Note 18. 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, 2011 and 2010, 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.

Community banking

The Company's Community Banking segment which includes Royal Bank America and Royal Asian Bank, in the prior period, 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 Royal Bank. For example, commercial lending is dependent upon the ability of Royal Bank to fund cash needed to make loans with retail deposits and other borrowings and to manage interest rate and credit risk. While Royal Bank makes very few consumer loans, cash needed to make such loans would be funded similarly to commercial loans. Royal Asian assets of $94.5 million and deposits of $81.3 million were included in “Community Banking” in the segment table for the three and six months ended June 30, 2010 respectively. Royal Asian recorded net income of $139,000 for the second quarter of 2010 and a net loss of $856,000 for the first six months of 2010.

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. Through June 30, 2011, Royal Bank had loaned $2.6 million to the Partnership and may be required to fund additional costs associated with capital improvements, operating and marketing expenses. The loan balance was paid down to $0 during the second quarter of 2011 as a result of the sales proceeds received from an auction that was held in April of 2011.

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 $12.6 million in impairment through 2010. The measurement and recognition of the impairment was based on estimated future discounted operating cash flows. No additional impairment was recognized during the first six months of 2011. 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, 2011 and 2010.

	Three months ended June 30, 2011
(In thousands)	Community Banking			Tax Lien Operation		Equity Investment		Leasing		Consolidated
Total assets	$	783,194		$	85,340	$	4,689	$	36,461	$	909,684
Total deposits	$	628,961		$	-	$	-	$	-	$	628,961
Interest income	$	7,294		$	1,838	$	-	$	868	$	10,000
Interest expense		2,908			643		-		289		3,840
Net interest income	$	4,386		$	1,195	$	-	$	579	$	6,160
Provision for loan and lease losses		2,600			193		-		263		3,056
Total other income		2,189			32		445		121		2,787
Total other expenses		8,916			526		53		290		9,785
Income tax (benefit) expense		(319	)		196		-		123		-
Net (loss) income	$	(4,622	)	$	312	$	392	$	24	$	(3,894	)
Noncontrolling interest	$	-		$	125	$	196	$	10	$	331
Net (loss) income attributable to Royal Bancshares	$	(4,622	)	$	187	$	196	$	14	$	(4,225	)

	Three months ended June 30, 2010
(In thousands)	Community Banking			Tax Lien Operation		Equity 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	)

	Six months ended June 30, 2011
	Community Banking			Tax Lien Operation		Equity Investment		Leasing		Consolidated
Total assets	$	783,194		$	85,340	$	4,689	$	36,461	$	909,684
Total deposits	$	628,961		$	-	$	-	$	-	$	628,961
Interest income	$	14,602		$	4,227	$	-	$	1,745	$	20,574
Interest expense		5,920			1,356		-		583		7,859
Net interest income	$	8,682		$	2,871	$	-	$	1,162	$	12,715
Provision for loan and lease losses		4,374			304		-		462		5,140
Total other income		2,969			486		445		251		4,151
Total other expenses		15,101			930		101		622		16,754
Income tax (benefit) expense		(1,114	)		830		-		284		-
Net (loss) income	$	(6,710	)	$	1,293	$	344	$	45	$	(5,028	)
Noncontrolling interest	$	-		$	518	$	172	$	18	$	708
Net (loss) income attributable to Royal Bancshares	$	(6,710	)	$	775	$	172	$	27	$	(5,736	)

	Six months ended June 30, 2010
(In thousands)	Community Banking			Tax Lien Operation		Equity 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	)

Interest income earned by the Community Banking segment related to the Tax Lien Operation was approximately $643,000 and $868,000 for the three month periods ended June 30, 2011 and 2010, respectively and $1.4 million and $1.8 million for the six months ended June 30, 2011 and 2010, respectively.

Interest income earned by the Community Banking segment related to the Leasing Segment was approximately $289,000 and $312,000 for the three month periods ended June 30, 2011 and 2010, respectively and $583,000 and $615,000 for the six months ended June 30, 2011 and 2010, respectively.