REGULATORY MATTERS and SIGNIFICANT RISKS and UNCERTAINTIES	12 Months Ended
Dec. 31, 2011
REGULATORY MATTERS and SIGNIFICANT RISKS and UNCERTAINTIES [Abstract]
REGULATORY MATTERS and SIGNIFICANT RISKS and UNCERTAINTIES	NOTE 2 – REGULATORY MATTERS and SIGNIFICANT RISKS and UNCERTAINTIES FDIC and Department of Banking 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 Pennsylvania Department of Banking (the “Department”). The material terms of the Orders were identical and required Royal Bank among other items to 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%. The FDIC and the Department replaced the Orders in the fourth quarter of 2011 with an informal agreement, known as a memorandum of understanding (“MOU”). Included in the MOU is the continued requirement of maintaining a leverage ratio equal to or greater than 8% and a total risk-based capital ratio equal to or greater than 12%. Federal Reserve Agreement On March 17, 2010, the Company agreed to enter into the Federal Reserve Agreement with 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; (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. 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. 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 MOU 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 MOU and the Federal Reserve Agreement. The Company has been successful in commercial real estate lending; however, our ability to expand into potentially attractive commercial real estate or 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 MOU 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 MOU and the Federal Reserve Agreement. Continued Losses Over the past four years, the Company has recorded significant losses totaling $104.0 million which were primarily related to charge-offs on the loan and lease portfolio, impairment charges on investment securities, impairment charges on OREO, credit related expenses and the establishment of a deferred tax valuation allowance. The loss of earnings in 2011 amounted to $8.6 million, which represented a significant improvement of $15.5 million, or 64.5%, from the loss recorded in 2010. The year-over-year decrease in losses was mainly related to improved credit quality within the loan portfolio and the corresponding reduction in the provision for loan losses. Loan charge-offs and investment impairment charges that contributed to the losses in earnings are discussed below under “Credit Quality”. In addition to reducing the total shareholders' equity, the continued losses and negative retained earnings impacts the Company's ability to pay cash dividends to its shareholders now and in future years. The Company's deferred tax valuation allowance amounted to $36.4 million at the end of 2011. The deferred tax valuation allowance is 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. Due to the losses mentioned above that were primarily credit related, the Company has experienced an increase in other operating expenses over the past four years. These increased expenses include OREO impairment charges, OREO expenses, and legal and other expenses related to credit quality. Impairment associated with OREO, real estate joint ventures and real estate owned via equity investments has declined significantly during 2011. In addition the FDIC and state assessments have declined almost 50% from 2009 due to the redemption of brokered CDs and the sale of Royal Asian. Credit Quality Adverse economic conditions in our specific market areas and decreases in real estate property values due to the nature of our loan portfolio in particular have affected the ability of customers to repay their loans and generally impact our financial condition and results of operations. The financial services and real estate industries were hit particularly hard during the “Great Recession” and as a result 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 additional 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. The Company had non-performing loans and recorded charge-offs of $51.3 million and $13.2 million at December 31, 2011, $65.8 million and $31.7 million at December 31, 2010, and $73.7 million and $19.8 million at December 31, 2009, respectively. OREO balances were $21.0 million, $29.2 million, and $30.3 million at December 31, 2011, 2010, and 2009, respectively. Royal Bank was successful in reducing net classified loans, which includes LHFS, and OREO from $149.6 million at June 30, 2009 to $74.2 million at December 31, 2011. Royal Bank's delinquent loans held for investment (30 to 90 days) amounted to $36.3 million at June 30, 2009 versus $4.2 million at December 31, 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. Royal Bank's non-performing loans held for investment were $80.8 million and $38.7 million at June 30, 2009 and December 31, 2011, respectively. Total non-performing loans at December 31, 2011 were $51.3 million and include $12.6 million in LHFS. 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. Other-than-temporary-impairment losses were $1.8 million, $479,000, and $11.0 million at December 31, 2011, 2010, and 2009, respectively. 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 depends 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, which 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 then 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. Non-residential real estate and construction and land development loans held for investment were $236.7 million at December 31, 2011 comprising 57% 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 $178.8 million at December 31, 2011, which amounted to 187.3% of total capital and 202.4% of Tier 1 capital. At December 31, 2011, total construction/land loans (“CL loans”) including loans held for sale amounted to $63.4 million, or 66.5%, of total capital and 71.8% of Tier 1 capital. Based on capital levels calculated under U.S. GAAP, as shown above, 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 (“Guidance”). Based on capital levels calculated under RAP (see discussions under “GAAP RAP Difference” under “Note 1 -Significant Accounting Policies” and “Note 15 – 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 217.0%, 237.1%, 77.0% and 84.1%. Under RAP, Royal Bank no longer has a concentration of commercial real estate loans as defined in the Guidance. Included in the figures above are loans held for sale as of December 31, 2011. Liquidity and Funds Management Royal Bank has limited capacity to borrow additional funds in the event it is needed for liquidity purposes. However, Royal Bank has continued to maintain liquidity measures that are well in excess of the target levels. As discussed in “Note 10 – Borrowings and Subordinated Debentures” to the Consolidated Financial Statement, Royal Bank has an over collateralized delivery requirement of 105% with the FHLB as a result of the level of non-performing assets and the losses that have been experienced over the past four years. The ability to borrow additional funds is based on the amount of collateral that is available to be pledged. As of December 31, 2011, Royal Bank had approximately $3 million of available borrowing capacity at the FHLB as a result of excess collateral that has been pledged. In addition at December 31, 2011, Royal Bank had $132.4 million in unpledged agency securities that were available to be pledged as collateral if needed and $24.5 million in cash on hand. Royal Bank also has limited availability to borrow from the Federal Reserve Discount Window, which was approximately $7 million at December 31, 2011, and was based on collateral pledged. At December 31, 2011, the liquidity to deposits ratio was 31.8% compared to Royal Bank's 12% policy target and the liquidity to total liabilities ratio was 23.9% compared to Royal Bank's 10% policy target. Brokered CDs declined $221.1 million from $226.9 million at June 30, 2009 to $5.8 million at December 31, 2011. Borrowings declined $135.9 million from $283.9 million at June 30, 2009 to $148.0 million at December 31, 2011. The Company also has unfunded pension plan obligations of $14.9 million as of December 31, 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 MOU 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 and to suspend interest payments on the $25.8 million in trust preferred securities. As of December 31, 2011, the Series A Preferred stock dividend in arrears is $4.1 million, which has not been recognized in the consolidated financial statements. As of December 31, 2011 the trust preferred interest payment in arrears was $1.8 million and has been recorded in interest expense and accrued interest payable. The Company believes the decision to suspend the preferred cash dividends and the trust preferred interest payments will better support the capital position of Royal Bank. As a result of the Company missing the sixth quarterly dividend payment due on November 16, 2010, the Treasury exercised its rights under the Capital Purchase Program and appointed two directors to our board of directors in 2011 until all accrued but unpaid dividends have been paid in full by the Company. At December 31, 2011, 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. 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 prior bank regulatory examination, the FDIC concluded, based upon its interpretation of the Consolidated Reports of Condition and Income (the “Call Report”) instructions and under regulatory accounting principles (“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 December 31, 2011 and the previous five quarters 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 potentially the Company's capital ratios as disclosed in “Note 15 - Regulatory Capital Requirements” to the Consolidated Financial Statements. Royal Bank is in discussions with the FDIC to resolve the matter. Under the MOU, Royal Bank must maintain a minimum total risk-based capital ratio and a minimum Tier 1 leverage ratio of 12% and 8%, respectively. At December 31, 2011, based on capital levels calculated under RAP, Royal Bank's total risk-based capital and Tier 1 leverage ratios were 15.04% and 9.09%, respectively. Department of Justice Investigation (“DOJ”) As described under “Item 1 – Business” of this Report, 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. On March 4, 2009, each of CSC and RTL received grand jury subpoenas 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 subpoenas sought certain documents and information relating to an ongoing investigation being conducted by the DOJ relating to alleged bid-rigging at tax lien auctions in New Jersey. CSC and RTL have produced to the DOJ documents responsive to the subpoenas and have been cooperating with the DOJ throughout the investigation. On February 23, 2012, the former President of CSC and RTL entered a plea of guilty to one count of bid-rigging at certain auctions for tax liens in New Jersey from 1998 until approximately the spring of 2009. The former President's employment with CSC and RTL effectively terminated in November 2010. As previously disclosed, Royal Bank had been advised that neither CSC nor RTL were targets of the DOJ investigation, but they were subjects of the investigation. It is possible, particularly in light of the plea entered by the former President of CSC and RTL, 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. No proceedings have been instituted by the DOJ or any other governmental authority against CSC or RTL as of the date of this filing. As a result of the plea agreements of the former President of CSC and RTL and others resulting from the DOJ investigation, on March 13, 2012, the former president of RTL and CSC, RTL, CSC, the Company and certain other parties were named as defendants in a putative class action lawsuit filed in the Superior Court of New Jersey, Chancery Division on behalf of a proposed class of taxpayers who became delinquent in paying their municipal tax obligations (Boyer v. Robert W. Stein, Crusader Servicing Corp. Royal Tax Lien Services LLC, Royal Bancshares of Pennsylvania, Inc., et al., Superior Court of New Jersey, Chancery Division, Docket No. C-14007/12). The lawsuit alleges violations of the New Jersey Antitrust Act and unjust enrichment, and seeks treble damages, attorney fees and injunctive relief. As of the date of this filing, the Company cannot reasonably estimate the possible loss or range of loss that may result from these actions or proceedings. Management Plans In addition to increased board oversight and the creation of a Regulatory Compliance Committee in response to the previous 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 banking regulator with consulting experience, a former CEO of a much larger financial institution who has bank turnaround experience, a former President of a larger financial institution (Treasury appointee), a former executive within the financial services industry (Treasury appointee) and a former senior partner of a public accounting firm. The Company implemented a strategy to mitigate the negative impact to the capital ratios associated with losses in earnings through the reduction of the balance sheet (deleveraging), which was accomplished primarily through the redemption of brokered deposits and FHLB borrowings 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 losses of income by maintaining that capital ratio as a percentage of the remaining reduced level of assets in order to achieve capital ratios at required regulatory levels. The board and management remain committed to meeting the capital level requirements for Royal Bank as set forth in the previous Orders and current MOU and have therefore developed a contingency plan to maintain capital ratios at required levels. The contingency plan expands the deleveraging beyond the redemption of brokered CDs and FHLB advances and considers additional measures, if required, to insure that capital ratios continue to meet the current requirements of the MOU. These additional measures include the following: consider selling selected branches with high concentrations of retail CDs, consider selling specific segments of the loan portfolio, consider a shareholder rights offering, and consider reducing the level of investment securities by allowing maturing CDs to selectively runoff. It is extremely unlikely that all of the above alternatives would be initiated. The deleveraging of the balance sheet over the past 30 months resulted from paying off FHLB advances and redeeming brokered CDs totaling $344.4 million within Royal Bank. As part of the restructuring of the investment portfolio, the Company also reduced the investment portfolio by approximately $110 million in the past two years, primarily during 2010, which was almost entirely within Royal Bank. In addition, during the past two years loans have declined by approximately $262 million due to pay downs of principal, payoffs, charge-offs, transfers to OREO and sale of Royal Asian. The Company's strategic plan includes compliance with the MOU 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 has started to 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 continuing the reduction of the risk profile of the Company and Royal Bank. During the past two years the Company has made significant progress in reducing losses in earnings, improving capital ratios, improving credit quality, reducing the CRE concentration, strengthening the board of directors and maintaining strong liquidity.

NOTE 2 – REGULATORY MATTERS and SIGNIFICANT RISKS and UNCERTAINTIES

FDIC and Department of Banking 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 Pennsylvania Department of Banking (the “Department”). The material terms of the Orders were identical and required Royal Bank among other items to 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%. The FDIC and the Department replaced the Orders in the fourth quarter of 2011 with an informal agreement, known as a memorandum of understanding (“MOU”). Included in the MOU is the continued requirement of maintaining a leverage ratio equal to or greater than 8% and a total risk-based capital ratio equal to or greater than 12%.

Federal Reserve Agreement

On March 17, 2010, the Company agreed to enter into the Federal Reserve Agreement with 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; (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.

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.

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 MOU 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 MOU and the Federal Reserve Agreement. The Company has been successful in commercial real estate lending; however, our ability to expand into potentially attractive commercial real estate or 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 MOU 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 MOU and the Federal Reserve Agreement.

Continued Losses

Over the past four years, the Company has recorded significant losses totaling $104.0 million which were primarily related to charge-offs on the loan and lease portfolio, impairment charges on investment securities, impairment charges on OREO, credit related expenses and the establishment of a deferred tax valuation allowance. The loss of earnings in 2011 amounted to $8.6 million, which represented a significant improvement of $15.5 million, or 64.5%, from the loss recorded in 2010. The year-over-year decrease in losses was mainly related to improved credit quality within the loan portfolio and the corresponding reduction in the provision for loan losses. Loan charge-offs and investment impairment charges that contributed to the losses in earnings are discussed below under “Credit Quality”. In addition to reducing the total shareholders' equity, the continued losses and negative retained earnings impacts the Company's ability to pay cash dividends to its shareholders now and in future years. The Company's deferred tax valuation allowance amounted to $36.4 million at the end of 2011. The deferred tax valuation allowance is 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.

Due to the losses mentioned above that were primarily credit related, the Company has experienced an increase in other operating expenses over the past four years. These increased expenses include OREO impairment charges, OREO expenses, and legal and other expenses related to credit quality. Impairment associated with OREO, real estate joint ventures and real estate owned via equity investments has declined significantly during 2011. In addition the FDIC and state assessments have declined almost 50% from 2009 due to the redemption of brokered CDs and the sale of Royal Asian.

Credit Quality

Adverse economic conditions in our specific market areas and decreases in real estate property values due to the nature of our loan portfolio in particular have affected the ability of customers to repay their loans and generally impact our financial condition and results of operations. The financial services and real estate industries were hit particularly hard during the “Great Recession” and as a result 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 additional 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.

The Company had non-performing loans and recorded charge-offs of $51.3 million and $13.2 million at December 31, 2011, $65.8 million and $31.7 million at December 31, 2010, and $73.7 million and $19.8 million at December 31, 2009, respectively. OREO balances were $21.0 million, $29.2 million, and $30.3 million at December 31, 2011, 2010, and 2009, respectively.

Royal Bank was successful in reducing net classified loans, which includes LHFS, and OREO from $149.6 million at June 30, 2009 to $74.2 million at December 31, 2011. Royal Bank's delinquent loans held for investment (30 to 90 days) amounted to $36.3 million at June 30, 2009 versus $4.2 million at December 31, 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. Royal Bank's non-performing loans held for investment were $80.8 million and $38.7 million at June 30, 2009 and December 31, 2011, respectively. Total non-performing loans at December 31, 2011 were $51.3 million and include $12.6 million in LHFS. 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. Other-than-temporary-impairment losses were $1.8 million, $479,000, and $11.0 million at December 31, 2011, 2010, and 2009, respectively.

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 depends 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, which 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 then 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.

Non-residential real estate and construction and land development loans held for investment were $236.7 million at December 31, 2011 comprising 57% 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 $178.8 million at December 31, 2011, which amounted to 187.3% of total capital and 202.4% of Tier 1 capital. At December 31, 2011, total construction/land loans (“CL loans”) including loans held for sale amounted to $63.4 million, or 66.5%, of total capital and 71.8% of Tier 1 capital. Based on capital levels calculated under U.S. GAAP, as shown above, 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 (“Guidance”). Based on capital levels calculated under RAP (see discussions under “GAAP RAP Difference” under “Note 1 -Significant Accounting Policies” and “Note 15 – 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 217.0%, 237.1%, 77.0% and 84.1%. Under RAP, Royal Bank no longer has a concentration of commercial real estate loans as defined in the Guidance. Included in the figures above are loans held for sale as of December 31, 2011.

Liquidity and Funds Management

Royal Bank has limited capacity to borrow additional funds in the event it is needed for liquidity purposes. However, Royal Bank has continued to maintain liquidity measures that are well in excess of the target levels. As discussed in “Note 10 – Borrowings and Subordinated Debentures” to the Consolidated Financial Statement, Royal Bank has an over collateralized delivery requirement of 105% with the FHLB as a result of the level of non-performing assets and the losses that have been experienced over the past four years. The ability to borrow additional funds is based on the amount of collateral that is available to be pledged. As of December 31, 2011, Royal Bank had approximately $3 million of available borrowing capacity at the FHLB as a result of excess collateral that has been pledged. In addition at December 31, 2011, Royal Bank had $132.4 million in unpledged agency securities that were available to be pledged as collateral if needed and $24.5 million in cash on hand. Royal Bank also has limited availability to borrow from the Federal Reserve Discount Window, which was approximately $7 million at December 31, 2011, and was based on collateral pledged.

At December 31, 2011, the liquidity to deposits ratio was 31.8% compared to Royal Bank's 12% policy target and the liquidity to total liabilities ratio was 23.9% compared to Royal Bank's 10% policy target. Brokered CDs declined $221.1 million from $226.9 million at June 30, 2009 to $5.8 million at December 31, 2011. Borrowings declined $135.9 million from $283.9 million at June 30, 2009 to $148.0 million at December 31, 2011.

The Company also has unfunded pension plan obligations of $14.9 million as of December 31, 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 MOU 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 and to suspend interest payments on the $25.8 million in trust preferred securities. As of December 31, 2011, the Series A Preferred stock dividend in arrears is $4.1 million, which has not been recognized in the consolidated financial statements. As of December 31, 2011 the trust preferred interest payment in arrears was $1.8 million and has been recorded in interest expense and accrued interest payable. The Company believes the decision to suspend the preferred cash dividends and the trust preferred interest payments will better support the capital position of Royal Bank. As a result of the Company missing the sixth quarterly dividend payment due on November 16, 2010, the Treasury exercised its rights under the Capital Purchase Program and appointed two directors to our board of directors in 2011 until all accrued but unpaid dividends have been paid in full by the Company.

At December 31, 2011, 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. 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 prior bank regulatory examination, the FDIC concluded, based upon its interpretation of the Consolidated Reports of Condition and Income (the “Call Report”) instructions and under regulatory accounting principles (“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 December 31, 2011 and the previous five quarters 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 potentially the Company's capital ratios as disclosed in “Note 15 - Regulatory Capital Requirements” to the Consolidated Financial Statements. Royal Bank is in discussions with the FDIC to resolve the matter.

Under the MOU, Royal Bank must maintain a minimum total risk-based capital ratio and a minimum Tier 1 leverage ratio of 12% and 8%, respectively. At December 31, 2011, based on capital levels calculated under RAP, Royal Bank's total risk-based capital and Tier 1 leverage ratios were 15.04% and 9.09%, respectively.

Department of Justice Investigation (“DOJ”)

As described under “Item 1 – Business” of this Report, 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. On March 4, 2009, each of CSC and RTL received grand jury subpoenas 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 subpoenas sought certain documents and information relating to an ongoing investigation being conducted by the DOJ relating to alleged bid-rigging at tax lien auctions in New Jersey. CSC and RTL have produced to the DOJ documents responsive to the subpoenas and have been cooperating with the DOJ throughout the investigation. On February 23, 2012, the former President of CSC and RTL entered a plea of guilty to one count of bid-rigging at certain auctions for tax liens in New Jersey from 1998 until approximately the spring of 2009. The former President's employment with CSC and RTL effectively terminated in November 2010. As previously disclosed, Royal Bank had been advised that neither CSC nor RTL were targets of the DOJ investigation, but they were subjects of the investigation. It is possible, particularly in light of the plea entered by the former President of CSC and RTL, 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. No proceedings have been instituted by the DOJ or any other governmental authority against CSC or RTL as of the date of this filing.

As a result of the plea agreements of the former President of CSC and RTL and others resulting from the DOJ investigation, on March 13, 2012, the former president of RTL and CSC, RTL, CSC, the Company and certain other parties were named as defendants in a putative class action lawsuit filed in the Superior Court of New Jersey, Chancery Division on behalf of a proposed class of taxpayers who became delinquent in paying their municipal tax obligations (Boyer v. Robert W. Stein, Crusader Servicing Corp. Royal Tax Lien Services LLC, Royal Bancshares of Pennsylvania, Inc., et al., Superior Court of New Jersey, Chancery Division, Docket No. C-14007/12). The lawsuit alleges violations of the New Jersey Antitrust Act and unjust enrichment, and seeks treble damages, attorney fees and injunctive relief.

As of the date of this filing, the Company cannot reasonably estimate the possible loss or range of loss that may result from these actions or proceedings.

Management Plans

In addition to increased board oversight and the creation of a Regulatory Compliance Committee in response to the previous 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 banking regulator with consulting experience, a former CEO of a much larger financial institution who has bank turnaround experience, a former President of a larger financial institution (Treasury appointee), a former executive within the financial services industry (Treasury appointee) and a former senior partner of a public accounting firm.

The Company implemented a strategy to mitigate the negative impact to the capital ratios associated with losses in earnings through the reduction of the balance sheet (deleveraging), which was accomplished primarily through the redemption of brokered deposits and FHLB borrowings 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 losses of income by maintaining that capital ratio as a percentage of the remaining reduced level of assets in order to achieve capital ratios at required regulatory levels. The board and management remain committed to meeting the capital level requirements for Royal Bank as set forth in the previous Orders and current MOU and have therefore developed a contingency plan to maintain capital ratios at required levels. The contingency plan expands the deleveraging beyond the redemption of brokered CDs and FHLB advances and considers additional measures, if required, to insure that capital ratios continue to meet the current requirements of the MOU. These additional measures include the following: consider selling selected branches with high concentrations of retail CDs, consider selling specific segments of the loan portfolio, consider a shareholder rights offering, and consider reducing the level of investment securities by allowing maturing CDs to selectively runoff. It is extremely unlikely that all of the above alternatives would be initiated.

The deleveraging of the balance sheet over the past 30 months resulted from paying off FHLB advances and redeeming brokered CDs totaling $344.4 million within Royal Bank. As part of the restructuring of the investment portfolio, the Company also reduced the investment portfolio by approximately $110 million in the past two years, primarily during 2010, which was almost entirely within Royal Bank. In addition, during the past two years loans have declined by approximately $262 million due to pay downs of principal, payoffs, charge-offs, transfers to OREO and sale of Royal Asian.

The Company's strategic plan includes compliance with the MOU 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 has started to 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 continuing the reduction of the risk profile of the Company and Royal Bank. During the past two years the Company has made significant progress in reducing losses in earnings, improving capital ratios, improving credit quality, reducing the CRE concentration, strengthening the board of directors and maintaining strong liquidity.