royal Bank		97,418		13.30	%		29,301		4.00	%	$	43,951		6.00	%
Royal Asian		12,202		16.44	%		2,968		4.00	%		4,452		6.00	%
Tier I capital (to average assets, leverage)
Company (consolidated)	$	125,395		10.38	%	$	48,315		4.00	%		N/A		N/A
Royal Bank		97,418		8.83	%		44,109		4.00	%	$	55,136		5.00	%
Royal Asian		12,202		12.90	%		3,783		4.00	%		4,729		5.00	%

	As of December 31, 2009
											To be well capitalized
						For capital					capitalized under prompt
	Actual					adequacy purposes					corrective action provision
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital (to risk-weighted assets)
Company (consolidated)	$	141,854		15.45	%	$	73,446		8.00	%		N/A		N/A
Royal Bank		111,412		13.37	%		66,685		8.00	%	$	83,357		10.00	%
Royal Asian		14,085		16.99	%		6,630		8.00	%		8,288		10.00	%
Tier I capital (to risk-weighted assets)
Company (consolidated)	$	130,145		14.18	%	$	36,723		4.00	%		N/A		N/A
Royal Bank		100,772		12.09	%		33,343		4.00	%	$	50,014		6.00	%
Royal Asian		13,036		15.73	%		3,315		4.00	%		4,973		6.00	%
Tier I Capital (to average assets, leverage)
Company (consolidated)	$	130,145		9.78	%	$	53,255		4.00	%		N/A		N/A
Royal Bank		100,772		8.09	%		49,810		4.00	%	$	62,262		5.00	%
Royal Asian		13,036		12.52	%		4,164		4.00	%		5,205		5.00	%

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The capital ratios set forth above 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 the banking regulators. At December 31, 2009, the Company was required to have minimum Tier 1 and total capital ratios of 4.0% and 8.0%, respectively, and a minimum Tier 1 leverage ratio of 4.0%. At June 30, 2010, the Company met the regulatory minimum capital requirements, and management believes that, under current regulations, the Company will continue to meet its minimum capital requirements in the foreseeable future. At June 30, 2010, Royal Asian met the criteria for a well capitalized institution which is a leverage ratio of 5%, a Tier 1 ratio of 8%, and a total capital ratio of 10%.

On February 20, 2009, as part of the Capital Purchase Program (“CPP”) established by the United States Department of Treasury (“Treasury”), the Company issued to Treasury 30,407 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, without par value per share (the “Series A Preferred Stock”), and a liquidation preference of $1,000 per share. In conjunction with the purchase of the Series A Preferred Stock, Treasury received a warrant to purchase 1,104,370 shares of the Company’s Class A common stock. The aggregate purchase price for the Series A Preferred Stock and Warrant was $30.4 million in cash. The Series A Preferred Stock qualifies as Tier 1 capital and pays cumulative dividends at a rate of 5% per annum for the first five years, and 9% per annum thereafter. The Series A Preferred Stock may generally be redeemed by the Company at any time following consultation with its primary banking regulators. The warrant issued to Treasury has a 10-year term and is immediately exercisable upon its issuance, with an exercise price, subject to anti-dilution adjustments, equal to $4.13 per share of the common stock.

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 investments and the repayment of loans. These sources provide alternatives to meet its short-term liquidity needs. 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, availability on lines of credit, and unpledged investment securities and subtracting any reserve requirements, this amount is then divided by total deposits as well as by total liabilities to determine the liquidity ratios. The Company’s policy is to maintain a liquidity ratio as a percentage of total deposits of at least 12% and a liquidity ratio as a percentage of total liabilities of at least 10%. At June 30, 2010, the Company’s liquidity ratios well exceeded the policy minimums. The high liquidity level at June 30, 2010 is due to the anticipated redemption of brokered certificates of deposits and FHLB borrowing maturities of $55.1 million and $52.5 million, respectively, in the last half of 2010.

On August 13, 2009, the Company’s board of directors determined to suspend the regular quarterly cash dividends on the $30.4 million in Series A Preferred Stock issued to the United States Department of the Treasury (“Treasury”) as part of the Capital Purchase Program (“CPP”) established by the Treasury. The Company’s board of directors took this action in consultation with the Federal Reserve Bank of Philadelphia as required by recent regulatory policy guidance. The board of directors also intends to suspend interest payments on its $25.8 million of outstanding trust preferred securities. The Company currently has sufficient capital and liquidity to pay the scheduled dividends and interest payments on its preferred stock and trust preferred securities. However, the Company believes this decision will better support the capital position of Royal Bank, a wholly owned subsidiary of the Company. As of June 30, 2010 the trust preferred interest payment in arrears was $833,000 and has been recorded in interest expense and accrued interest payable. As of June 30, 2010 the Series A Preferred stock dividend in arrears was $1.6 million which is comprised of $1.5 million in dividends and $43,000 in interest which have not been recognized in the consolidated financial statements.

The Company’s level of liquidity is provided by funds invested primarily in corporate bonds, capital trust securities, U.S. agencies, and to a lesser extent, federal funds sold. The overall liquidity position of Royal Bank is monitored on a weekly basis while the remaining legal entities are monitored monthly.

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

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repricing, the timing of the repricing, and the interest rate sensitivity gaps which are 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, 2010:

	Days						1 to 5		Over 5		Non-rate
(In millions)	0 – 90			91 – 365			Years		Years		Sensitive			Total
Assets
Interest-bearing deposits in banks	$	92.0		$	—		$	—	$	—	$	22.8		$	114.8
Investment securities:
Available for sale		35.2			82.9			156.3		52.4		12.0			338.8
Loans:
Fixed rate		38.4			60.2			222.2		27.2		—			348.0
Variable rate		239.9			45.4			1.7		—		(22.8	)		264.2
Total loans		278.3			105.6			223.9		27.2		(22.8	)		612.2
Other assets		—			19.4			—		—		98.3			117.7
Total Assets	$	405.5		$	207.9		$	380.2	$	79.6	$	110.3		$	1,183.5
Liabilities & Capital
Deposits:
Non interest bearing deposits	$	—		$	—		$	—	$	—	$	62.3		$	62.3
Interest bearing deposits		22.2			72.4			126.2		—		—			220.8
Certificate of deposits		157.0			232.5			112.7		6.5		—			508.7
Total deposits		179.2			304.9			238.9		6.5		62.3			791.8
Borrowings (1)		73.8			62.3			85.5		40.0		0.7			262.3
Other liabilities		—			—			—		—		25.4			25.4
Capital		—			—			—		—		104.0			104.0
Total liabilities & capital	$	253.0		$	367.2		$	324.4	$	46.5	$	192.4		$	1,183.5
Net interest rate GAP	$	152.5		$	(159.3	)	$	55.8	$	33.1	$	(82.1	)
Cumulative interest rate GAP	$	152.5		$	(6.8	)	$	49.0	$	82.1
GAP to total assets		13	%		-13	%
GAP to total equity		147	%		-153	%
Cumulative GAP to total assets		13	%		-1	%
Cumulative GAP to total equity		147	%		-7	%

(1) The $727,000 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. At June 30, 2010, floating rate loans with floors and without floors were $125.3 million and $161.7 million, respectively.

REGULATORY ORDERS

FDIC Orders

On July 15, 2009, Royal Bank agreed to enter into a Stipulation and Consent to the Issuance of an Order to Cease and Desist (the “Orders”) with each of the Federal Deposit Insurance Corporation (“FDIC”) and the Commonwealth of Pennsylvania Department of Banking (“Department”). The material terms of the Orders are identical and require

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Royal Bank to: (i) have and retain qualified management, and notify the FDIC and the Department of any changes in Royal Bank’s board of directors or senior management; (ii) increase participation of Royal Bank’s board of directors in Royal Bank’s affairs by having the board assume full responsibility for approving Royal Bank’s policies and objectives and for supervising Royal Bank’s management; (iii) eliminate all assets classified as “Loss” and formulate a written plan to reduce assets classified as “Doubtful” and “Substandard” at its regulatory examination; (iv) develop a written plan to reduce delinquent loans, and restrict additional advances to borrowers with existing credits classified as “Loss,” “Doubtful” or “Substandard”; (v) develop a written plan to reduce Royal Bank’s commercial real estate loan concentration; (vi) maintain, after establishing an adequate allowance for loan and lease losses, a ratio of Tier 1 capital to total assets (“leverage ratio”) equal to or greater than 8% and a ratio of qualifying total capital to risk-weighted assets (total risk-based capital ratio) equal to or greater than 12%; (vii) formulate and implement written profit plans and comprehensive budgets for each year during which the Orders are in effect; (viii) formulate and implement a strategic plan covering at least three years, to be reviewed quarterly and revised annually; (ix) revise the liquidity and funds management policy and update and review the policy annually; (x) refrain from increasing the amount of brokered deposits held by Royal Bank and develop a plan to reduce the reliance on non-core deposits and wholesale funding sources; (xi) refrain from paying cash dividends without prior approval of the FDIC and the Department; (xii) refrain from making payments to or entering contracts with Royal Bank’s Holding Company or other Royal Bank affiliates without prior approval of the FDIC and the Department; (xiii) submit to the FDIC for review and approval an executive compensation plan that incorporates qualitative as well as profitability performance standards for Royal Bank’s executive officers; (xiv) establish a compliance committee of the board of directors of Royal Bank with the responsibility to ensure Royal Bank’s compliance with the Orders; and (xv) prepare and submit quarterly reports to the FDIC and the Department detailing the actions taken to secure compliance with the Orders. The Orders will remain in effect until modified or terminated by the FDIC and the Department.

The Orders do not restrict Royal Bank from transacting its normal banking business. Royal Bank will continue to serve its customers in all areas including making loans, establishing lines of credit, accepting deposits and processing banking transactions. Customer deposits remain fully insured to the highest limits set by the FDIC. The FDIC and the Department did not impose or recommend any monetary penalties in connection with the Orders.

Following are the actions Royal Bank has taken to respond to and comply with the Orders as of the date of this report:

1.	Board Oversight and Senior Management
	The board of director’s has increased their participation in the affairs of Royal Bank. A Regulatory Compliance Committee comprised of outside directors and management was created in the third quarter of 2009. The purpose of the Committee is to monitor compliance with the Orders. Royal Bank has recently completed an internal assessment of senior management’s qualifications and has submitted the report to the FDIC and the Department for their review.
2.	Reduction of Classified Assets
	Royal Bank has eliminated from its books via charge-off all assets classified as “Loss”. Royal Bank submitted to the FDIC and the Department a “Plan for the Reduction of Classified Assets” (“classified assets plan”) required under the Orders. The FDIC and the Department have approved the classified assets plan. No material advances were made on any classified loan unless approved by the board of directors and determined to be in Royal Bank’s best interest. Royal Bank was successful in reducing net classified loans (outstanding loan balance less charge-offs) plus other real estate owned (“OREO”) from $149.6 million at June 30, 2009 to $118.3 million at June 30, 2010.
3.	Reduction of Delinquencies
	Royal Bank submitted to the FDIC and the Department a “Plan for the Reduction of Delinquencies” (“delinquency reduction plan”) required under the Orders. The FDIC and the Department have approved the delinquency reduction plan. No advances were made on any delinquent loan unless approved by the board of directors and determined to be in Royal Bank’s best interest. Royal Bank’s delinquent loans (30 to 90 days)

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	amounted to $36.3 million at June 30, 2009 versus $22.4 million at June 30, 2010. Royal Bank’s non-accrual loans were $80.8 million and $67.2 million at June 30, 2009 and June 30, 2010, respectively.
4.	Reduction of Commercial Real Estate Concentrations
	Royal Bank submitted to the FDIC and the Department a “Plan for the Reduction of Commercial Real Estate Concentrations” (“CRE concentration plan”) required under the Orders. The FDIC and the Department have approved the CRE concentration plan. Management has been working diligently to reduce the concentration in commercial real estate loans (“CRE loans”). Royal Bank was successful in reducing the CRE concentration from $289.1 million at June 30, 2009 to $238.4 million at June 30, 2010, which amounted to 223.42% of total capital and 244.73% of Tier 1 capital.
	At June 30, 2010, total construction/land loans (“CL loans”) amounted to $106.2 million, or 99.51%, of total capital and 109.0% of Tier 1 capital. CL loans were approximately $21 million less than what was projected under the CRE concentration plan at year end 2009. Royal Bank no longer has a concentration of commercial real estate loans as defined in the joint agency “Guidance on Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices” issued on December 12, 2006.
5.	Capital Maintenance
	Under the Orders, Royal Bank must maintain a minimum total risk-based capital ratio and a minimum Tier 1 leverage ratio of 12% and 8%, respectively. At June 30, 2010, Royal Bank’s total risk-based capital and Tier 1 leverage ratios were 14.57% and 8.83%, respectively.
6.	Budget Plan
	Royal Bank submitted to the FDIC and the Department a revised 2009 budget and profit plan required under the Orders. The FDIC and the Department have approved the 2009 budget and profit plan. In addition Royal Bank has submitted to the FDIC and the Department a 2010 budget and profit plan.
7.	Strategic Plan
	Royal Bank submitted to the FDIC and the Department a three-year strategic plan required under the Orders. The FDIC and the Department have approved the three-year strategic plan. The board of directors and senior management are executing the strategic plan and will incorporate any modifications as deemed necessary by our regulators.
8.	Liquidity and Funds Management
	Royal Bank submitted to the FDIC and the Department a liquidity and funds management plan (“liquidity plan”) required under the Orders. The FDIC and the Department have approved the liquidity plan. At June 30, 2010, Royal Bank had $112.5 million in cash on hand and $57.9 million in unpledged agency securities. At June 30, 2010, the liquidity to deposits ratio was 28.2% compared to Royal Bank’s 12% target and the liquidity to total liabilities ratio was 19.9% compared to Royal Bank’s 10% target.
9.	Brokered Deposits and Borrowings
	Royal Bank submitted to the FDIC and the Department a plan for reduction of reliance on non-core deposits and wholesale funding sources plan (“brokered deposit plan”) required under the Orders. The FDIC and the Department have approved the brokered deposit plan. Since entering the Orders Royal Bank has not renewed, accepted, or rolled over any maturing brokered certificates of deposit (“CDs”); nor has Royal Bank issued new brokered CDs. Brokered CDs declined $82.8 million from $226.9 million at June 30, 2009 to $144.1 million at June 30, 2010. Royal Bank has redeemed an additional $36.4 million in brokered CDs through July 2010. Borrowings declined $48.1 million from $283.9 million at June 30, 2009 to $235.8 million at June 30, 2010.

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	The borrowing amounts do not include the $727,000 in obligations owned via equity investment which are not guaranteed by Royal Bank or any of its subsidiaries.
10.	Cash Dividends and other Payments to the Company
	Royal Bank will seek approval from the FDIC and the Department prior to declaring a cash dividend to the Company and prior to making payments or entering into new contracts with our affiliates.
11.	Executive Compensation
	Royal Bank submitted to the FDIC an executive compensation plan (“compensation plan”) required under the Orders. The FDIC has approved the compensation plan. Royal Bank was not required to submit the compensation plan to the Department.

Royal Bank has submitted all required quarterly reports to the FDIC and the Department detailing the actions taken to secure compliance with the Orders as of the date of this Report.

Federal Reserve Agreement

On March 17, 2010, the Company agreed to enter into a Written Agreement (the “Federal Reserve Agreement”) with the Federal Reserve Bank of Philadelphia (the “Reserve Bank”). The material terms of the Federal Reserve Agreement provide that: (i) the Company’s board of directors will take appropriate steps to fully utilize the Company’s financial and managerial resources to serve as a source of strength to its subsidiary banks, including taking steps to ensure that Royal Bank complies with the Orders previously entered into with the FDIC and the Department on July 15, 2009; (ii) the Company’s board of directors will, within 60 days of the Federal Reserve Agreement, submit to the Reserve Bank a written plan to strengthen board oversight of the management and operations of the consolidated operation; (iii) the Company will not declare or pay any dividends without the prior written approval of the Reserve Bank and the Director of the Division of Banking Supervision and Regulation of the Board of Governors of the Federal Reserve System; (iv) the Company and its non-bank subsidiaries will not make any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities without the prior approval of the Reserve Bank and the Director of the Division of Banking Supervision and Regulation of the Board of Governors of the Federal Reserve System; (v) the Company and its nonbank subsidiaries will not, directly or indirectly, incur, increase, or guarantee any debt without the prior written approval of the Reserve Bank; (vi) the Company will not, directly or indirectly, purchase or redeem any shares of its stock without the prior written approval of the Reserve Bank; (vii) the Company will, within 60 days of the Federal Reserve Agreement, submit to the Reserve Bank an acceptable written capital plan to maintain sufficient capital at the Company on a consolidated basis, which plan will at a minimum address: regulatory requirements for the Company and the Banks, the adequacy of the Banks’ capital taking into account the volume of classified credits, the allowance for loan and lease losses, current and projected asset growth, and projected retained earnings; the source and timing of additional funds necessary to fulfill the consolidated organization’s and the Banks’ future capital requirements; supervisory requests for additional capital at the Banks or the requirements of any supervisory action imposed on the Banks by federal or state regulators; and applicable legal requirements that the Company serve as a source of strength to the Banks; (viii) the Company will, within 60 days of the Federal Reserve Agreement, submit to the Reserve Bank cash flow projections for 2010 showing planned sources and uses of cash for debt service, operating expenses, and other purposes, and will submit similar cash flow projections for each subsequent calendar year at least one month prior to the beginning of such year; (ix) the Company will comply with applicable legal notice provisions in advance of appointing any new director or senior executive officer or changing the responsibilities of any senior executive officer such that the officer would assume a different senior executive officer position, and comply with restrictions on indemnification and severance payments imposed by the Federal Deposit Insurance Act; and (x) the Company’s board of directors will, within 45 days after the end of each quarter, submit progress reports to the Reserve Bank detailing the form and manner of all actions taken to secure compliance with the Agreement and the results thereof, together with a parent company-level balance sheet, income statement, and, as applicable, report of changes in shareholders’ equity.

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The Federal Reserve Agreement will remain in effect and enforceable until stayed, modified, terminated or suspended by the Reserve Bank. Royal Bancshares has submitted all progress reports and responses required under the Federal Reserve Agreement as of the date of this Report.

Recent Legislation Affecting the Financial Services Industry

Only July 21, 2010, the President signed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) into law. The Dodd Frank Act significantly changes regulation of financial institutions and the financial services industry, including: creating a Financial Services Oversight Council to identify emerging systemic risks and improve interagency cooperation; centralizing the responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau, which will be responsible for implementing, examining and enforcing compliance with federal consumer financial laws; permanently raising the current standard maximum deposit insurance amount to $250,000; establishing strengthened capital standards for banks, and disallowing trust preferred securities as qualifying as Tier 1 capital (subject to certain grandfather provisions for existing trust preferred securities); establishing new minimum mortgage underwriting standards; granting the Federal Reserve Board the power to regulate debit card interchange fees; and implementing corporate governance changes. Many aspects of the Dodd-Frank Act are subject to rulemaking that will take effect over several years, thus making it difficult to assess the impact of the statute on the financial industry, including the Company, at this time. The Company is currently reviewing the provisions of the Dodd-Frank Act and assessing their probable impact on the Company and it operations.

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, as defined in Rule 13a-15(e) of the Exchange Act. Based on that evaluation our CEO and CFO concluded that the Company’s disclosure controls and procedures were effective at June 30, 2010.

(b) Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting during the second quarter of 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Royal Bank holds a 60% equity interest in each of Crusader Servicing Corporation (“CSC”) and Royal Tax Lien Services, LLC (“RTL”). CSC and RTL acquire, through public auction, delinquent tax liens in various jurisdictions thereby assuming a superior lien position to most other lien holders, including mortgage lien holders. As previously discussed in the Company’s form 10-K for the year ended December 31, 2008, on March 4, 2009, each of CSC and RTL received a grand jury subpoena issued by the U.S. District Court for New Jersey upon application of the Antitrust Division of the U.S. Department of Justice (“DOJ”). The subpoena seeks certain documents and information relating to an ongoing investigation being conducted by the DOJ. Royal Bank has been advised that neither CSC nor RTL are targets of the DOJ investigation, but they are subjects of the investigation. Royal Bank, CSC and RTL are cooperating in the investigation.

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, 2009.

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

None

Item 3. Default Upon Senior Securities.

None

Item 4. (Removed and Reserved).

Item 5. Other Information.

None

Item 6. Exhibits.

     (a)

3.1	Articles of Incorporation of the Company. (Incorporated by reference to Exhibit 3(i) of the Company’s report on Form 10-K filed with the Commission on March 30, 2009.)
3.2	Bylaws of the Company (Incorporated by reference to Exhibit 3(ii) to the Company’s report on Form 10-K filed with the Commission on March 30, 2009.)
31.1	Section 302 Certification Pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 signed by Robert R. Tabas, Principal Executive Officer of Royal Bancshares of Pennsylvania on August 19, 2010.
31.2	Section 302 Certification Pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 signed by Robert A. Kuehl, Principal Financial Officer of Royal Bancshares of Pennsylvania on August 19, 2010.
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 Robert R. Tabas, Principal Executive Officer of Royal Bancshares of Pennsylvania on August 19, 2010.

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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 Robert A. Kuehl, Principal Financial Officer of Royal Bancshares of Pennsylvania on August 19, 2010.

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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 19, 2010	/s/ Robert A. Kuehl
	Robert A. Kuehl
	Principal Financial and Accounting Officer

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