Regulatory Matters and Significant Risks or Uncertainties	6 Months Ended
Jun. 30, 2011
Regulatory Matters and Significant Risks or Uncertainties [Abstract]
Regulatory Matters and Significant Risks or Uncertainties	Note 2. Regulatory Matters and Significant Risks or Uncertainties 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 materially restrict Royal Bank from transacting its normal banking business. Royal Bank continues 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. Royal Bank created a Regulatory Compliance Committee comprised of outside directors and management in the third quarter of 2009. The purpose of the Committee is to monitor compliance with the Orders. Royal Bank has submitted an internal assessment of senior management's qualifications report to the FDIC and the Department. Additionally Royal Bank has submitted plans for reducing classified assets, reducing delinquencies, reducing commercial real estate concentrations, liquidity and funds management, and reducing non-core deposits and whole-sale funding sources, and a compensation plan. All plans submitted prior to 2011 have been approved by the FDIC and the Department where required. Royal Bank has submitted on a timely basis all required plans for 2011 to the FDIC and the Department for their review. Royal Bank has submitted all required quarterly reports to the FDIC and the Department detailing the actions taken to maintain 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 30 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. In April 2011, with respect to the capital plan submissions by the Company to the Reserve Bank, the Reserve Bank advised the Company that it will not approve a capital plan until such time as the Company is able to successfully raise additional capital and/or substantially reduce its risk profile, or is able to offer credible assurances that the Company will be able to raise capital or reduce its risk profile. Our success as a Company is dependent upon pursuing various alternatives in not only achieving the growth and expansion of our banking franchise but also in managing our day to day operations. The existence of the Orders and the Federal Reserve Agreement may limit or impact our ability to pursue all previously available alternatives in the management of the Company. Our ability to retain existing retail and commercial customers as well as the ability to attract potentially new customers may be impacted by the existence of the Orders and the Federal Reserve Agreement. The Company has been successful in commercial real estate lending; however, our ability to expand into construction loans at this time is limited. The Company's ability to raise capital in the current economic environment could be potentially limited or impacted as a result of the Orders and the Federal Reserve Agreement. Attracting new management talent is critical to the success of our business and could be potentially impacted due to the existence of the Orders and the Federal Reserve Agreement. At June 30, 2011, each of the Company and Royal Bank met all capital regulatory requirements to which it is subject. Continued Losses Over the past 14 quarters, the Company has recorded significant losses totaling $101.1 million ($5.7 million for the six months ended June 30, 2011, and $24.1 million, $33.2 million and $38.1 million for the years ended December 31, 2010, 2009 and 2008, respectively) which were primarily related to charge-offs on the loan and lease portfolio, impairment charges on investment securities, and the establishment of a deferred tax valuation allowance. The year-over-year decrease in losses was mainly related to the reduction in other-than-temporary impairment (“OTTI”) on investment securities. As a result of these losses, the Company has negative retained earnings of $97.7 million at June 30, 2011. Also contributing to the negative retained earnings were the cash and stock dividends declared and paid in previous years. In addition to reducing the total shareholders' equity, the continued losses, negative retained earnings, and required regulatory approval impact the Company's ability to pay cash dividends to its shareholders now and in future years. The deterioration of the real estate market over the past few years has significantly impacted the Company's loan portfolio which has a high concentration of real estate secured loans. Net loan charge-offs were $6.5 million and $6.7 million for the three and six months ended June 30, 2011, respectively, and $30.4 million, $19.2 million, and $12.2 million for the years ended 2010, 2009, and 2008, respectively. The provision for loan and lease losses was $3.1 million and $5.1 million for the three and six months ended June 30, 2011, respectively, compared to $4.3 million and $6.2 million for the three and six months ended June 30, 2010, respectively. The 2011 provision is directly related to $5.1 million in additional specific reserves that were charged-off during the second quarter of 2011. The level of charge-offs was the primary reason for the significant provision for loan and lease losses of $22.1 million, $20.6 million, and $21.8 million that were recorded in 2010, 2009, and 2008, respectively. Non-performing loans held for investment (“LHFI”) totaled $45.3 million at June 30, 2011 compared to $43.2 million at December 31, 2010, $73.7 million at December 31, 2009 and $85.8 million at December 31, 2008. Total non-performing loans at June 30, 2011 and December 31, 2010 were $62.7 million and $65.8 million, respectively, and include $17.4 million and $22.6 million in loans held for sale (“LHFS”), respectively. For the three months and six months ended June 30, 2011, the Company recorded OTTI of $381,000 on the investment portfolio compared to $165,000 and $341,000 for the comparable 2010 periods, respectively. OTTI charges totaled $479,000, $11.0 million, and $23.4 million in 2010, 2009, and 2008, respectively. As evidenced by the significant reduction in impairment charges, the Company has reduced the credit risk within its investment portfolio. This was accomplished by taking advantage of opportunities to sell investments that had potential credit risk for minimal losses as well as instituting new policy guidelines regarding types of investments, as well as limits on the amount of each type of investment. The establishment of a deferred tax valuation allowance resulted in a $15.5 million non-cash charge to the consolidated statement of operations in 2008. This was a result of management's conclusion 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. Subsequent additions to the allowance have resulted in a deferred tax valuation allowance of $33.5 million at June 30, 2011. In addition to the losses mentioned above, the Company has experienced an increase in other operating expenses related to credit quality which includes OREO impairment charges, OREO and loan collection expenses, and legal expenses. Impairment charges related to real estate owned via equity investments totaled $2.6 million, $0, and $1.5 million in 2010, 2009, and 2008 respectively. There was no further impairment on real estate owned via equity investments in the first six months of 2011. Also included in other operating expenses are FDIC and state assessments which totaled $3.0 million, $3.8 million, and $658,000 in 2010, 2009, and 2008, respectively. As a result of the reduction of deposits in 2010, largely related to the decline in brokered deposits, the FDIC assessment decreased in 2010. The FDIC assessment for the first six months of 2011 amounted to $1.0 million, which results in a decline year over year on an annualized basis. Credit Quality The Company's success significantly depends on the growth in population, income levels, loans and deposits and on the continued stability in real estate values in our markets. If the communities in which we operate do not grow or if prevailing economic conditions locally or nationally are unfavorable, our business may be adversely affected. Adverse economic conditions in our specific market areas, specifically decreases in real estate property values due to the nature of our loan portfolio could reduce our growth rate, affect the ability of customers to repay their loans and generally affect our financial condition and results of operations. Many industries have been impacted by the effects of the economic conditions over the past three years, with financial services, housing, and commercial real estate being hit particularly hard. The Company's loan and investment portfolios were directly affected. The Company's commercial real estate loans, including construction and land development loans, have seen a decline in the collateral values, and a reduction in the borrowers' ability to meet the payment terms of their loans due to reduced cash flow. Further declines in collateral values and borrowers' liquidity with sustained unemployment at current levels may lead to increases in foreclosures, delinquencies and customer bankruptcies. The Company is less able than a larger institution to spread the risks of unfavorable local economic conditions across a large number of more diverse economies. Our allowance for loan and lease losses is based on our historical loss experience as well as an evaluation of the risks associated with our loan portfolio, including the size and composition of the loan portfolio, current economic conditions and trends in delinquencies and non-performing loans within the portfolio. Our allowance for loan and lease losses may not be adequate to cover actual loan and lease losses and future provisions for loan and lease losses could materially and adversely affect our financial results. The Company had non-performing loans of $62.7 million ($45.3 million in LHFI and $17.4 million in LHFS) at June 30, 2011. Non-performing loans were $65.8 million ($43.2 million in LHFI and $22.6 million in LHFS), $73.7 million, and $85.8 million at December 31, 2010, 2009 and 2008, respectively. The Company recorded $6.9 million and $7.1 million in charge-offs for the three and six months ended June 30, 2011, respectively, compared to $10.8 million and $14.5 million in charge-offs for the three and six months ended June 30, 2010. Charge-offs recorded for the years ended 2010, 2009, and 2008 were $31.7 million, $19.8 million, and $12.3 million, respectively. OREO balances were $25.4 million at June 30, 2011 and $29.2 million, $30.3 million, and $10.3 million at December 31, 2010, 2009, and 2008, respectively. The Company signed a letter of intent in the first quarter of 2011 to sell a pool of $54.1 million of classified assets in a bulk sale, which was expected to close in the second quarter of 2011. The associated sale value, or fair market value, of the classified assets resulted in an additional loss of $14.2 million during the fourth quarter of 2010. The Company was unable to arrive at a mutually satisfactory purchase and sale agreement with the prospective purchaser and terminated negotiations. The Company has marketed these assets within the pool to individual buyers to facilitate the reduction of classified assets and improve the credit quality of the loan portfolio. Efforts through the six months ended June 30, 2011 have resulted in the sale of $4.8 million of assets originally within the pool. The Company recorded a net gain of $898,000 on these sold assets. In accordance with the Orders, Royal Bank has eliminated from the balance sheet via charge-off all assets classified as “Loss”. Royal Bank was successful in reducing classified assets, which includes LHFS and OREO, from $149.6 million at June 30, 2009 to $109.3 million at June 30, 2011. Royal Bank's delinquent loans (30 to 90 days) amounted to $36.3 million at June 30, 2009 versus $1.6 million at June 30, 2011. No material advances were made on any classified or delinquent loan unless approved by the board of directors and determined to be in Royal Bank's best interest. The Company has restructured the investment portfolio to reduce credit risk by selling corporate debt securities and equity securities and replacing their maturities with U.S. government issued or sponsored securities. For the six months ended June 30, 2011 the Company recorded OTTI losses amounting to $381,000 on the investment portfolio compared to $341,000 for the six months ended June 30, 2010. Year-over-year OTTI losses have decreased from $23.4 million at December 31, 2008 to $11.0 million at December 31, 2009 to $479,000 at December 31, 2010. Commercial Real Estate Concentrations As mentioned previously the adverse economic conditions have primarily impacted the real estate secured loan portfolio. Non-residential real estate and construction and development loans are often riskier and tend to have significantly larger balances than home equity loans or residential mortgage loans to individuals. While the Company believes that the commercial real estate concentration risk is mitigated by diversification among the types and characteristics of real estate collateral properties, sound underwriting practices, and ongoing portfolio monitoring and market analysis, the repayments of these loans usually depend on the successful operation of a business or the sale of the underlying property. As a result, these loans are more likely to be unfavorably affected by adverse conditions in the real estate market or the economy in general. The remaining loans in the portfolio are commercial or industrial loans, which are collateralized by various business assets the value of which may decline during adverse market and economic conditions. Adverse conditions in the real estate market and the economy may result in increasing levels of loan charge-offs and non-performing assets and the reduction of earnings. When we take collateral in foreclosures and similar proceedings, we are required to mark the related asset to the fair market value of the collateral, which may ultimately result in a loss. It is possible that Royal Bank may be required to maintain higher levels of capital than it would be otherwise be expected to maintain as a result of the Bank's commercial real estate loans, which may require the Company to obtain additional capital. Management has been working diligently to reduce the concentration in commercial real estate loans (“CRE loans”). Our non-residential real estate and construction and land development loan portfolio held for investment was $256.3 million at June 30, 2011 comprising 58% of total loans compared to $284.1 million or 57% of total loans at December 31, 2010. Royal Bank was successful in reducing the CRE concentration, which includes loans held for sale from $289.1 million at June 30, 2009 to $197.4 million at June 30, 2011, which amounted to 202.7% of total capital and 220.1% of Tier 1 capital. At June 30, 2011, total construction/land loans (“CL loans”) including loans held for sale amounted to $81.0 million, or 83.2%, of total capital and 90.3% of Tier 1 capital. Based on capital levels calculated under U.S. GAAP, 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 in December 2006 (“Guidance”). Based on capital levels calculated under regulatory accounting principles (“RAP”) (see discussion under “Note 11 – Regulatory Capital Requirements” to the Consolidated Financial Statements), CRE loans and CL loans as a percentage of total capital and Tier 1 capital, respectively, are 235.9%, 259.0%, 96.8% and 106.3%. Under RAP, Royal Bank does not have a concentration in CL loans as defined in the Guidance. Included in the figures above are loans held for sale as of June 30, 2011. Balance Sheet Reduction (Deleveraging) During the past 24 months, Royal Bank has continued to record losses in earnings, which have negatively impacted its capital ratios. The Company implemented a strategy to mitigate this impact to the capital ratios through the reduction of the assets (deleveraging). The balance sheet deleveraging was accomplished primarily through the run off of maturing brokered certificates of deposit (“CDs”) and FHLB borrowings as required under the Orders by reducing the balances of cash, investment securities and loans. This strategy of reducing the size of the balance sheet has provided greater use of the existing capital despite the continued loss of income by maintaining that level of capital as a percentage of the remaining reduced level of assets in order to achieve capital ratios at required regulatory levels. The Company recognizes that deleveraging will also potentially have a negative impact on future earnings, but will provide a short-term benefit to capital levels. The deleveraging of the balance sheet over the past 24 months resulted from paying off and paying down FHLB advances and the run off of brokered CDs totaling $323.0 million within Royal Bank. The Company does not plan to roll over maturing brokered CDs during the remainder of 2011. As part of the restructuring of the investment portfolio, the Company also reduced the investment portfolio by approximately $122 million during 2010, which is almost entirely within Royal Bank with no substantive change during the first six months of 2011. At year end 2010, loans had declined by approximately $116 million, with an additional decline of $64.1 million in the first six months of 2011 due to pay downs of principal, payoffs, charge-offs, sales, and transfers to OREO. Liquidity and Funds Management Royal Bank may not accept new brokered deposits and has limited capacity to borrow additional funds in the event such funds are needed for liquidity purposes. However, Royal Bank has continued to maintain liquidity measures that are more than two times the target levels. As discussed in “Note 8 – Borrowings and Subordinated Debentures” to the Consolidated Financial Statements, Royal Bank has an over collateralized delivery requirement of 105% with the Federal Home Loan Bank (“FHLB”) as a result of the level of non-performing assets and the losses that have been experienced over the past three years. The ability to borrow additional funds is based on the amount of collateral that is available to be pledged. As of June 30, 2011, Royal Bank had approximately $8 million of available borrowing capacity at the FHLB as a result of excess collateral that has been pledged. In addition, Royal Bank has approximately $136 million of unpledged agency securities that are available to be pledged as collateral if needed. Royal Bank also has limited availability to borrow from the Federal Reserve Discount Window. The availability, which is approximately $7 million at June 30, 2011, is based on collateral pledged. At June 30, 2011, Royal Bank had $54.8 million in cash on hand and $135.8 million in unpledged agency securities.At June 30, 2011, the liquidity to deposits ratio was 35.9% compared to Royal Bank's 12% policy target and the liquidity to total liabilities ratio was 27.2% compared to Royal Bank's 10% policy target. Since entering the Orders Royal Bank has not renewed, accepted, or rolled over any maturing brokered CDs; nor has Royal Bank issued new brokered CDs. Brokered CDs declined $190.9 million from $226.9 million at June 30, 2009 to $36.0 million at June 30, 2011. Borrowings declined $132.4 million from $283.9 million at June 30, 2009 to $151.5 million at June 30, 2011. The Company also has unfunded pension plan obligations of $12.7 million as of June 30, 2011 which potentially could impact liquidity. The Company plans to fund the pension plan obligations through existing Company owned life insurance policies. Dividend and Interest Restrictions Due to the Orders and the Federal Reserve Agreement, our ability to obtain lines of credit, to receive attractive collateral treatment from funding sources, and to pursue all attractive funding alternatives in this current low interest rate environment could be impacted and thereby limit liquidity alternatives. 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 which had been issued to the United States Department of Treasury (“Treasury”) as part of the Capital Purchase Program (“CPP”), and to suspend interest payments on the $25.8 million in trust preferred securities. As of June 30, 2011, the Series A Preferred stock dividend in arrears was $3.2 million and has not been recognized in the consolidated financial statements. As of June 30, 2011, the trust preferred interest payment in arrears was $1.5 million and has been recorded in interest expense and accrued interest payable. The decision to suspend the preferred cash dividends and the trust preferred interest payments better supports the capital and liquidity position of Royal Bank. As a consequence of missing the sixth dividend payment in the fourth quarter of 2010, the Treasury has the right to appoint two directors to our board of directors until all accrued but unpaid dividends have been paid. On July 13, 2011, the Treasury exercised its right to appoint a director to the Company's board of directors. The Company expects the Treasury to appoint a second director in the near future, subject to the approval of the Federal Reserve. At June 30, 2011, as a result of significant losses within Royal Bank and cash and stock dividends declared and paid in previous years, the Company had negative retained earnings and therefore would not have been able to declare and pay any cash dividends. Under the Orders, 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 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. Capital Adequacy In connection with a recent bank regulatory examination, the FDIC concluded, based upon its interpretation of the Consolidated Reports of Condition and Income (the “Call Report”) instructions and under RAP, that income from Royal Bank's tax lien business should be recognized on a cash basis, not an accrual basis. Royal Bank's current accrual method is in accordance with U.S. GAAP. Royal Bank disagrees with the FDIC's conclusion and filed the Call Report for June 30, 2011, and the three previous quarterly filings in accordance with U.S. GAAP. However, the change in the manner of revenue recognition for the tax lien business for regulatory accounting purposes affects Royal Bank's and the Company's capital ratios as disclosed in “Note 11 - Regulatory Capital Requirements” to the Consolidated Financial Statements. Royal Bank is in discussions with the FDIC to resolve the difference of opinion. 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, 2011, based on capital levels calculated under RAP, Royal Bank's total risk-based capital and Tier 1 leverage ratios were 14.23% and 8.34%, respectively. As of June 30, 2011, each of the Company and Royal Bank met all capital adequacy requirements to which it is subject. Department of Justice Investigation (“DOJ”) 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 DOJ. The subpoena sought certain documents and information relating to an ongoing investigation being conducted by the DOJ. It is possible that the outcome of the investigation could result in fines and penalties being assessed against both CSC and RTL, which could also result in reputational risk due to negative publicity. However, Royal Bank has been advised that neither CSC nor RTL are targets of the DOJ investigation, but they are “subjects” of the investigation and therefore the Company has concluded that it is unlikely that a contingent liability exists. Royal Bank, CSC and RTL are cooperating in the investigation. Management Plans The Company was successful during the past year reducing the cost of funds, which improved the net interest margin; completing the sale of Royal Asian, which permitted the Company to contribute additional capital of $10.3 million to Royal Bank; minimizing investment impairment, recouping $1.7 million of the $5.0 million collateral loss associated with the collapse of Lehman in 2008; and addressing the matters set forth in the Orders, which included maintaining required capital ratios and liquidity measures. During the first two quarters of 2011, the Company has been successful in reducing the level of classified assets, reducing the level of loan delinquencies, experiencing minimal investment impairment, significantly reducing the unsold condo units within the partnership of the real estate owned via equity investment through a successful auction, and reducing the cost of funds. In addition to increased board oversight and the creation of a Regulatory Compliance Committee in response to the Orders, the Company has enhanced the board through the addition of experienced directors with diverse backgrounds. The new members are comprised of the following: the CEO of a public company who has legal and consulting experience, a former regulator with consulting experience, a former CEO of a much larger financial institution who has bank turnaround experience and a former senior partner of a public accounting firm. Moreover, the director that was recently appointed by Treasury has significant experience in banking, most recently as the Chief Executive Officer for a larger financial institution. The board and management have developed a contingency plan to maintain capital ratios at required levels under the Orders that expands the deleveraging beyond the run off of maturing brokered CDs and FHLB advances, which includes the potential securitization or sale of a significant portion of the tax lien portfolio. The Company will also consider the following measures as part of the contingency plan, if required, to insure that capital ratios continue to meet the requirements of the Orders. These additional measures, if required, include the following: sales of selected branches with high concentrations of retail CDs, sales of performing loans or specific segments of the loan portfolio, a shareholder rights offering, a reduction in the level of investment securities, and allow maturing CDs to selectively run off. It is extremely unlikely that all of the above alternatives would be initiated. The Company recognizes that some of these measures will also potentially have a negative impact on future earnings due to the loss of earning assets, but they also can potentially provide a short-term benefit to capital levels. The board of directors and management of the Company remain committed to meeting the capital level requirements for Royal Bank as set forth in the Orders. The Company's strategic plan includes compliance with the Orders and the Federal Reserve Agreement discussed above, reducing the level of classified loans within the loan portfolio and improving the overall level of credit quality, maintaining reduced credit risk within the investment portfolio and returning to profitability. In concert with these efforts, the Company will transition more toward a community bank focus within its geographic footprint and adjacent markets. This will be achieved through the continued diversification of the loan portfolio, increased emphasis on the growth of core deposits, the utilization of enterprise risk management for reviewing strategic initiatives and maintenance of improved underwriting standards. The strategic plan provides a framework for maintaining required capital ratios while also reducing the risk profile of the Company and Royal Bank.

Note 2. Regulatory Matters and Significant Risks or Uncertainties

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 materially restrict Royal Bank from transacting its normal banking business. Royal Bank continues 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.

Royal Bank created a Regulatory Compliance Committee comprised of outside directors and management in the third quarter of 2009. The purpose of the Committee is to monitor compliance with the Orders. Royal Bank has submitted an internal assessment of senior management's qualifications report to the FDIC and the Department. Additionally Royal Bank has submitted plans for reducing classified assets, reducing delinquencies, reducing commercial real estate concentrations, liquidity and funds management, and reducing non-core deposits and whole-sale funding sources, and a compensation plan. All plans submitted prior to 2011 have been approved by the FDIC and the Department where required. Royal Bank has submitted on a timely basis all required plans for 2011 to the FDIC and the Department for their review.

Royal Bank has submitted all required quarterly reports to the FDIC and the Department detailing the actions taken to maintain 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 30 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. In April 2011, with respect to the capital plan submissions by the Company to the Reserve Bank, the Reserve Bank advised the Company that it will not approve a capital plan until such time as the Company is able to successfully raise additional capital and/or substantially reduce its risk profile, or is able to offer credible assurances that the Company will be able to raise capital or reduce its risk profile.

Our success as a Company is dependent upon pursuing various alternatives in not only achieving the growth and expansion of our banking franchise but also in managing our day to day operations. The existence of the Orders and the Federal Reserve Agreement may limit or impact our ability to pursue all previously available alternatives in the management of the Company. Our ability to retain existing retail and commercial customers as well as the ability to attract potentially new customers may be impacted by the existence of the Orders and the Federal Reserve Agreement. The Company has been successful in commercial real estate lending; however, our ability to expand into construction loans at this time is limited. The Company's ability to raise capital in the current economic environment could be potentially limited or impacted as a result of the Orders and the Federal Reserve Agreement. Attracting new management talent is critical to the success of our business and could be potentially impacted due to the existence of the Orders and the Federal Reserve Agreement. At June 30, 2011, each of the Company and Royal Bank met all capital regulatory requirements to which it is subject.

Continued Losses

Over the past 14 quarters, the Company has recorded significant losses totaling $101.1 million ($5.7 million for the six months ended June 30, 2011, and $24.1 million, $33.2 million and $38.1 million for the years ended December 31, 2010, 2009 and 2008, respectively) which were primarily related to charge-offs on the loan and lease portfolio, impairment charges on investment securities, and the establishment of a deferred tax valuation allowance. The year-over-year decrease in losses was mainly related to the reduction in other-than-temporary impairment (“OTTI”) on investment securities. As a result of these losses, the Company has negative retained earnings of $97.7 million at June 30, 2011. Also contributing to the negative retained earnings were the cash and stock dividends declared and paid in previous years. In addition to reducing the total shareholders' equity, the continued losses, negative retained earnings, and required regulatory approval impact the Company's ability to pay cash dividends to its shareholders now and in future years.

The deterioration of the real estate market over the past few years has significantly impacted the Company's loan portfolio which has a high concentration of real estate secured loans. Net loan charge-offs were $6.5 million and $6.7 million for the three and six months ended June 30, 2011, respectively, and $30.4 million, $19.2 million, and $12.2 million for the years ended 2010, 2009, and 2008, respectively. The provision for loan and lease losses was $3.1 million and $5.1 million for the three and six months ended June 30, 2011, respectively, compared to $4.3 million and $6.2 million for the three and six months ended June 30, 2010, respectively. The 2011 provision is directly related to $5.1 million in additional specific reserves that were charged-off during the second quarter of 2011. The level of charge-offs was the primary reason for the significant provision for loan and lease losses of $22.1 million, $20.6 million, and $21.8 million that were recorded in 2010, 2009, and 2008, respectively. Non-performing loans held for investment (“LHFI”) totaled $45.3 million at June 30, 2011 compared to $43.2 million at December 31, 2010, $73.7 million at December 31, 2009 and $85.8 million at December 31, 2008. Total non-performing loans at June 30, 2011 and December 31, 2010 were $62.7 million and $65.8 million, respectively, and include $17.4 million and $22.6 million in loans held for sale (“LHFS”), respectively.

For the three months and six months ended June 30, 2011, the Company recorded OTTI of $381,000 on the investment portfolio compared to $165,000 and $341,000 for the comparable 2010 periods, respectively. OTTI charges totaled $479,000, $11.0 million, and $23.4 million in 2010, 2009, and 2008, respectively. As evidenced by the significant reduction in impairment charges, the Company has reduced the credit risk within its investment portfolio. This was accomplished by taking advantage of opportunities to sell investments that had potential credit risk for minimal losses as well as instituting new policy guidelines regarding types of investments, as well as limits on the amount of each type of investment.

The establishment of a deferred tax valuation allowance resulted in a $15.5 million non-cash charge to the consolidated statement of operations in 2008. This was a result of management's conclusion 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. Subsequent additions to the allowance have resulted in a deferred tax valuation allowance of $33.5 million at June 30, 2011.

In addition to the losses mentioned above, the Company has experienced an increase in other operating expenses related to credit quality which includes OREO impairment charges, OREO and loan collection expenses, and legal expenses. Impairment charges related to real estate owned via equity investments totaled $2.6 million, $0, and $1.5 million in 2010, 2009, and 2008 respectively. There was no further impairment on real estate owned via equity investments in the first six months of 2011. Also included in other operating expenses are FDIC and state assessments which totaled $3.0 million, $3.8 million, and $658,000 in 2010, 2009, and 2008, respectively. As a result of the reduction of deposits in 2010, largely related to the decline in brokered deposits, the FDIC assessment decreased in 2010. The FDIC assessment for the first six months of 2011 amounted to $1.0 million, which results in a decline year over year on an annualized basis.

Credit Quality

The Company's success significantly depends on the growth in population, income levels, loans and deposits and on the continued stability in real estate values in our markets. If the communities in which we operate do not grow or if prevailing economic conditions locally or nationally are unfavorable, our business may be adversely affected. Adverse economic conditions in our specific market areas, specifically decreases in real estate property values due to the nature of our loan portfolio could reduce our growth rate, affect the ability of customers to repay their loans and generally affect our financial condition and results of operations. Many industries have been impacted by the effects of the economic conditions over the past three years, with financial services, housing, and commercial real estate being hit particularly hard. The Company's loan and investment portfolios were directly affected. The Company's commercial real estate loans, including construction and land development loans, have seen a decline in the collateral values, and a reduction in the borrowers' ability to meet the payment terms of their loans due to reduced cash flow. Further declines in collateral values and borrowers' liquidity with sustained unemployment at current levels may lead to increases in foreclosures, delinquencies and customer bankruptcies. The Company is less able than a larger institution to spread the risks of unfavorable local economic conditions across a large number of more diverse economies.

Our allowance for loan and lease losses is based on our historical loss experience as well as an evaluation of the risks associated with our loan portfolio, including the size and composition of the loan portfolio, current economic conditions and trends in delinquencies and non-performing loans within the portfolio. Our allowance for loan and lease losses may not be adequate to cover actual loan and lease losses and future provisions for loan and lease losses could materially and adversely affect our financial results.

The Company had non-performing loans of $62.7 million ($45.3 million in LHFI and $17.4 million in LHFS) at June 30, 2011. Non-performing loans were $65.8 million ($43.2 million in LHFI and $22.6 million in LHFS), $73.7 million, and $85.8 million at December 31, 2010, 2009 and 2008, respectively. The Company recorded $6.9 million and $7.1 million in charge-offs for the three and six months ended June 30, 2011, respectively, compared to $10.8 million and $14.5 million in charge-offs for the three and six months ended June 30, 2010. Charge-offs recorded for the years ended 2010, 2009, and 2008 were $31.7 million, $19.8 million, and $12.3 million, respectively. OREO balances were $25.4 million at June 30, 2011 and $29.2 million, $30.3 million, and $10.3 million at December 31, 2010, 2009, and 2008, respectively.

The Company signed a letter of intent in the first quarter of 2011 to sell a pool of $54.1 million of classified assets in a bulk sale, which was expected to close in the second quarter of 2011. The associated sale value, or fair market value, of the classified assets resulted in an additional loss of $14.2 million during the fourth quarter of 2010. The Company was unable to arrive at a mutually satisfactory purchase and sale agreement with the prospective purchaser and terminated negotiations. The Company has marketed these assets within the pool to individual buyers to facilitate the reduction of classified assets and improve the credit quality of the loan portfolio. Efforts through the six months ended June 30, 2011 have resulted in the sale of $4.8 million of assets originally within the pool. The Company recorded a net gain of $898,000 on these sold assets.

In accordance with the Orders, Royal Bank has eliminated from the balance sheet via charge-off all assets classified as “Loss”. Royal Bank was successful in reducing classified assets, which includes LHFS and OREO, from $149.6 million at June 30, 2009 to $109.3 million at June 30, 2011. Royal Bank's delinquent loans (30 to 90 days) amounted to $36.3 million at June 30, 2009 versus $1.6 million at June 30, 2011. No material advances were made on any classified or delinquent loan unless approved by the board of directors and determined to be in Royal Bank's best interest. The Company has restructured the investment portfolio to reduce credit risk by selling corporate debt securities and equity securities and replacing their maturities with U.S. government issued or sponsored securities. For the six months ended June 30, 2011 the Company recorded OTTI losses amounting to $381,000 on the investment portfolio compared to $341,000 for the six months ended June 30, 2010. Year-over-year OTTI losses have decreased from $23.4 million at December 31, 2008 to $11.0 million at December 31, 2009 to $479,000 at December 31, 2010.

Commercial Real Estate Concentrations

As mentioned previously the adverse economic conditions have primarily impacted the real estate secured loan portfolio. Non-residential real estate and construction and development loans are often riskier and tend to have significantly larger balances than home equity loans or residential mortgage loans to individuals. While the Company believes that the commercial real estate concentration risk is mitigated by diversification among the types and characteristics of real estate collateral properties, sound underwriting practices, and ongoing portfolio monitoring and market analysis, the repayments of these loans usually depend on the successful operation of a business or the sale of the underlying property. As a result, these loans are more likely to be unfavorably affected by adverse conditions in the real estate market or the economy in general. The remaining loans in the portfolio are commercial or industrial loans, which are collateralized by various business assets the value of which may decline during adverse market and economic conditions. Adverse conditions in the real estate market and the economy may result in increasing levels of loan charge-offs and non-performing assets and the reduction of earnings. When we take collateral in foreclosures and similar proceedings, we are required to mark the related asset to the fair market value of the collateral, which may ultimately result in a loss. It is possible that Royal Bank may be required to maintain higher levels of capital than it would be otherwise be expected to maintain as a result of the Bank's commercial real estate loans, which may require the Company to obtain additional capital.

Management has been working diligently to reduce the concentration in commercial real estate loans (“CRE loans”). Our non-residential real estate and construction and land development loan portfolio held for investment was $256.3 million at June 30, 2011 comprising 58% of total loans compared to $284.1 million or 57% of total loans at December 31, 2010. Royal Bank was successful in reducing the CRE concentration, which includes loans held for sale from $289.1 million at June 30, 2009 to $197.4 million at June 30, 2011, which amounted to 202.7% of total capital and 220.1% of Tier 1 capital. At June 30, 2011, total construction/land loans (“CL loans”) including loans held for sale amounted to $81.0 million, or 83.2%, of total capital and 90.3% of Tier 1 capital. Based on capital levels calculated under U.S. GAAP, 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 in December 2006 (“Guidance”). Based on capital levels calculated under regulatory accounting principles (“RAP”) (see discussion under “Note 11 – Regulatory Capital Requirements” to the Consolidated Financial Statements), CRE loans and CL loans as a percentage of total capital and Tier 1 capital, respectively, are 235.9%, 259.0%, 96.8% and 106.3%. Under RAP, Royal Bank does not have a concentration in CL loans as defined in the Guidance. Included in the figures above are loans held for sale as of June 30, 2011.

Balance Sheet Reduction (Deleveraging)

During the past 24 months, Royal Bank has continued to record losses in earnings, which have negatively impacted its capital ratios. The Company implemented a strategy to mitigate this impact to the capital ratios through the reduction of the assets (deleveraging). The balance sheet deleveraging was accomplished primarily through the run off of maturing brokered certificates of deposit (“CDs”) and FHLB borrowings as required under the Orders by reducing the balances of cash, investment securities and loans. This strategy of reducing the size of the balance sheet has provided greater use of the existing capital despite the continued loss of income by maintaining that level of capital as a percentage of the remaining reduced level of assets in order to achieve capital ratios at required regulatory levels. The Company recognizes that deleveraging will also potentially have a negative impact on future earnings, but will provide a short-term benefit to capital levels.

The deleveraging of the balance sheet over the past 24 months resulted from paying off and paying down FHLB advances and the run off of brokered CDs totaling $323.0 million within Royal Bank. The Company does not plan to roll over maturing brokered CDs during the remainder of 2011. As part of the restructuring of the investment portfolio, the Company also reduced the investment portfolio by approximately $122 million during 2010, which is almost entirely within Royal Bank with no substantive change during the first six months of 2011. At year end 2010, loans had declined by approximately $116 million, with an additional decline of $64.1 million in the first six months of 2011 due to pay downs of principal, payoffs, charge-offs, sales, and transfers to OREO.

Liquidity and Funds Management

Royal Bank may not accept new brokered deposits and has limited capacity to borrow additional funds in the event such funds are needed for liquidity purposes. However, Royal Bank has continued to maintain liquidity measures that are more than two times the target levels. As discussed in “Note 8 – Borrowings and Subordinated Debentures” to the Consolidated Financial Statements, Royal Bank has an over collateralized delivery requirement of 105% with the Federal Home Loan Bank (“FHLB”) as a result of the level of non-performing assets and the losses that have been experienced over the past three years. The ability to borrow additional funds is based on the amount of collateral that is available to be pledged. As of June 30, 2011, Royal Bank had approximately $8 million of available borrowing capacity at the FHLB as a result of excess collateral that has been pledged. In addition, Royal Bank has approximately $136 million of unpledged agency securities that are available to be pledged as collateral if needed. Royal Bank also has limited availability to borrow from the Federal Reserve Discount Window. The availability, which is approximately $7 million at June 30, 2011, is based on collateral pledged.

At June 30, 2011, Royal Bank had $54.8 million in cash on hand and $135.8 million in unpledged agency securities.At June 30, 2011, the liquidity to deposits ratio was 35.9% compared to Royal Bank's 12% policy target and the liquidity to total liabilities ratio was 27.2% compared to Royal Bank's 10% policy target. Since entering the Orders Royal Bank has not renewed, accepted, or rolled over any maturing brokered CDs; nor has Royal Bank issued new brokered CDs. Brokered CDs declined $190.9 million from $226.9 million at June 30, 2009 to $36.0 million at June 30, 2011. Borrowings declined $132.4 million from $283.9 million at June 30, 2009 to $151.5 million at June 30, 2011.

The Company also has unfunded pension plan obligations of $12.7 million as of June 30, 2011 which potentially could impact liquidity. The Company plans to fund the pension plan obligations through existing Company owned life insurance policies.

Dividend and Interest Restrictions

Due to the Orders and the Federal Reserve Agreement, our ability to obtain lines of credit, to receive attractive collateral treatment from funding sources, and to pursue all attractive funding alternatives in this current low interest rate environment could be impacted and thereby limit liquidity alternatives. 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 which had been issued to the United States Department of Treasury (“Treasury”) as part of the Capital Purchase Program (“CPP”), and to suspend interest payments on the $25.8 million in trust preferred securities. As of June 30, 2011, the Series A Preferred stock dividend in arrears was $3.2 million and has not been recognized in the consolidated financial statements. As of June 30, 2011, the trust preferred interest payment in arrears was $1.5 million and has been recorded in interest expense and accrued interest payable. The decision to suspend the preferred cash dividends and the trust preferred interest payments better supports the capital and liquidity position of Royal Bank. As a consequence of missing the sixth dividend payment in the fourth quarter of 2010, the Treasury has the right to appoint two directors to our board of directors until all accrued but unpaid dividends have been paid. On July 13, 2011, the Treasury exercised its right to appoint a director to the Company's board of directors. The Company expects the Treasury to appoint a second director in the near future, subject to the approval of the Federal Reserve.

At June 30, 2011, as a result of significant losses within Royal Bank and cash and stock dividends declared and paid in previous years, the Company had negative retained earnings and therefore would not have been able to declare and pay any cash dividends. Under the Orders, 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 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.

Capital Adequacy

In connection with a recent bank regulatory examination, the FDIC concluded, based upon its interpretation of the Consolidated Reports of Condition and Income (the “Call Report”) instructions and under RAP, that income from Royal Bank's tax lien business should be recognized on a cash basis, not an accrual basis. Royal Bank's current accrual method is in accordance with U.S. GAAP. Royal Bank disagrees with the FDIC's conclusion and filed the Call Report for June 30, 2011, and the three previous quarterly filings in accordance with U.S. GAAP. However, the change in the manner of revenue recognition for the tax lien business for regulatory accounting purposes affects Royal Bank's and the Company's capital ratios as disclosed in “Note 11 - Regulatory Capital Requirements” to the Consolidated Financial Statements. Royal Bank is in discussions with the FDIC to resolve the difference of opinion.

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, 2011, based on capital levels calculated under RAP, Royal Bank's total risk-based capital and Tier 1 leverage ratios were 14.23% and 8.34%, respectively. As of June 30, 2011, each of the Company and Royal Bank met all capital adequacy requirements to which it is subject.

Department of Justice Investigation (“DOJ”)

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 DOJ. The subpoena sought certain documents and information relating to an ongoing investigation being conducted by the DOJ. It is possible that the outcome of the investigation could result in fines and penalties being assessed against both CSC and RTL, which could also result in reputational risk due to negative publicity. However, Royal Bank has been advised that neither CSC nor RTL are targets of the DOJ investigation, but they are “subjects” of the investigation and therefore the Company has concluded that it is unlikely that a contingent liability exists. Royal Bank, CSC and RTL are cooperating in the investigation.

Management Plans

The Company was successful during the past year reducing the cost of funds, which improved the net interest margin; completing the sale of Royal Asian, which permitted the Company to contribute additional capital of $10.3 million to Royal Bank; minimizing investment impairment, recouping $1.7 million of the $5.0 million collateral loss associated with the collapse of Lehman in 2008; and addressing the matters set forth in the Orders, which included maintaining required capital ratios and liquidity measures. During the first two quarters of 2011, the Company has been successful in reducing the level of classified assets, reducing the level of loan delinquencies, experiencing minimal investment impairment, significantly reducing the unsold condo units within the partnership of the real estate owned via equity investment through a successful auction, and reducing the cost of funds.

In addition to increased board oversight and the creation of a Regulatory Compliance Committee in response to the Orders, the Company has enhanced the board through the addition of experienced directors with diverse backgrounds. The new members are comprised of the following: the CEO of a public company who has legal and consulting experience, a former regulator with consulting experience, a former CEO of a much larger financial institution who has bank turnaround experience and a former senior partner of a public accounting firm. Moreover, the director that was recently appointed by Treasury has significant experience in banking, most recently as the Chief Executive Officer for a larger financial institution.

The board and management have developed a contingency plan to maintain capital ratios at required levels under the Orders that expands the deleveraging beyond the run off of maturing brokered CDs and FHLB advances, which includes the potential securitization or sale of a significant portion of the tax lien portfolio. The Company will also consider the following measures as part of the contingency plan, if required, to insure that capital ratios continue to meet the requirements of the Orders. These additional measures, if required, include the following: sales of selected branches with high concentrations of retail CDs, sales of performing loans or specific segments of the loan portfolio, a shareholder rights offering, a reduction in the level of investment securities, and allow maturing CDs to selectively run off. It is extremely unlikely that all of the above alternatives would be initiated. The Company recognizes that some of these measures will also potentially have a negative impact on future earnings due to the loss of earning assets, but they also can potentially provide a short-term benefit to capital levels. The board of directors and management of the Company remain committed to meeting the capital level requirements for Royal Bank as set forth in the Orders.

The Company's strategic plan includes compliance with the Orders and the Federal Reserve Agreement discussed above, reducing the level of classified loans within the loan portfolio and improving the overall level of credit quality, maintaining reduced credit risk within the investment portfolio and returning to profitability. In concert with these efforts, the Company will transition more toward a community bank focus within its geographic footprint and adjacent markets. This will be achieved through the continued diversification of the loan portfolio, increased emphasis on the growth of core deposits, the utilization of enterprise risk management for reviewing strategic initiatives and maintenance of improved underwriting standards. The strategic plan provides a framework for maintaining required capital ratios while also reducing the risk profile of the Company and Royal Bank.