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 September 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 in the prior period, Royal Asian Bank, 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 $87.0 million and deposits of $74.1 million were included in “Community Banking” in the segment table for the three and nine months ended September 30, 2010 respectively. Royal Asian recorded a net loss of $413,000 and $1.3 million for the three and nine months ended September 30, 2010, respectively.

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 September 30, 2011, Royal Bank had loaned $2.6 million to the Partnership and any additional operating expenses required for funding will be insignificant. The $2.6 million 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 nine 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 nine month periods ended September 30, 2011 and 2010.

	Three months ended September 30, 2011
	Community			Tax Lien		Equity
(In thousands)	Banking			Operation		Investment		Leasing		Consolidated
Total assets	$	740,550		$	77,106	$	4,421	$	35,286	$	857,363
Total deposits	$	577,891		$	-	$	-	$	-	$	577,891
Interest income	$	7,451		$	1,774	$	-	$	824	$	10,049
Interest expense		2,357			582		-		278		3,217
Net interest income	$	5,094		$	1,192	$	-	$	546	$	6,832
Provision for loan and lease losses		142			248		-		38		428
Total other income		(161	)		1		86		147		73
Total other expenses		7,478			447		23		161		8,109
Income tax (benefit) expense		(418	)		193		-		225		-
Net (loss) income	$	(2,269	)	$	305	$	63	$	269	$	(1,632	)
Noncontrolling interest	$	-		$	122	$	32	$	107	$	261
Net (loss) income attributable to Royal Bancshares	$	(2,269	)	$	183	$	31	$	162	$	(1,893	)

	Three months ended September 30, 2010
	Community			Tax Lien		Equity
(In thousands)	Banking			Operation		Investment			Leasing		Consolidated
Total assets	$	968,818		$	103,184	$	6,450		$	39,237	$	1,117,689
Total deposits	$	743,488		$	-	$	-		$	-	$	743,488
Interest income	$	10,102		$	2,699	$	-		$	918	$	13,719
Interest expense		4,968			869		4			316		6,157
Net interest income (loss)	$	5,134		$	1,830	$	(4	)	$	602	$	7,562
Provision for loan and lease losses		2,028			-		-			166		2,194
Total other income		1,412			57		230			124		1,823
Total other expenses		7,910			440		117			166		8,633
Impairment -real estate owned via equity investment		-			-		1,700			-		1,700
Income tax (benefit) expense		(670	)		566		(51	)		154		-
Net (loss) income	$	(2,723	)	$	881	$	(1,540	)	$	240	$	(3,142	)
Noncontrolling interest	$	-		$	352	$	(795	)	$	96	$	(347	)
Net (loss) income attributable to Royal Bancshares	$	(2,723	)	$	529	$	(745	)	$	144	$	(2,795	)

	Nine months ended September 30, 2011
	Community			Tax Lien		Equity
(In thousands)	Banking			Operation		Investment		Leasing		Consolidated
Total assets	$	740,550		$	77,106	$	4,421	$	35,286	$	857,363
Total deposits	$	577,891		$	-	$	-	$	-	$	577,891
Interest income	$	22,052		$	6,001	$	-	$	2,570	$	30,623
Interest expense		8,276			1,938		-		862		11,076
Net interest income	$	13,776		$	4,063	$	-	$	1,708	$	19,547
Provision for loan and lease losses		4,516			552		-		500		5,568
Total other income		2,808			486		532		398		4,224
Total other expenses		22,579			1,377		124		783		24,863
Income tax (benefit) expense		(1,531	)		1,022		-		509		-
Net (loss) income	$	(8,980	)	$	1,598	$	408	$	314	$	(6,660	)
Noncontrolling interest	$	-		$	639	$	204	$	126	$	969
Net (loss) income attributable to Royal Bancshares	$	(8,980	)	$	959	$	204	$	188	$	(7,629	)

	Nine months ended September 30, 2010
	Community			Tax Lien		Equity
(In thousands)	Banking			Operation		Investment			Leasing		Consolidated
Total assets	$	968,818		$	103,184	$	6,450		$	39,237	$	1,117,689
Total deposits	$	743,488		$	-	$	-		$	-	$	743,488
Interest income	$	33,913		$	7,835	$	-		$	2,767	$	44,515
Interest expense		16,996			2,652		22			931		20,601
Net interest income (expense)	$	16,917		$	5,183	$	(22	)	$	1,836	$	23,914
Provision for loan and lease losses		7,424			60		-			903		8,387
Total other income		3,601			346		658			241		4,846
Total other expenses		22,846			1,524		382			421		25,173
Impairment -real estate joint venture		1,552			-		-			-		1,552
Impairment -real estate owned via equity investment		-			-		1,700			-		1,700
Income tax (benefit) expense		(2,005	)		1,620		-			385		-
Net (loss) income	$	(9,299	)	$	2,325	$	(1,446	)	$	368	$	(8,052	)
Noncontrolling interest	$	-		$	930	$	(723	)	$	147	$	354
Net (loss) income attributable to Royal Bancshares	$	(9,299	)	$	1,395	$	(723	)	$	221	$	(8,406	)

Interest income earned by the Community Banking segment related to the Tax Lien Operation was approximately $518,000 and $869,000 for the three month periods ended September 30, 2011 and 2010, respectively and $1.9 million and $2.7 million for the nine months ended September 30, 2011 and 2010, respectively.

Interest income earned by the Community Banking segment related to the Leasing Segment was approximately $278,000 and $316,000 for the three month periods ended September 30, 2011 and 2010, respectively and $862,000 and $931,000 for the nine months ended September 30, 2011 and 2010, respectively.