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                                    FORM 10-K
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

[X]      ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
         ACT OF 1934

                   For the fiscal year ended DECEMBER 31, 2001
                                            ------------------

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934.
            For the transition period from ___________ to ___________

                         Commission File Number 0-26366
                                     -------

                     ROYAL BANCSHARES OF PENNSYLVANIA, INC.
                ------------------------------------------------
             (Exact name of registrant as specified in its charter)

           Pennsylvania                                         23-2812193
---------------------------------                          ---------------------
 (State or other jurisdiction of                              (IRS Employer
  incorporation or organization)                            Identification No.)

               732 Montgomery Avenue, Narberth, Pennsylvania 19072
  ----------------------- ----------------------------------------------------
                    (Address of principal executive offices)

         Registrant's telephone number, including area code  (610) 668-4700
                                                             --------------

         Securities registered pursuant to Section 12(b) of the Act:     None
                                                                      ----------

         Securities registered pursuant to Section 12(g) of the Act:
                                          Class A Common Stock ($2.00 par value)
                                          Class B Common Stock ($.10 par value)

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contended,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

         The aggregate market value of common shares of the Registrant held by
non-affiliates, based on the closing sale price as of February 28, 2002 was
$107,805,249.

          As of February 28, 2002, the Registrant had 9,503,924 and 1,913,053
shares outstanding of Class A and Class B common stock, respectively.




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Item 1. BUSINESS.

The Company

         Royal Bancshares of Pennsylvania, Inc. ("Royal Bancshares") is a
Pennsylvania business corporation and a bank holding company registered under
the Federal Bank Holding Company Act of 1956, as amended (the "Holding Company
Act"), and is supervised by the Board of Governors of the Federal Reserve System
(Federal Reserve Board). Its legal headquarters is located at 732 Montgomery
Avenue, Narberth, PA. On June 29, 1995, pursuant to the plan of reorganization
approved by the shareholders of Royal Bank of Pennsylvania ("Royal Bank"), all
of the outstanding shares of common stock of Royal Bank were acquired by the
Royal Bancshares and were exchanged on a one-for-one basis for common stock of
Royal Bancshares. The principal activities of Royal Bancshares are owning and
supervising Royal Bank, which engages in a general banking business in
Montgomery County, Pennsylvania. Royal Bancshares also has a wholly owned
nonbank subsidiary, Royal Investments of Delaware, Inc., which is engaged in
investment activities. At December 31, 2001, Royal Bancshares had consolidated
total assets of approximately $931.0 million, total deposits of approximately
$701.9 million and stockholders' equity of approximately $108.4 million.

         From time to time, Royal Bancshares may include forward-looking
statements relating to such matters as anticipated financial performance,
business prospects, technological developments, new products, research and
development activities and similar matters in this and other filings with the
Securities Exchange Commission. The Private Securities Litigation Reform Act of
1995 provides safe harbor for forward-looking statements. When we use words such
as "believes", or "expects," "anticipates" or similar expressions, we are making
forward-looking statements. In order to comply with the terms of the safe
harbor, Royal Bancshares notes that a variety of factors could cause Royal
Bancshares actual results and experience to differ materially from the
anticipated results or other expectations expressed in Royal Bancshares
forward-looking statements. The risks and uncertainties that may affect the
operations, performance development and results of Royal Bancshares business
include the following: general economic conditions, including their impact on
capital expenditures; interest rate fluctuations: business conditions in the
banking industry; the regulatory environment; rapidly changing technology and
evolving banking industry standards; competitive factors, including increased
competition with community, regional and national financial institutions; new
service and product offerings by competitors and price pressures and similar
items.


Royal Bank

         Royal Bank was incorporated in the Commonwealth of Pennsylvania on July
30, 1963, was chartered by the Commonwealth of Pennsylvania Department of
Banking and commenced operation as a Pennsylvania state-chartered bank on
October 22, 1963. Royal Bank is the successor of the Bank of King of Prussia,
the principal ownership of which was acquired by Daniel M. Tabas in 1980. Royal
Bank of Pennsylvania is an insured bank under the Federal Deposit Insurance
Corporation (the "FDIC").

         As of June 22, 2001, the bank completed its acquisition of
substantially all the assets of Crusader Holding Corporation. Under the terms of
the acquisition certain assets and liabilities were purchased for $41.5 million,
which represented the approximate fair value of the assets acquired. The
purchase price was paid in cash with $15.2 million of Royal Bank's cash on hand
being utilized. This transaction was accounted for under the purchase method of
account.

                                       2
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         Royal Bank derives its income principally from interest charged on
loans and interest on investment securities and fees received in connection with
the origination of loans and other services. Royal Bank's principal expenses are
interest expense on deposits and operating expenses. Principally operating
revenues, deposit growth and the repayment of outstanding loans provide funds
for activities.

         Service Area. Royal Bank's primary service area includes Montgomery,
Chester, Bucks, Delaware, Berks and Philadelphia counties, southern New Jersey
and Delaware in the vicinity of Wilmington. This area includes residential areas
and industrial and commercial businesses of the type usually found within a
major metropolitan area. Royal Bank serves this area from fifteen offices
located throughout Montgomery, Philadelphia and Berks counties. The Bank also
considers the states of Pennsylvania, New Jersey, New York and Delaware to
constitute its service area for certain services. On occasion, Royal Bank will
do business with clients located outside of its service area. Royal Bank's legal
headquarters are located at 732 Montgomery Avenue, Narberth, PA.

         Royal Bank conducts business operations as a commercial bank offering
checking accounts, savings and time deposits, and loans, including residential
mortgages, home equity and SBA loans. Royal Bank also offers safe deposit boxes,
collections, internet banking and bill payment along with other customary bank
services (excluding trust) to its customers. Drive-up, ATM, and night depository
facilities are available. Services may be added or deleted from time to time.
The services offered and the business of Royal Bank is not subject to
significant seasonal fluctuations. Royal Bank is a member of the Federal Reserve
Fedline Wire Transfer System. Royal Bank became 16.5% partner in Bankers
Settlement Services of Eastern Pennsylvania, L.L.C., a title company
("Bankers"). The Bank, together with five other banks in the area, formed this
title company on August 16, 2000. Royal Bank's ownership decreased to 15% with
the addition of a new bank partner in 2001.

         Competition. Royal Bank is subject to intense competition from
commercial banks, thrifts and other financial institutions. Royal Bank actively
competes with such banks and institutions for local deposits and local retail
and commercial accounts, and is also subject to competition from banks from
areas outside its service area for certain segments of its business. For a
number of years, competition has been increasing in Royal Bank's basic banking
business because of the growing number of financial service entities that have
entered our local market. This trend was accelerated by the passage of federal
laws in the early 1980's, which sharply expanded the powers of thrifts and
credit unions, giving them most of the powers that were formerly reserved for
commercial banks. While attempting to equalize the competition among the
depository institutions, these statutes have little effect on less regulated
entities such as money market mutual funds and investment banking firms. Many of
these competitors have substantially greater financial resources and more
extensive branch systems. To be successful, smaller banks must find a
competitive edge. Royal Bank prides itself on giving its customers personalized
service. Royal Bank has continued at modest levels its research activities
relating to the development of new services and the improvement of existing bank
services. Marketing activities have continued that have allowed Royal Bank to
remain competitive. These activities include the review of existing services and
the solicitation of new users of banking services. Royal Bank is not dependent
upon a single customer or a small number of customers, the loss of which should
have a material adverse effect on Royal Bank or Royal Bancshares.

         Employees. Royal Bancshares employed approximately 158 persons on a
full-time equivalent basis as of December 31, 2001.

         Deposits. At December 31, 2001, total deposits of Royal Bank were
distributed among demand deposits (8%), money market deposit accounts, savings
and Super Now (26%) and time deposits (66%). At year-end 2001, deposits
increased $229.3 million from year-end 2000, or 49%, primarily due to purchase
of deposits from Crusader Holding Corporation on June 22, 2001.

                                       3
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         Lending. At December 31, 2001, Royal Bank had a total loan portfolio of
$646.2 million, representing 69% of total assets. The loan portfolio is
categorized into commercial, commercial mortgages, residential mortgages
(including home equity lines of credit), construction, real estate tax liens and
installment loans.

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


Non-Bank  Subsidiary

         On June 30, 1995, Royal Bancshares established a special purpose
Delaware investment company, Royal Investments of Delaware, Inc., ("RID") as a
wholly owned subsidiary. Its legal headquarters is at 103 Springer Building,
3411 Silverside Road, Wilmington, DE. RID buys, holds and sells investment
securities. At December 31, 2001, total assets of RID were $32.4 million, of
which $20.3 million was held in cash and cash equivalents, $10.4 million in real
estate development and loans and $1.5 million was held in investment securities.

         On June 22, 2001, Royal Bancshares through it's wholly owned subsidiary
Royal Bank of Pennsylvania, purchased 60% ownership in Crusader Servicing
Corporation ("CSC") from Crusader Holding Corporation. Its legal headquarters is
at 6526 Castor Avenue, Philadelphia, PA. CSC acquires, through auction,
delinquent property tax liens in various jurisdictions, assuming a lien position
that is generally superior to any mortgage liens on the property, and obtaining
certain foreclosure rights as defined by local statute. At December 31, 2001,
total assets of CSC were $41.9 million.

Supervision and Regulation

         Holding Company. Royal Bancshares, as a Pennsylvania business
corporation, is subject to the jurisdiction of the Securities and Exchange
Commission (the "SEC") and of state securities commissions for matters relating
to the offering and sale of its securities. Accordingly, if Royal Bancshares
wishes to issue additional shares of its Common Stock, in order, for example, to
raise capital or to grant stock options, Royal Bancshares will have to comply
with the registration requirements of the Securities Act of 1933 as amended, or
find an applicable exemption from registration.

         Royal Bancshares is subject to the provisions of the Bank Holding
Company Act of 1956, as amended (the "BHC Act"), and to supervision by the
Federal Reserve Board. The BHC Act requires Royal Bancshares to secure the prior
approval of the Federal Reserve Board before it owns or controls, directly or
indirectly, more than 5% of the voting shares of any corporation, including
another bank. In addition, the BHC Act prohibits Royal Bancshares from acquiring
more than 5 % of the voting shares of, or interest in, or all or substantially
all of the assets of, any bank located outside Pennsylvania, unless such an
acquisition is specifically authorized by laws of the state in which such bank
is located.

         A bank holding company also is prohibited from engaging in or acquiring
direct or indirect control of more than 5% of the voting shares of any such
company engaged in non-banking activities unless the Federal Reserve Board, by
order or regulation, has found such activities to be closely related to banking
or managing or controlling banks as to be a proper incident thereto. In making
this determination, the Federal Reserve Board considers whether the performance
of these activities by a bank holding company would offer benefits to the public
that outweigh possible adverse effects.

                                       4
<PAGE>

         As a bank holding company, Royal Bancshares is required to file an
annual report with the Federal Reserve Board and any additional information that
the Federal Reserve Board may require pursuant to the BHC Act. The Federal
Reserve Board may also make examinations of the holding company and any or all
of subsidiaries. Further, under Section 106 of the 1970 amendments to the BHC
Act and the Federal Reserve Board's regulation, a bank holding company and its
subsidiaries are prohibited from engaging in certain tying arrangements in
connection with any extension of credit or provision of credit of any property
or services. The so called "anti-tying" provisions state generally that a bank
may not extend credit, lease, sell property or furnish any service to a customer
on the condition that the customer obtain additional credit or service from the
bank, its bank holding company or any other subsidiary of its bank holding
company, or on the condition that the customer not obtain other credit or
services from a competitor of the bank, its bank holding company or any
subsidiary of its bank holding company.

         Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act and by state banking laws on any
extensions of credit to the bank holding company or any of its subsidiaries, on
investments in the stock or other securities of the bank holding company and on
taking of such stock or securities as collateral for loans to any borrower.

         Under Pennsylvania law, Royal Bancshares is permitted to control an
unlimited number of banks. However, Royal Bancshares would be required under the
BHC Act to obtain the prior approval of the Federal Reserve Board before
acquiring all or substantially all of the assets of any bank, or acquiring
ownership or control of any voting shares of any other than the Bank, if, after
such acquisition, would control more than 5% of the voting shares of such bank.

         Royal Bank. The deposits of Royal Bank are insured by the FDIC. Royal
Bank is subject to supervision, regulation and examination by the Pennsylvania
Department of Banking and by the FDIC. In addition, Royal Bank is subject to a
variety of local, state and federal laws that affect its operation.

         Under the Pennsylvania Banking Code of 1965, as amended, the ("Code"),
Royal Bancshares is permitted to control an unlimited number of banks. This rule
has been in effect since March 4, 1990. However, Royal Bancshares would be
required under the Bank Holding Company Act to obtain the prior approval of the
Federal Reserve Board before it could acquire all or substantially all of the
assets of any bank, or acquiring ownership or control of any voting shares of
any bank other than Royal Bank, if, after such acquisition, the registrant would
own or control more than 5% of the voting shares of such bank. The Bank Holding
Company Act has been amended by the Riegle-Neal Interstate Banking and Branching
Act of 1994 which authorizes bank holding companies subject to certain
limitations and restrictions to acquire banks located in any state.

         In 1995, the Code was amended to harmonize Pennsylvania law with the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 to enable
Pennsylvania institutions to participate fully in interstate banking and to
remove obstacles to the choice by banks from other states engaged in interstate
banking to select Pennsylvania as a head office location. Some of the more
salient features of the amendment are described below.

                                       5
<PAGE>

         A bank holding company located in Pennsylvania, another state, the
District of Columbia or a territory or possession of the United States may
control one or more banks, bank and trust companies, national banks, interstate
banks and, with the prior written approval of the Pennsylvania Department of
Banking, may acquire control of a bank and trust company or a national bank
located in Pennsylvania. A Pennsylvania-chartered institution may maintain
branches in any other state, the District of Columbia, or a territory or
possession of the United States upon the written approval of the Pennsylvania
Department of Banking.

         Finally, a banking institution existing under the laws of another
jurisdiction may establish a branch in Pennsylvania if the laws of the
jurisdiction in which it is located permit a Pennsylvania-chartered institution
or a national bank located in Pennsylvania to establish and maintain a branch in
such jurisdiction on substantially the same terms and conditions.

         In 1995, the Pennsylvania General Assembly enacted the Economic
Development Agency, Fiduciary and Lender Environmental Liability Protection Act
which, among other things, provides protection to lenders from environmental
liability and remediation costs under the environmental laws for releases and
contamination caused by others. A lender who engages in activities involved in
the routine practices of commercial lending, including, but not limited to, the
providing of financial services, holding of security interests, workout
practices, foreclosure or the recovery of funds from the sale of property shall
not be liable under the environmental acts or common law equivalents to the
Pennsylvania Department of Environmental resources or to any other person by
virtue of the fact that the lender engages in such commercial lending practices.
A lender, however, will be liable if it, its employees or agents, directly cause
an immediate release or directly exacerbate a release of regulated substances on
or from the property, or knowingly and willfully compelled the borrower to
commit an action, which caused such release or violation of an environmental
act. The Economic Development Agency, Fiduciary and Lender Environmental
Liability Protection Act, however, does not limit federal liability which still
exists under certain circumstances.

         A subsidiary bank of a holding company is subject to certain
restrictions imposed by the Federal Reserve Act, as amended, on any extensions
of credit to the bank holding company or its subsidiaries, on investments in the
stock or other securities of the bank holding company or its subsidiaries, and
on taking such stock or securities as collateral for loans. The Federal Reserve
Act, as amended, and Federal Reserve Board regulations also place certain
limitations and reporting requirements on extensions of credit by a bank to
principal shareholders of its parent holding company, among others, and to
related interests of such principal shareholders. In addition, such legislation
and regulations may affect the terms upon which any person who becomes a
principal shareholder of a holding company may obtain credit from banks with
which the subsidiary bank maintains a correspondent relationship.

         Federal law also prohibits the acquisition of control of a bank holding
company without prior notice to certain federal bank regulators. Control is
defined for this purpose as the power, directly or indirectly, to direct the
management or policies of the bank or bank holding company or to vote 25% or
more of any class of voting securities of the bank holding company.

         From time to time, various types of federal and state legislation have
been proposed that could result in additional regulation of, and restrictions
on, the business of the Bank. It cannot be predicted whether any such
legislation will be adopted or how such legislation would affect the business of
the Bank. As a consequence of the extensive regulation of commercial banking
activities in the United States, the Bank's business is particularly susceptible
to being affected by federal legislation and regulations that may increase the
costs of doing business.

                                       6
<PAGE>

         Under the Federal Deposit Insurance Act ("FDIC Act"), the FDIC
possesses the power to prohibit institutions regulated by it (such as the Bank)
from engaging in any activity that would be an unsafe and unsound banking
practice or in violation of applicable law. Moreover, the FDIC Act: (i) empowers
the FDIC to issue cease-and-desist or civil money penalty orders against the
Bank or its executive officers, directors and/or principal shareholders based on
violations of law or unsafe and unsound banking practices; (ii) authorizes the
FDIC to remove executive officers who have participated in such violations or
unsound practices; (iii) restricts lending by the Bank to its executive
officers, directors, principal shareholders or related interests thereof; (iv)
restricts management personnel of a bank from serving as directors or in other
management positions with certain depository institutions whose assets exceed a
specified amount or which have an office within a specified geographic area.
Additionally, the FDIC Act provides that no person may acquire control of the
Bank unless the FDIC has been given 60-days prior written notice and within that
time has not disapproved the acquisition or extended the period for disapproval.
In April 1995, regulators revised the Community Reinvestment Act ("CRA") with an
emphasis on performance over process and documentation. Under the revised rules,
the five-point rating scale is still utilized by examiners to assign a numerical
score for a bank's performance in each of three areas: lending, service and
investment.

         Under the CRA, the FDIC is required to: (i) assess the records of all
financial institutions regulated by it to determine if these institutions are
meeting the credit needs of the community (including low-and moderate-income
neighborhoods) which they serve, and (ii) take this record into account in its
evaluation of any application made by any such institutions for, among other
things, approval of a branch or other deposit facility, office relocation, a
merger or an acquisition of bank shares. The CRA also requires the federal
banking agencies to make public disclosures of their evaluation of each bank's
record of meeting the credit needs of its entire community, including low-and
moderate-income neighborhoods. This evaluation will include a descriptive rate
("outstanding," "satisfactory," "needs to improve" or "substantial
noncompliance") and a statement describing the basis for the rating. After its
most recent examination of the Bank under CRA, the FDIC gave the Bank a CRA
rating of satisfactory.

         Under the Bank Secrecy Act ("BSA"), banks and other financial
institutions are required to report to the Internal Revenue Service currency
transactions of more than $10,000 or multiple transactions in any one day of
which the Bank is aware that exceed $10,000 in the aggregate. Civil and criminal
penalties are provided under the BSA for failure to file a required report, for
failure to supply information required by the BSA or for filing a false or
fraudulent report.

         Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994.
Royal Bank believes that further merger activity within Pennsylvania is likely
to occur in the future, resulting in increased concentration levels in banking
markets within Pennsylvania and other significant changes in the competitive
environment. The Riegle-Neal allows adequately capitalized and managed bank
holding companies to acquire banks in any state starting one year after
enactment (September 29, 1995). Another provision of the Riegle-Neal Act allows
interstate merger transactions beginning June 1, 1997. States are permitted,
however, to pass legislation providing for either earlier approval of mergers
with out-of-state banks, or "opting-out" of interstate mergers entirely. Through
interstate merger transactions, banks will be able to acquire branches of
out-of-state banks by converting their offices into branches of the resulting
bank. The Riegle-Neal Act provides that it will be the exclusive means for bank
holding companies to obtain interstate branches. Under the Riegle-Neal Act,
banks may establish and operate a "de novo branch" in any State that "opts-in"
to de novo branching. Foreign banks are allowed to operate branches, either de
novo or by merger. These branches can operate to the same extent that the
establishment and operation of such branches would be permitted if the foreign
bank were a national bank or state bank. All these changes are expected to
intensify competition in local, regional and national banking markets. The
Pennsylvania Banking Code has been amended to enable Pennsylvania institutions
to participate fully in interstate banking (see discussion above).


                                       7
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         Management cannot anticipate what changes Congress may enact, or, if
enacted, their impact on Royal Bancshares' financial position and reported
results of operation. As a consequence of the extensive regulation of commercial
banking activities in the United States, Royal Bancshares and Royal Bank's
business is particularly susceptible to being affected by federal and state
legislation and regulations that may increase the costs of doing business.

Federal Deposit Insurance Corporation Improvement Act of 1991

         General. The Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDIC Improvement Act") includes several provisions that have a direct
impact on the Bank. The most significant of these provisions are discussed
below.

         The FDIC is required to conduct periodic full-scope, on-site
examinations of Royal Bank. In order to minimize losses to the deposit insurance
funds, the FDIC Improvement Act establishes a format to more monitor
FDIC-insured institutions and to enable prompt corrective action by the
appropriate federal supervisory agency if an institution begins to experience
any difficulty. The FDIC Improvement Act establishes five "capital" categories.
They are: (1) well capitalized, (2) adequately capitalized, (3)
undercapitalized, (4) significantly undercapitalized, and (5) critically
undercapitalized. The overall goal of these new capital measures is to impose
more scrutiny and operational restrictions on banks as they descend the capital
categories from well capitalized to critically undercapitalized.

         Under Current regulations, a "well-capitalized" institution would be
one that has at least a 10% total risk-based capital ratio, a 6% Tier 1
risk-based capital ratio, a 5% Tier 1 Leverage Ratio, and is not subject to any
written order or final directive by the FDIC to meet and maintain a specific
capital level. Royal Bank is presently categorized as a "well-capitalized"
institution.

         An "adequately capitalized" institution would be one that meets the
required minimum capital levels, but does not meet the definition of a
"well-capitalized" institution. The existing capital rules generally require
banks to maintain a Tier 1 Leverage Ratio of at least 4% and an 8% total
risk-based capital ratio. Since the risk-based capital requirement to be in the
form of Tier 1 capital, this also will mean that a bank would need to maintain
at least 4% Tier 1 risk-based capital ratio. An institution must meet each of
the required minimum capital levels in order to be deemed "adequately
capitalized."

         An "undercapitalized" institution is one that fails to meet one or more
of the required minimum capital levels for an "adequately capitalized"
institution. Under the FDIC Improvement Act, an "undercapitalized" institution
must file a capital restoration plan and is automatically subject to
restrictions on dividends, management fees and asset growth. In addition, the
institution is prohibited from making acquisitions, opening new branches or
engaging in new lines of business without the prior approval of its primary
federal regulator. A number of other restrictions may be imposed.

         A "critically undercapitalized" institution is one that has a tangible
equity (Tier 1 capital) ratio of 2% or less. In addition to the same
restrictions and prohibitions that apply to "undercapitalized" and
"significantly undercapitalized" institutions, any institution that becomes
"critically undercapitalized" is prohibited from taking the following actions
without the prior written approval of its primary federal supervisory agency:
engaging in any material transactions other than in the usual course of
business; extending credit for highly leveraged transactions; amending its
charter or bylaws; making any material changes in accounting methods; engaging
in certain transactions with affiliates; paying excessive compensation or
bonuses; and paying interest on liabilities exceeding the prevailing rates in
the institution's market area. In addition, a "critically undercapitalized"
institution is prohibited from paying interest or principal on its subordinated
debt and is subject to being placed in conservatorship or receivership if its
tangible equity capital level is not increased within certain mandated time
frames.

                                       8
<PAGE>

         Real Estate Lending Guidelines. Pursuant to the FDIC Improvement Act,
the FDIC has issued real estate lending guidelines that establish loan-to-value
("LTV") ratios for different types of real estate loans. A LTV ratio is
generally defined as the total loan amount divided by the appraised value of the
property at the time the loan is originated. If a bank does not hold a first
lien position, the total loan amount would be combined with the amount of all
senior liens when calculating the ratio. In addition to establishing the LTV
ratios, the FDIC's real estate guidelines require all real estate loans to be
based upon proper loan documentation and a recent independent appraisal of the
property.


The FDIC's guidelines establish the following limits for LTV ratios:
                                                                   LTV
             Loan Category                                         Limit
             -------------                                         -----
             Raw Land                                               65%
             Land Development
             Construction:
                           Commercial, Multifamily (includes
                            condos and co-ops), and other
                             Nonresidential                         80%
                             Improved Property                      85%
             Owner occupied 1-4 Family and Home Equity
                             (without credit enhancements)          90%

         The guidelines provide exceptions to the LTV ratios for
government-backed loans; loans facilitating the sale of real estate acquired by
the lending institution in the normal course of business; loans where the Bank's
decision to lend is not based on the offer of real estate as collateral and such
collateral is taken only out of an abundance of caution; and loans renewed,
refinanced, or restructured by the original lender to the same borrower, without
the advancement of new money. The regulation also allows institutions to make a
limited amount of real estate loans that do not conform with the proposed LTV
ratios. Under this exception, the Bank would be allowed to make real estate
loans that do not conform with the LTV ratio limits, up to an amount not to
exceed 100% of the Bank's total capital.

         Truth in Savings Act. The FDIC Improvement Act also contains the Truth
in Savings Act. The purpose of this Act is to require the clear and uniform
disclosure of the rates of interest that are payable on deposit accounts by the
Bank and the fees that are assessable against deposit accounts, so that
consumers can make a meaningful comparison between the competing claims of banks
with regard to deposit accounts and products. This Act requires the Bank to
include, in a clear and conspicuous manner, the following information with each
periodic statement of a deposit account: (1) the annual percentage yield earned,
(2) the amount of interest earned, (3) the amount of any fee and charges imposed
and (4) the number of days in the reporting period. This Act allows for civil
lawsuits to be initiated by customers if the Bank violates any provision or
regulation under this Act.



                                       9
<PAGE>



         Gramm-Leach-Bliley Act. On November 12, 1999, President Clinton signed
the Gramm-Leach-Bliley Act of 1999, the Financial services Modernization Act.
The Financial Services Modernization Act repeals the two affiliation provisions
of the Glass-Steagall Act:

         o     Section 20, which restricted the affiliation of Federal Reserve
               Member Banks with firms "engaged principally" in specified
               securities activities; and

         o     Section 32, which restricts officer, director, or employee
               interlocks between a member bank and any company or person
               "primarily engaged" in specified securities activities.

In addition, the Financial Services Modernization Act contains provisions that
expressly preempt any state insurance law. The law establishes a comprehensive
framework to permit affiliations among commercial banks, insurance companies,
securities firms, and other financial service providers. It revises and expands
the framework of the Bank Holding Company Act framework to permit a holding
company system to engage in a full range of financial activities through a new
entity known as a Financial Holding Company. "Financial activities" is broadly
defined to include not only banking, insurance and securities activities, but
also merchant banking and additional activities that the Federal Reserve, in
consultation with the Secretary of the Treasury, determines to be financial in
nature, incidental to such financial activities, or complementary activities
that do not pose a substantial risk to the safety and soundness of depository
institutions or the financial system generally.

         In general, the Financial Services Modernization Act:

         o     Repeals historical restrictions on, and eliminates many federal
               and state law barriers to, affiliations among banks, securities
               firms, insurance companies, and other financial service
               providers;

         o     Provides a uniform framework for the functional regulation of the
               activities of banks, savings institutions and their holding
               companies;

         o     Broadens the activities that may be conducted by national banks,
               banking subsidiaries of bank holding companies, and their
               financial subsidiaries;

         o     Provides an enhanced framework for protecting the privacy of
               consumer information;

         o     Adopts a number of provisions related to the capitalization,
               membership, corporate governance, and the other measures designed
               to modernize the Federal Home Loan Bank system;

         o     Modifies the laws governing the implementation of the Community
               Reinvestment Act; and

         o     Addresses a variety of other legal and regulatory issues
               affecting both day-to-day operations and long-term activities of
               financial institutions.

                                       10
<PAGE>

              In order for the Royal Bancshares to take advantage of the ability
to affiliate with other financial service providers, Royal Bancshares must
become a "Financial Holding Company" as permitted under an amendment to the Bank
Holding Company Act. To become a Financial holding Company, a company must file
a declaration with the Federal Reserve, electing to engage in activities
permissible for Financial Holding Companies and certifying that it is eligible
to do so because all of its insured depository institution subsidiaries are
well-capitalized and well-managed. In addition, the Federal Reserve must
determine that each insured depository institution subsidiary of the company has
at least a satisfactory "CRA rating. Royal Bancshares currently meets the
requirements to make an election to become a Financial Holding Company. The
Royal Bancshares management has not determined at this time whether it will seek
an election to become a Financial Holding Company. Royal Bancshares is examining
its strategic business plan to determine whether, based on market conditions,
the relative financial conditions of Royal Bancshares and its subsidiaries,
regulatory capital requirements, general economic conditions, and other factors,
Royal Bancshares desires to utilize any of its expanded powers provided in the
Financial Service Modernization Act.

              The Financial Services Modernization Act also includes a new
section of the Federal Deposit Insurance Act governing subsidiaries of state
banks that engage in "activities as principal that would only be permissible"
for a national bank to conduct in a financial subsidiary. It expressly preserves
the ability of a state bank to retain all existing subsidiaries. Because
Pennsylvania permits commercial banks chartered by the state to engage in any
activity permissible for national banks, Royal Bank will be permitted to form
subsidiaries to engage in the activities authorized by the Financial Services
Modernization Act, to the same extent as a national bank. In order to form a
financial subsidiary, Royal Bank must be well-capitalized, and Royal Bank would
be subject to the same capital deduction, risk management and affiliate
transaction rules as applicable to national banks.

                  Royal Bancshares and Royal Bank do not believe that the
Financial Services Modernization Act will have a material adverse effect on our
operations in the near-term. However, to the extent that it permits banks,
securities firms, and insurance companies to affiliate, the financial services
industry may experience further consolidation. The Financial Services
Modernization Act is intended to grant to community banks certain powers as a
matter of right that larger institutions have accumulated on an ad hoc basis.
Nevertheless, this act may have the result of increasing the amount of
competition that Royal Bancshares and Royal Bank face from larger institutions
and other types of companies offering financial products, many of which may have
substantially more financial resources than Royal Bancshares and Royal Bank.

Monetary Policy

         The earnings of Royal Bank are affected by the policies of regulatory
authorities including the Federal Reserve Board. An important function of the
Federal Reserve System is to influence the money supply and interest rates.
Among the instruments used to implement those objectives are open market
operations in United States government securities, changes in reserve
requirements against member bank deposits and limitations on interest rates that
member banks may pay on time and savings deposits. These instruments are used in
varying combinations to influence overall growth and distribution of bank loans,
investments and deposits, and their use may also affect rates charged on loans
or paid for deposits.

                                       11
<PAGE>

         The policies and regulations of the Federal Reserve Board have had and
will probably continue to have a significant effect on its reserve requirements,
deposits, loans and investment growth, as well as the rate of interest earned
and paid, and are expected to affect Royal Bank's operations in the future. The
effect of such policies and regulations upon the future business and earnings of
Royal Bank cannot be predicted.

Effects of Inflation

         Inflation has some impact on Royal Bancshares' operating costs. Unlike
many industrial companies, however, substantially all of Royal Bancshares'
assets and liabilities are monetary in nature. As a result, interest rates have
a more significant impact on Royal Bancshares' performance than the general
level of inflation. Over short periods of time, interest rates may not
necessarily move in the same direction or in the same magnitude as prices of
goods and services.


ITEM 2.  PROPERTIES

         Royal Bank has seventeen banking offices, which are located in
Pennsylvania.
<TABLE>
<CAPTION>

<S>                                <C>                                <C>
Narberth Office (1)                Villanova Office                   King of Prussia Office (1)
-------------------                ----------------                   --------------------------
732 Montgomery Ave                 801 East Lancaster Avenue          Rt. 202 at Wilson Road
Narberth, Pa. 19072                Villanova, Pa. 19085               King of Prussia, Pa. 19406

Philadelphia  Offices              Shillington Office                 Bridgeport Office (1)
---------------------              ------------------                 ---------------------
- One Penn Square West             516 East Lancaster Avenue          105 W. 4th Street
  30 South 15th Street             Shillington. Pa 19607              Bridgeport, Pa. 19406
  Philadelphia, Pa 19102
                                   Trooper Office(1)                  Upper Merion Office
                                   -----------------                  -------------------
- 1340 Walnut Street               Trooper & Egypt Roads              Beidler & Henderson Roads
  Philadelphia, Pa. 19107          Trooper, Pa. 19401                 King of Prussia, Pa. 19406

- 401 Fairmount Avenue (1)         Reading Office                     Phoenixville Office (1)
  Philadelphia, Pa. 19123          --------------                     ----------------------
                                   501 Washington Street              808 Valley Forge Road
- 6526 Castor Avenue               Reading, Pa. 19601                 Phoenixville, Pa. 19460
  Philadelphia, PA 19149
                                   Philadelphia Loan Office (2)
                                   ----------------------------
- 1650 Grant Avenue (1)            2 Penn Center
  Philadelphia, PA  19115          Philadelphia, PA  19102

Jenkintown Office (1)              Narberth Training Ctr. (1) (3)
---------------------              814 Montgomery Ave
600 Old York Road                  Narberth, PA 19072
Jenkintown, Pa 19046
</TABLE>

 ----------------------------------
(1) owned
(2) Residential Loan Office-Not a branch
(3) Used for employee training

         Royal Bank owns nine of the above properties. One property is subject
to a mortgage. The remaining eight properties are leased with expiration dates
between 2002 and 2004. Royal Bank also leases storage warehouse space in
Bridgeport, Pa. at an annual rate of 11 thousand dollars. During 2001, Royal
Bank made aggregate lease payments of approximately 501 thousand dollars. Royal
Bank believes that all of its properties are attractive, adequately insured, and
well maintained and are adequate for Royal Bank's purposes. Royal Bank also owns
a property located at 144 Narberth Avenue, Narberth, PA, which may serve as a
site for future expansion.



                                       12
<PAGE>



ITEM 3.  LEGAL PROCEEDINGS

         Management, after consulting with Royal Bancshares's legal counsel, is
not aware of any litigation that would have a material adverse effect on the
consolidated financial position of Royal Bancshares. There are no proceedings
pending other than routine litigation incident to the business of Royal
Bancshares. In addition, no material proceedings are known to be contemplated by
governmental authorities against Royal Bancshares.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None


ITEM 5. MARKET FOR THE BANK'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS

         On September 6, 1988 the Royal Bancshares' Class A Common Stock
commenced trading on the NASDAQ National Market System (NASDAQ/NMS). Royal
Bancshares' NASDAQ Symbol is Royal Bancshares and is included in the NASDAQ
National Market Stock Table, which is published in most major newspapers. There
is no market for Royal Bancshares' Class B Common Stock, as such is prohibited
by the terms of the Class B Common Stock. The following table shows the range of
high, low-end and closing bid prices for Royal Bancshares' stock as reported by
NASDAQ


                                            Bid Prices

         2001                             High          Low         Close
         ----------------------         -------       -------      -------
         First Quarter ........         $ 15.756     $ 11.817     $ 12.929

         Second Quarter .......           17.037       12.412       16.033

         Third  Quarter .......           20.694       15.085       16.546
         Fourth Quarter .......           19.009       15.567       19.009

         2000                             High          Low         Close
         ----------------------         -------       -------      -------
         First  Quarter .......         $ 14.229     $ 11.792     $ 12.024
         Second Quarter .......           15.854       14.250       14.603
         Third  Quarter .......           17.167       15.792       16.012
         Fourth Quarter .......           16.209       14.750       14.246

         (Source: This summary reflects information supplied by NASDAQ.)

         The bid information shown above is derived from statistical reports of
the NASDAQ Stock Market and reflects inter-dealer prices without retail mark-up,
mark-down or commissions and may not necessarily represent actual transaction.
The bid prices do not reflect the 6% stock dividend that was declared on January
16, 2002. The NASDAQ Stock Market, Inc., is a wholly-owned subsidiary of
National Association of Securities Dealers, Inc.




                                       13
<PAGE>


         The approximate number of recorded holders of Royal Bancshares' Class A
and Class B Common Stock, as of February 28, 2002, is shown below:

         Title of Class                            Number of Record Holders
         --------------------                      ------------------------
         Class A Common Stock                              390
         Class B Common Stock                              160

Because substantially all of the holders of Class B Common Stock are also
holders of Class A Common stock the number of record holders of the two classes
on a combined basis was approximately 451 as of February 28, 2002.


Dividends

         Subject to certain limitations imposed by law, the Board of Directors
of Royal Bancshares may declare a dividend on shares of common stock.

         Stock dividends. On April 21, 1999, the Board of Directors of Royal
Bancshares declared a 4% stock dividend on both its Class A Common Stock and
Class B Common Stock shares payable May 14, 1999, to Shareholders of record on
May 3, 1999. The stock dividend resulted in the issuance of 288,728 additional
shares of Class A Common Stock and 65,296 additional shares of Class B Common
Stock.

          On October 20, 1999, the Board of Directors of Royal Bancshares
declared a 5% stock dividend on both its Class A Common Stock and Class B Common
Stock shares payable on January 17, 2000, to shareholders of record on January
3, 2000. The stock dividend resulted in the issuance of 382,857 additional
shares of Class A Common Stock and 84,234 additional shares of Class B Common
Stock.

         On January 17, 2001, the Board of Directors of Royal Bancshares
declared a 5% stock dividend on both its Class A Common Stock and Class B Common
Stock shares payable on February 12, 2001, to shareholders of record on January
29, 2001. The stock dividend resulted in the issuance of 408,197 additional
shares of Class A Common Stock and 86,614 additional shares of Class B Common
Stock.

         On January 16, 2002, the Board of Directors of Royal Bancshares
declared a 6% stock dividend on both its Class A Common Stock and Class B Common
Stock shares payable on February 8, 2002, to shareholders of record on January
28, 2002. The stock dividend resulted in the issuance of 517,635 additional
shares of Class A common stock and 108,282 additional shares of Class B common
stock. Future stock dividends, if any, will be at the discretion of the Board of
Directors and will be dependent on the level of earnings and compliance with
regulatory requirements.

                                       14
<PAGE>

         Cash Dividends. Royal Bancshares paid cash dividends in each quarter of
2001 and 2000 for holders of Class A Common Stock and for holders of Class B
Common Stock. This resulted in a charge to retained earnings of approximately
$9.0 million and $8.5 million for 2001 and 2000, respectively. The following
table sets forth on a quarterly basis the dividend paid to holders of each Class
A and Class B Common Stock for 2001 and 2000, adjusted to give effect to the
stock dividends paid.



                                    Cash Dividends Per Share
                                    ------------------------
                 2001                Class A          Class B
                 ----                -------          -------
                 First  Quarter       $.21             $.2415
                 Second Quarter       $.21             $.2415
                 Third  Quarter       $.21             $.2415
                 Fourth Quarter       $.23             $.2645


                                     Cash Dividends Per Share
                                     ------------------------
                 2000                Class A          Class B
                 ----                -------          -------
                 First  Quarter       $.21             $.2415
                 Second Quarter       $.21             $.2415
                 Third  Quarter       $.21             $.2415
                 Fourth Quarter       $.21             $.2415

         Future dividends must necessarily depend upon net income, capital
requirements, appropriate legal restrictions and other factors relevant at the
time the Board of Directors of Royal Bancshares considers dividend policy cash
necessary to fund dividends available for dividend distributions to the
shareholders of Royal Bancshares must initially come from dividends paid by the
Royal Bank to Royal Bancshares. Therefore, the restrictions on the Royal Bank's
dividend payments are directly applicable to Royal Bancshares. Under the
Pennsylvania Banking Code of 1965, as amended, Royal Bank places a restriction
on the availability of capital surplus for payment of dividends.

         Under the Pennsylvania Business Corporation Law of 1988, as amended,
Royal Bancshares may pay dividends only if after payment the Registrant would be
able to pay its debts as they become due in the usual course of business and the
total assets are greater than the sum of its total liabilities plus the amount
that would be needed if Royal Bancshares were to be dissolved at the time of the
dividend to satisfy the preferential rights upon dissolution of shareholders
whose preferential rights are superior to those receiving the dividend. See
Regulatory Matters Note to the Consolidated Financial Statements in Item 8 of
this report.

                                       15
<PAGE>




ITEM 6. SELECTED FINANCIAL DATA

         The following selected consolidated financial and operating information
for Royal Bancshares should be read in conjunction with ITEM 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and accompanying notes in ITEM 8:
<TABLE>
<CAPTION>

                                                                         Years ended December 31,
                                                                (in thousands, except per share data)
                                             ------------------------------------------------------------------------------
Income Statement Data                            2001            2000             1999             1998            1997
---------------------                        ------------    ------------     -----------      -----------     ------------

<S>                                               <C>             <C>             <C>              <C>              <C>
Interest income                                   $69,224         $58,875         $44,682          $40,640          $33,372
Interest expense                                   31,808          22,549          15,922           13,163           10,048
                                             ------------    ------------     -----------      -----------     ------------
Net interest income                                37,416          36,326          28,760           27,477           23,324
Increase (Decrease) Provision for loan                  -             250               -            4,770          (2,118)
losses
                                             ------------    ------------     -----------      -----------     ------------
Net interest income after loan loss                37,416          36,076          28,760           22,707           25,442
provision
    Gains on sale of loans                            372               -              45                4               29
    Gains on sale of real estate                      188              53             350                -            1,204
    (Losses) on AFS investment securities              60         (1,302)               -                -                -
    Other income                                    1,118           1,206           1,644            3,570            1,392
                                             ------------    ------------     -----------      -----------     ------------
Total other income                                  1,738            (43)           2,039            3,574            2,625
Income before other expenses & income taxes        39,154          36,033          30,799           26,281           28,067
Non-interest expenses:
    Salaries and benefits                          10,479           7,979           7,265            5,028            9,546
    Other                                           7,124           5,812           5,865            5,845            5,088
                                             ------------    ------------     -----------      -----------     ------------
Total other expenses                               17,603          13,791          13,130           10,873           14,634
                                             ------------    ------------     -----------      -----------     ------------
Income before taxes                                21,551          22,242          17,669           15,408           13,433
Income taxes                                        5,797           7,982           5,564            4,624            4,074
                                             ------------    ------------     -----------      -----------     ------------
Net income                                        $15,754         $14,260         $12,105          $10,784           $9,359
                                             ============    ============     ===========      ===========     ============


Basic earnings per share (1)                       $1.39           $1.26           $1.09            $0.98           $0.85
                                                   -----           -----           -----            -----           -----
Diluted earnings per share (1)                     $1.37           $1.24           $1.07            $0.97           $0.83
                                                   -----           -----           -----            -----           -----
</TABLE>

-------------

(1)      Earnings per share has the weighted average number of shares used in
         the calculation adjusted to reflect a 6% stock dividend in January
         2002, a 5% stock dividend in 2001, a 5% stock dividend in 2000, a 4%
         stock dividend in 1999, a 4% stock dividend in 1998, and a 4% stock
         dividend in 1997.


<PAGE>

<TABLE>
<CAPTION>
                                                                         As of December 31,
                                         ----------------------------------------------------------------------------------
Balance Sheet Data                           2001              2000              1999              1998              1997
------------------                       -------------    -------------      -------------     -------------     ----------
(in thousands, except for percentages)
<S>                                        <C>              <C>                <C>               <C>               <C>
Total assets                               $930,980         $630,081           $522,536          $427,622          $416,598
Total average assets                        788,419          573,780            469,193           407,623           342,361
Loans, net                                  634,347          411,973            343,081           292,556           282,711
Total deposits                              701,860          472,582            381,286           290,390           265,363
Total long term debt                         70,225           30,000             30,000            30,000            30.000
Total stockholders' equity                  108,449          103,502             95,835            94,069            89,505
Total average stockholders' equity          105,072           99,746             94,824            91,374            86,572
Return on average assets                       2.0%             2.5%               2.6%              2.6%              2.7%
Return on average equity                      15.0%            14.3%              12.8%             11.8%             10.8%
Average equity to average assets              13.3%            17.4%              20.2%             22.4%             25.3%
Cash dividend payout ratio                    57.0%            55.0%              70.3%             66.5%             83.9%

</TABLE>

                                       16
<PAGE>


Average Balances

         The following table presents the average daily balances of assets,
liabilities and stockholders' equity and the respective interest paid on
interest bearing assets and interest bearing liabilities, as well as average
rates for the periods indicated:

<TABLE>
<CAPTION>
                                                  2001                              2000
                                     ---------------------------------  -------------------------------
                                      Average                Yield/      Average              Yield/
Assets (In thousands)                 Balance    Interest     Rate       Balance   Interest    Rate
---------------------                 -------    --------     ----       -------   --------    ----
<S>                                     <C>           <C>       <C>          <C>         <C>     <C>
Interest bearing deposits in banks      $18,230       $533      2.92%        $559        $23     4.11%
Federal funds                            18,468        752      4.07%      24,117      1,531     6.35%
Investment securities:
   Held to maturity:
         Taxable                         97,055      7,610      7.84%      67,050      5,115     7.63%
         Nontaxable (1)                      --         --         --          --         --        --
                                     ---------------------------------  -------------------------------
          Total held to maturity         97,055      7,610      7.84%      67,050      5,115     7.63%

    Available for sale
          Taxable                        76,338      6,945      9.10%      67,185      6,177     9.19%
                                     ---------------------------------  -------------------------------
Total investment securities             173,392     14,555      8.39%     134,235     11,292     8.41%
Loans: (2)
    Commercial & industrial             202,327     20,012      9.89%     182,359     19,580    10.74%
    Commercial mortgages                337,410     32,936      9.76%     213,281     25,326    11.87%
    Other loans (1)                       4,116        436     10.59%       9,154      1,123    12.27%
                                     ---------------------------------  -------------------------------
            Total loans                 543,854     53,384      9.82%     404,794     46,029    11.37%
                                     ---------------------------------  -------------------------------
Total interest earning assets          $753,944    $69,224      9.18%    $563,705    $58,875    10.44%
Non interest earning assets
      Cash & due from banks               5,432                             9,648
      Other assets                       46,113                            18,810
      Allowance for loan loss           (12,264)                          (12,034)
      Def income/unearned disc           (4,806)                           (6,349)
                                     -----------                        ----------
Total non interest
          Earning assets                 34,475                            10,075
                                     -----------                        ----------
Total assets                           $788,419                          $573,780
                                     ===========                        ==========
Liabilities & Stockholders' Equity
Deposits:
      Savings                           $26,312        637      2.42%     $19,942        541     2.71%
      NOW                                38,353        869      2.27%      35,714        870     2.44%
      Money market                      108,792      4,031      3.71%      56,514      2,278     4.03%
      CDs & other time deposits         369,680     22,237      6.02%     269,430     16,939     6.29%
                                     ---------------------------------  -------------------------------
Total interest bearing deposits        $543,137     27,774      5.11%    $381,600     20,628     5.41%
Federal funds                               334         15      4.49%         295         17     5.76%
Borrowings                               68,129      4,019      5.90%      30,613      1,904     6.22%
                                     ---------------------------------  -------------------------------
Total interest bearing liabilities     $611,600     31,808      5.20%    $412,508     22,549     5.47%
                                     ---------------------------------  -------------------------------
    Non interest bearing deposits        49,904                            45,501
    Other liabilities                    16,025                            16,025
                                     -----------                        ----------
Total liabilities                       683,347                           474,034
     Stockholders' equity               105,072                            99,746
                                     -----------                        ----------
Total liabilities and
            Stockholders' equity       $788,419                          $573,780
                                     ===========                        ==========
Net interest income                                $37,416                           $36,326
                                                ===========                       ===========
Net yield on
         Interest-earning assets                                4.96%                            6.44%
                                                           ===========                       ==========

</TABLE>


<PAGE>
[TABLE RESTUBBED]

<TABLE>
<CAPTION>

                                                   1999
                                      --------------------------------
                                       Average               Yield/
Assets (In thousands)                  Balance   Interest     Rate
---------------------                  -------   --------     ----
<S>                                        <C>         <C>      <C>
Interest bearing deposits in banks         $430        $16      3.72%
Federal funds                            11,345        558      4.92%
Investment securities:
   Held to maturity:
         Taxable                         78,251      5,726      7.32%
         Nontaxable (1)                     694         82     11.82%
                                      --------------------------------
          Total held to maturity         78,945      5,808      7.36%

    Available for sale
          Taxable                        51,617      4,512      8.74%
                                      --------------------------------
Total investment securities             130,562     10,320      7.90%
Loans: (2)
    Commercial & industrial             139,639     15,374     11.01%
    Commercial mortgages                170,282     17,131     10.06%
    Other loans (1)                      10,623      1,311     12.34%
                                      --------------------------------
            Total loans                 320,544     33,816     10.55%
                                      --------------------------------
Total interest earning assets          $462,881    $44,710      9.66%
Non interest earning assets
      Cash & due from banks               8,775
      Other assets                       17,159
      Allowance for loan loss           (12,186)
      Def income/unearned disc           (7,436)
                                      ----------
Total non interest
          Earning assets                  6,312
                                      ----------
Total assets                           $469,193
                                      ==========
Liabilities & Stockholders' Equity
Deposits:
      Savings                           $19,932       $538      2.70%
      NOW                                31,480        699      2.22%
      Money market                       43,809      1,424      3.25%
      CDs & other time deposits         192,545     11,356      5.90%
                                      --------------------------------
Total interest bearing deposits        $287,766    $14,017      4.87%
Federal funds                                61          3      4.92%
Borrowings                               30,869      1,902      6.16%
                                      --------------------------------
Total interest bearing liabilities     $318,696    $15,922      5.00%
                                      --------------------------------
    Non interest bearing deposits        42,829
    Other liabilities                    12,844
                                      ----------
Total liabilities                       374,369
     Stockholders' equity                94,824
                                      ----------
Total liabilities and
            Stockholders' equity       $469,193
                                      ==========
Net interest income                                $28,788
                                                ===========
Net yield on
         Interest-earning assets                                6.22%
                                                           ===========

</TABLE>
----------------
(1)      The indicated income and annual rate are presented in a taxable
         equivalent basis using the federal tax rate of 34% for all periods.
(2)      Nonaccruing loans have been included in the appropriate average loan
         balance category, but interest on these loans has not been included.


                                       17
<PAGE>

Rate Volume

         The following table sets forth a rate/volume analysis, which segregates
in detail the major factors contributing to the change in net interest income
for the years ended, December 31, 2001 and 2000, as compared to respective
previous periods, into amounts attributable to both rate and volume variances.

<TABLE>
<CAPTION>

                                                              2001 Vs 2000                       2000 Vs 1999
                                                             (in thousands)                     (in thousands)
                                                    -------------------------------    ---------------------------------
                                                            Changes due to:                     Changes due to:
                                                    -------------------------------    --------------------------------
Interest income                                     Volume       Rate        Total      Volume       Rate       Total
                                                   --------    --------    --------    --------    --------    --------
<S>                                              <C>        <C>         <C>              <C>        <C>          <C>
Interest bearing deposits in banks                 $    518    $     (8)   $    510    $      9    $     (4)   $      5
Federal funds sold                                     (308)       (471)       (779)      1,105        (130)        975
Investment securities:
   Held to maturity:
         Taxable                                      2,349         146       2,495        (896)        285        (611)
         Nontaxable                                    --          --          --           (54)       --           (54)
    Available for sale
          Taxable                                       833         (65)        768       1,421         244       1,665
                                                   --------    --------    --------    --------    --------    --------
      Total investment securities                     3,182          81       3,263         471         529       1,000
Loans:
    Commercial & industrial                           2,046      (1,614)        432       4,596        (390)      4,206
    Commercial mortgages                             12,730      (5,120)      7,610       4,781       3,414       8,195
    Other loans                                        (550)       (137)       (687)       (180)         (8)       (188)
                                                   --------    --------    --------    --------    --------    --------
            Total loans                              14,226      (6,871)      7,355       9,197       3,016      12,213
                                                   --------    --------    --------    --------    --------    --------

Total increase (decrease) in interest income       $ 17,618    $ (7,269)   $ 10,349    $ 10,782    $  3,411    $ 14,193


Interest expense

Deposits:
  Savings                                          $    171    $    (75)   $     96    $    (14)   $     17    $      3
  NOW & Money Market                                  1,831         (79)      1,752         530         495       1,025
  CDs & other time deposits                           6,063        (766)      5,297       4,791         792       5,583
                                                   --------    --------    --------    --------    --------    --------
         Total interest bearing deposits              8,065        (920)      7,145       5,307       1,304       6,611
Federal funds purchased                                   2          (4)         (2)         14          --          14
Mortgage payable and
      long term borrowings                            2,218        (103)      2,115         (16)         18           2
                                                   --------    --------    --------    --------    --------    --------

Total increase (decrease) in interest expense        10,285      (1,027)      9,258       5,305       1,322       6,627
                                                   --------    --------    --------    --------    --------    --------
Total increase (decrease) in
      net interest income                          $  7,333    $ (6,242)   $  1,091    $  5,477    $  2,089    $  7,566
                                                   ========    ========    ========    ========    ========    ========
</TABLE>




                                       18
<PAGE>



Loans

         The following table reflects the composition of the loan portfolio of
Royal Bank of Pennsylvania and the percent of gross outstandings represented by
each category at the dates indicated.
<TABLE>
<CAPTION>

                                                                     As of December 31,
                                                                       (in thousands)
                           --------------------------------------------------------------------------------------------------------
Loans                             2001                 2000                 1999                 1998                 1997
-----                      -------------------- -------------------- -------------------- -------------------- --------------------
<S>                          <C>           <C>    <C>           <C>     <C>          <C>     <C>          <C>     <C>          <C>
Comm'l & industrial          $218,498      34%    $193,398      45%     $168,329     46%     $127,972     42%     $123,800     41%
Real estate                   428,223      65%     233,111      54%      191,312     53%      182,595     57%      176,315     58%
Consumer                        2,714       1%       2,449       1%        2,653      1%        2,033      1%        1,523      1%
                          -----------     ---- -----------     ---- ------------    ---- ------------    ---- ------------    ----
      Total gross loans       649,435     100%     428,958     100%      362,294    100%      312,600    100%      301,638    100%
Unearned income                (1,056)              (1,991)               (2,154)              (1,833)              (1,498)
Disc on loans purchased        (2,144)              (3,020)               (5,322)              (6,291)              (9,243)
                          -----------          -----------          ------------         ------------         ------------
                              646,235              423,947               354,818              304,476              290,897
Allowance for loan loss       (11,888)             (11,973)              (11,737)             (11,920)              (8,186)
                          -----------          -----------          ------------         ------------         ------------
    Total loans, net         $634,347             $411,974              $343,081             $292,556             $282,711
                          ===========          ===========          ============         ============         ============
</TABLE>



                                       19
<PAGE>


Analysis of Allowance for Loan Loss
<TABLE>
<CAPTION>

                                                                        Year ending December 31,
                                                                             (in thousands)
                                         -------------------------------------------------------------------------------------
                                             2001              2000              1999               1998              1997
                                         ------------     -------------     -------------      -------------     -------------

<S>                                      <C>               <C>               <C>                <C>               <C>
Total Loans                                  $646,235          $423,947          $354,818           $304,476          $290,897
                                        =============     =============     =============      =============     =============

Daily average loan balance                   $543,854          $404,794          $320,544           $299,916          $213,368
                                        =============     =============     =============      =============     =============

Allowance for loan loss:
   Balance at the beginning of the year       $11,973           $11,737           $11,920             $8,186            $9,084
   Charge offs by loan type:
        Commercial                                 82               523             1,062              1,501               762
        Real estate                               435               105                13                135                --
                                        -------------     -------------     -------------      -------------     -------------
   Total charge offs                              517               628             1,075              1,636               762
   Recoveries by loan type:
         Commercial                               212               596               850                540             1,934
         Individual                                32                 4                35                 --                --
         Real estate                              188                14                 7                 60                48
                                        -------------     -------------     -------------      -------------     -------------
    Total recoveries                              432               614               892                600             1,982
                                        -------------     -------------     -------------      -------------     -------------
    Net loan charge offs                          (85)              (14)             (183)            (1,036)            1,220
         Increase (decrease) in
               Provision for loan loss            --                250                --              4,770           (2,118)
                                        -------------     -------------     -------------      -------------     -------------
Balance at end of year                        $11,888           $11,973           $11,737            $11,920            $8,186
                                        =============     =============     =============      =============     =============
Net charge offs to average loans                  .02%               --               .06%               .35%           (0.57%)
                                        =============     =============     =============      =============     =============
Allowance to total loans at year end             1.84%             2.82%             3.31%              3.91%             2.81%
                                        =============     =============     =============      =============     =============
</TABLE>


                                       20
<PAGE>

             The allowance for loan losses is established through provisions for
loan losses based on management's on-going evaluation of the risks inherent in
Royal Bank's loan portfolio. Factors considered in the evaluation process
include growth of the loan portfolio, risk characteristics of the types of loans
in the portfolio, geographic and large borrower concentrations, current regional
economic and real estate market conditions that could affect the ability of
borrowers to pay, the value of underlying collateral, and trends in loan
delinquencies and charge-offs.

         Royal Bank utilizes an internal rating system to monitor and evaluate
the credit risk inherent in its loan portfolio. All loans approved by the loan
committee, executive board committee and the Board of Directors are initially
assigned a rating of pass. The loan review officer, Vice President of Special
Assets and the loan review committee are expected to recommend changes in loan
ratings when facts come to their attention that warrant an upgrade or downgrade
in a loan rating. Problem and potential problem assets are assigned the three
lowest ratings. Such ratings coincide with the "Substandard", "Doubtful" and
"Loss" classifications used by federal regulators in their examination of
financial institutions. Generally, an asset is considered Substandard if it is
inadequately protected by the current net worth and paying capacity of the
obligors and/or the collateral pledged. Substandard assets have a well-defined
weakness or weaknesses that jeopardize the liquidation of the debt. Assets
classified as Doubtful have all the weaknesses inherent in those classified
Substandard with the added characteristics that the weaknesses present make
collection or liquidation in full, on the basis of currently existing facts,
highly questionable and improbable. Assets classified as Loss are those
considered uncollectable and of such little value that there continuance as
assets is not warranted. On a regular basis, the Loan Review Officer and senior
management review the status of each loan.

           While Royal Bank believes that it has established an adequate
allowance for loan losses, there can be no assurance that the regulators, in
reviewing Royal Bank's loan portfolio, will not request the company to
materially increase its allowances for loan losses. Although management believes
that adequate specific and general loan loss allowances have been established,
actual losses are dependant upon future events and, as such, further additions
to the level of specific and general loss allowances could become necessary.


                                       21
<PAGE>

Loans and Lease Financing Receivables

         The following table summarizes the loan portfolio by loan category and
amount that corresponds to the appropriate regulatory definitions.\
<TABLE>
<CAPTION>

                                                                                             As of
                                                                                          December 31,
                                                                                         (in thousands)
                                                                         --------------  ---------------   --------------
                                                                              2001            2000              1999
                                                                         --------------  ---------------   --------------
Loans secured by real estate
<S>                                                                             <C>              <C>              <C>
    Construction and land development                                           $64,551          $75,038          $50,210
    Secured by 1-4 family residential properties:
    Revolving, open-end loans secured by 1-4 family residential
           properties and extended under lines of credit                         35,367            7,825            8,341
        All other loans secured by 1-4 family residential properties:
            Secured by first liens                                              110,351            5,621           15,458
            Secured by junior liens                                               5,302            4,130            6,010
    Secured by multi family (5 or more) residential properties                   35,718           19,832           19,021
    Secured by nonfarm nonresidential properties                                375,501          291,450          237,247
    Commercial and industrial loans to US addresses                               8,544           20,245           21,090
    Loans to individuals for household, family, and other personal
            expenditures                                                         13,909            4,503            4,252

     Obligations of state and political subdivisions in the US                      192              256              411
     All other loans                                                                 --               58              254
     Less: Any unearned income on loans listed above                              3,200            5,011            7,476
                                                                        ---------------  ---------------  ---------------

     Total loans and leases, net of unearned income                            $646,235         $423,947         $354,818
                                                                        ===============  ===============  ===============

</TABLE>



                                       22
<PAGE>


Credit Quality

The following table presents the principal amounts of nonaccruing loans and
other real estate.
<TABLE>
<CAPTION>

                                                                      As of December 31,
                                                                        (in thousands)
                                         ------------------------------------------------------------------------
                                              2001           2000           1999            1998          1997
                                         ------------   ------------   ------------    ------------   -----------

<S>                                      <C>             <C>            <C>             <C>           <C>
Non-accruing loans (1)(2)                     $10,794         $3,548         $1,209          $3,419        $4,317
Other real estate                                 884             --             19             707            --
                                         ------------   ------------   ------------    ------------   -----------
          Total nonperforming assets          $11,678         $3,548         $1,228          $4,126        $4,317
                                         ============   ============   ============    ============   ===========

Nonperforming assets to total assets             1.25%          0.56%          0.24%           0.96%         1.04%
                                         ============   ============   ============    ============   ===========
Nonperforming loans to total loans               1.67%          0.84%          0.34%           1.12%         1.48%
                                         ============   ============   ============    ============   ===========
Allowance for loan loss
                to nonperforming loans         110.14%        337.46%        970.80%         348.64%       189.62%
                                         ============   ============   ============    ============   ===========

</TABLE>

(1)  Generally a loan is placed on nonaccruing status when it has been
     delinquent for a period of 90 days or more unless the loan is both well
     secured and in the process of collection.

(2)  If interest had been accrued on these nonaccruing loans, such income would
     have approximated $526,000 for 2001, $319,000 for 2000, $109,000 for 1999,
     $308,000 for 1998, and $389,000 for 1997,

                                       23
<PAGE>

Investments Securities

         The contractual maturity distribution and weighted average rate of
Royal Bancshares' investments held to maturity portfolio at December 31, 2001
are presented in the following table. Weighted average rate on tax-exempt
obligations have been computed on a fully taxable equivalent basis assuming a
tax rate of 34%.
<TABLE>
<CAPTION>


                                                              As of December 31, 2001
                                                                  (in thousands)
                   --------------------------------------------------------------------------------------------------------------
                                            After 1 year but     After 5 years, but
                       Within 1 year         Within 5 years        within 10 years       After 10 years             Total
Securities held    ---------------------- ---------------------- -------------------- ---------------------- --------------------
to maturity          Amount      Rate       Amount      Rate       Amount     Rate      Amount      Rate       Amount      Rate
------------         ------      ----       ------      ----       ------     ----      ------      ----       ------      ----
<S>                  <C>         <C>        <C>         <C>        <C>        <C>        <C>        <C>        <C>        <C>
US Treasuries
 & gov agencies            --          %          --          %      $5,000     6.4%     $30,000       6.5%     $35,000      6.5%
Other securities       19,218       7.9%      37,899       7.8%         161     7.0%         625       6.8%      57,903      7.8%
                   ---------- ---------- ----------- ---------- ----------- -------- ----------- ---------- ----------- ---------

      Total           $19,218       7.9%     $37,899       7.8%      $6,161     6.4%     $30,625       6.5%     $92,903      7.3%
                   ========== ========== =========== ========== =========== ======== =========== ========== =========== =========



                                                              As of December 31, 2001
                                                                  (in thousands)
                    ---------------------- ---------------------- -------------------- ---------------------- ---------------------
                                             After 1 year but     After 5 years, but
                        Within 1 year         Within 5 years        within 10 years       After 10 years             Total
Available for       ---------------------- ---------------------- -------------------- ---------------------- ---------------------
sale                  Amount      Rate       Amount      Rate       Amount     Rate      Amount      Rate       Amount      Rate
--------              ------      ----       ------      ----       ------     ----      ------      ----       ------      ----
Gov't agencies             --          %          --          %     $31,735     6.2%     $20,006       6.6%     $51,741      6.4%
M.B.S.                     --          %         209       7.5%         213     7.5%      11,528       6.6%      11,950      6.6%
Foreign                    --          %      16,744       7.4%          --        %          --          %      16,744      7.4%
Trust Preferred         1,602       9.0%          --          %          --        %      33,305       9.5%      34,907      9.5%

Other securities        8,230       6.3%       3,810       8.3%          --        %       2,373       6.8%      14,413      6.9%
                   ---------- ---------- ----------- ---------- ----------- -------- ----------- ---------- ----------- ---------

      Total            $9,832       6.7%     $20,763       7.6%     $31,948     6.2%     $67,212       8.0%    $129,755      7.4%
                   ========== ========== =========== ========== =========== ======== =========== ========== =========== =========
</TABLE>

                                       24
<PAGE>

         The following tables presents the consolidated book values and
approximate fair value at December 31, 2001, 2000, and 1999, respectively, for
each major category of Royal Bancshares' investment securities portfolio for
held to maturity securities and available for sale securities.
<TABLE>
<CAPTION>

                                                                     As of December 31,
                                                                       (in thousands)
                                  ------------------------- ----- ------------------------- ---- -------------------------
                                            2001                            2000                           1999
                                  -------------------------       -------------------------      -------------------------
                                   Amortized       Fair            Amortized       Fair           Amortized       Fair
Securities held to maturity           Cost        Value               Cost        Value              Cost         Value
---------------------------           ----        -----               ----        -----              ----         -----

<S>                                   <C>          <C>                 <C>         <C>                <C>          <C>
State & political subdivisions        $     --     $    --             $    --     $    --            $    --      $    --
US Treasuries & agencies                35,000      34,679              23,071      23,070              6,614        6,623
Other securities                        57,903      59,946              63,039      63,279             76,451       74,871
                                 ------------- -----------       ------------- -----------      ------------- ------------
             Total                     $92,903     $94,625             $86,110     $86,349            $83,065      $81,494
                                 ============= ===========       ============= ===========      ============= ============

                                                                     As of December 31,
                                                                       (in thousands)
                                  ------------------------- ----- ------------------------- ---- --------------------------
                                            2001                            2000                           1999
                                  -------------------------       -------------------------      --------------------------
                                   Amortized       Fair            Amortized       Fair           Amortized       Fair
Securities  available  for  sale      Cost        Value               Cost        value              Cost         Value
--------------------------------      ----        -----               ----        -----              ----         -----
Federal Home Loan Bank stock          $  4,875    $  4,875             $ 3,170     $ 3,170            $ 3,170      $ 3,170
Preferred and common stock                  39          54               1,040       1,043              3,727        3,537
Other securities                       128,888     124,826              66,828      65,931             55,652       52,778
                                 ------------- -----------       ------------- -----------      ------------- ------------
             Total                    $133,802    $129,755             $71,038     $70,144            $62,549      $59,485
                                 ============= ===========       ============= ===========      ============= ============

</TABLE>


                                       25
<PAGE>


Deposits

         The average balance of Royal Bank's deposits by major classifications
for each of the last three years is presented in the following table.

<TABLE>
<CAPTION>

                                                                  As of December 31,
                                                                    (in thousands)
                                  ----------------------- ---- ------------------------ ---- ------------------------
                                           2001                         2000                          1999
                                  -----------------------      ------------------------      ------------------------
                                    Average                       Average                       Average
                                    Balance        Rate           Balance        Rate           Balance        Rate
                                    -------        ----           -------        ----           -------        ----
Demand deposits:
<S>                                <C>           <C>             <C>           <C>              <C>           <C>
     Non interest bearing            $49,904          --           $45,501          --           $42,829        - -
     Interest bearing (NOW)           38,353        2.27%           35,714        2.44%           31,480       2.22%
Money market deposits                108,792        3.71%           56,514        4.03%           43,809       3.25%
Savings deposits                      26,312        2.42%           19,942        2.71%           19,932       2.70%
Certificate of deposit               369,680        6.02%          269,430        6.29%          192,545       5.90%
                                 -----------     --------      -----------    ---------      -----------    --------

         Total deposits             $593,041                      $427,101                      $330,595
                                 ===========                   ===========                   ===========


</TABLE>



                                       26
<PAGE>




The remaining maturity of Certificates of Deposit of $100,000 or greater:

                                                 As of December 31,
                                                   (in thousands)
                                           -------------------------------
Maturity                                     2001                 2000
                                           -----------        ------------

Three months or less                         $ 39,216             $ 19,509
Over three months through twelve months       131,691               25,562
Over twelve months through five years         116,273              109,846
Over five years                                16,613               12,143
                                           ----------         ------------

                   Total                     $303,793             $166,760
                                           ==========         ============



Short and Long Term Borrowings
<TABLE>
<CAPTION>

                                               Year ending December 31,
                                                    (in thousands)
                                      -----------------------------------------------
                                   2001       2000       1999       1998       1997
                                 --------   --------   --------   --------   --------
<S>                              <C>        <C>        <C>        <C>        <C>
Short term borrowings            $ 30,000   $  3,000   $   --     $   --     $ 15,000

Long term borrowings:
   Other borrowings                 2,725       --         --         --         --
   FHLB advances                   67,500     30,000     30,000     30,365     31,063
                                 --------   --------   --------   --------   --------

              Total borrowings   $100,225   $ 33,000   $ 30,000   $ 30,365   $ 46,063
                                 ========   ========   ========   ========   ========
</TABLE>



(1)  The mortgage payable is payable to a bank at 65% of prime rate (4.75% at
     December 31, 2001) and was issued through by an industrial development
     authority.



                                       27
<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION
         AND RESULTS OF OPERATIONS


         The following discussion and analysis of financial condition and
results of operations should be read in conjunction with the Consolidated
Financial Statements of Royal Bancshares (see Item 8) and related notes included
herein.

Financial Condition

         Total assets increased $300.9 million, or 48%, to $931.0 million at
December 31, 2001 from $630.1 million at year-end 2000, primarily due to the
acquisition of substantially all of the assets and liabilities of Crusader
Savings Bank and it's parent Crusader Holding Corporation on June 22, 2001.

         Cash and Cash Equivalents. Cash and cash equivalents are comprised of
cash on hand, and cash in interest bearing and non-interest bearing accounts in
banks, in addition to federal funds sold. Cash and cash equivalents decreased
$3.2 million, to $40.0 million at December 31, 2001. The average balance of cash
and cash equivalents was approximately $42.1 million for 2001 versus $34.3
million for 2000. The majority of this average balance is held in
interest-bearing accounts or invested daily in overnight fed funds. The average
balance of these funds that earn interest was $36.7 million in 2001. This
decrease in the balance of cash and cash equivalents is reflective of
utilization of cash in other earning assets.

         Investment Securities Held to Maturity. Held to maturity ("HTM")
investment securities represents approximately 13% of average earning assets
during 2001 and are comprised of primarily corporate debt securities of
investment grade quality, at the time of purchase. During 2001, HTM investment
securities increased by $6.8 million to $92.9 million at December 31, 2001, from
$86.1 million at December 31, 2000.

         Investment Securities Available for Sale. AFS investment securities
represent 10% of average earning assets during 2001 and are primarily comprised
of capital trust security issues of regional banks, domestic corporate debt,
U.S. denominated foreign corporate debt and government secured mortgaged-back
securities. At December 31, 2001, AFS investment securities were $129.8 million
while they were $70.1 million at December 31, 2000, an increase of $59.7 million
primarily due to the purchase of Crusader Holding Corporation's investment
portfolio on June 22, 2001, and a change in investment philosophy in classifying
most new security investments as AFS.

         Loans. Royal Bancshares' primary earning assets are loans, representing
approximately 72% of average earning assets during 2001. The loan portfolio has
historically been comprised primarily of business demand loans and commercial
mortgages in roughly equal amounts, and to a significantly lesser extent,
consumer loans comprised of one to four family residential and home equity
loans. During 2001, total loans increased $222.3 million from $423.9 million at
December 31, 2000 to $646.2 million at December 31, 2001 primarily due to the
acquisition of a substantial amount of the Crusader Holding Corporation's loan
portfolio. Included in the portfolio purchased was $146.3 million single family
first mortgages.

                                       28
<PAGE>

         Deposits. Royal Bancshares' primary source of funding, deposits,
increased $229.3 million, or 49%, from $472.6 million at December 31, 2000 to
$701.9 million at December 31, 2001. This increase in deposits is primarily due
to an increase of $170.7 million in certificates of deposits, or 58% from
December 31, 2000. At December 31, 2001, brokered deposits were $254.1 million
as compared to $143.2 million at December 31, 2000. Money market deposit
accounts increased $29.2 million, or 29% from $99.2 million at December 31, 2000
to $128.4 million at December 31, 2001. Other deposit categories comprised of
demand, NOW, and savings deposits increased $29.4 million during 2001 over their
levels at December 31, 2000. The increase in all savings categories is primarily
due to the acquisition of deposits of Crusader Savings Bank.

         Borrowings. Borrowings are comprised of long-term borrowings (advances)
and short-term borrowings (overnight borrowings, advances). Long-term borrowings
increased $40.2 million to $70.2 million at December 31, 2001 from $30.0 million
at December 31, 2000. Short-term borrowings increased from $3 million at
December 31, 2000 to $30 million at December 31, 2001, primarily due to the
remaining maturity on one advance being reduced to less than one year. The
average balance of borrowings and mortgages during 2001 was $68.1 million versus
$30.6 million for 2000.

         Stockholders' Equity. Stockholders' equity increased $4.9 million or 5%
in 2001 to $108.4 million primarily due to net income of $15.8 million partially
offset by $9.0 million in cash dividends paid in 2001. Additionally,
stockholders equity was affected by the decrease in market value of AFS
investment securities during 2001, which resulted in a downward adjustment of
$2.0 million.


Results of Operations

         General. Royal Bancshares' results of operations depend primarily on
net interest income, which is the difference between interest income on interest
earning assets and interest expense on interest bearing liabilities. Interest
earning assets consist principally of loans and investment securities, while
interest bearing liabilities consist primarily of deposits. Net income is also
affected by the provision for loan losses and the level of non-interest income
as well as by non-interest expenses, including salary and employee benefits,
occupancy expenses and other operating expenses.

         Net Income. Net income in 2001 was $15.8 million as compared to $14.3
million in 2000 and, $12.1 million in 1999. Basic earnings per share were $1.39,
$1.26 and $1.09 for 2001, 2000, and 1999, respectively. The $1.5 million
increase in net income for 2001 represents a 11% increase over 2000, and is
primarily attributable to the increase in interest income relating to loans and
the investment security portfolio, and to a lesser extent, non-recurring fee and
accretion income on loans. The increase in net income of $2.2 million for 2000
represents an 18% increase over 1999 and is primarily attributable to the
increase in interest income relating to the investment security portfolio.

         Net Interest Income. Net interest income is Royal Bancshares' primary
source of income. Its level is a function of the average balance of
interest-earning assets, the average balance of interest-bearing liabilities,
and the spread between the yield on assets and liabilities. In turn, these
factors are influenced by the pricing and mix of Royal Bancshares'
interest-earning assets and funding sources. Additionally, net interest income
is affected by market and economic conditions, which influence rates on loan and
deposit growth.

                                       29
<PAGE>

          Net interest income was $37.4 million in 2001 as compared to $36.3
million in 2000. The increase in 2001 of net interest income of $1.1 million is
primarily due to an increase in the average earning assets in 2001 to $753.9
million. This is an increase of $190.2 million, or 34% over the level for 2000.
This increase in average interest earning assets contributed to a $10.3 million
increase in interest income to $69.2 million in 2001, as compared to $58.9
million in 2000. Interest expense on interest bearing liabilities increased
$9.3, to $31.8 million in 2001, from $22.5 million in 2000. This increase is
primarily due to an increase in the average balance of interest-bearing
liabilities, primarily deposits in 2001 to $611.6 million from $412.5 million in
2000.

           Net interest income was $36.3 million in 2000 compared with $28.8
million in 1999. The increase in net interest income in 2000 was primarily due
to the increase in interest income relating to the increase in loans and
investment securities during 2000, while the yield on interest earning assets
increased 78 basis points to 10.44% from 9.66% for 1999. In 2000, average
interest earning assets increased $100.8 million to $563.7 million from the 1999
level. This increase in average interest earning assets in 2000 was due to
growth in average investment securities and loans of $3.7 million and $84.3
million, respectively. In 2000 rates on interest bearing liabilities increased
to 5.5% from 5.0% level in 1999 as overall rates increased during the year.
Average interest bearing liabilities increased to $412.5 million in 2000 from
$318.7 million in 1999.

Loans and Mortgages
<TABLE>
<CAPTION>

                                            2001              2000             1999
                                            ----              ----
<S>                                     <C>               <C>              <C>
         Average loan outstandings      $543,854,000      $404,794,000     $320,544,000
         Interest and fees on loans     $ 53,384,000        $46,029,00      $33,816,000
               Average Yield               9.82%             11.37%           10,55%
</TABLE>

         Royal Bancshares continues to originate both fixed rate and variable
rate loans. At December 31, 2001 variable rate loans represented 56% of total
loans. Together with some matching funding of fixed rate deposits to fixed rate
loans, variable rate loans have helped Royal Bank manage interest rate risk.
However, the unprecedented 11 interest rate cuts during 2001 caused the variable
rate loan portfolio to reprice faster than most deposits, resulting in
compression of the bank interest rate margin versus prior years.

                                       30
<PAGE>

         In 2001, the average balance of loans increased $139.1 million to
$543.9 million primarily due to the loans purchased via the Crusader Holding
Corporation acquisition. The average yield on loans decreased 155 basis points
to 9.82% in 2001 from 11.37% in 2000 primarily due to decreases in prime rate
during 2001. Royal Bancshares' average prime rate decreased 210 basis points to
approximately 7.09% in 2001 from 9.19% average prime rate for 2000.

         In 2000, the average balance of loans increased $84.3 million to $404.8
million primarily due to purchase of two loan pools, in addition to internally
generated loan growth. The average yield on loans increased 82 basis points in
2000 primarily due to new loans generally repricing upwards as Royal Bank's
average prime rate for 2000 increased 121 basis points to 9.19% from the 7.98%
average prime rate for 1999.


HTM Investment Securities
<TABLE>
<CAPTION>


                                                       2001              2000              1999
                                                       ----              ----              ----
<S>                                                 <C>              <C>               <C>
       Average HTM investment securities            $97,055,000      $67,050,000       $78,945,000
                Interest income                      $7,610,000       $5,115,000        $5,808,000
                 Average yield                         7.84%            7.63%             7.36%
</TABLE>

         HTM investment securities are comprised primarily of taxable corporate
debt issues and to a lesser extent, US Treasuries and agencies. The corporate
debt issues are investment grade at the time of purchase, with maturities in the
three to six year range. It is Royal Bancshares' expressed intention to hold
these securities to maturity.

         In 2001 the yield in HTM investment securities increased 21 basis
points to 7.84% from 7.63% in 2000. This increase is partially attributable to
an increase in yield on taxable investment securities in 2001, primarily due to
the purchase of higher yielding corporate debt securities. The average balance
of HTM investment securities increased $30 million to $97.1 million in 2001
primarily due to the purchase of government agency bonds during 2001.

         In 2000, the yield on HTM investment securities increased 27 basis
points to 7.63% from 7.36% for 1999. This increase was primarily due to the
purchase of higher yielding corporate debt securities.

                                       31
<PAGE>


AFS Investment Securities
<TABLE>
<CAPTION>

                                                       2001              2000              1999
                                                       ----              ----              ----
<S>                                                 <C>              <C>               <C>
       Average AFS investment securities            $76,338,000      $67,185,000       $51,617,000
          Interest and dividend income              $6,945,000        $6,177,000        $4,512,000
                 Average yield                         9.10%            9.19%             8.74%
</TABLE>

         AFS investment securities are comprised primarily of non-rated capital
trust security issues of regional banks, rated domestic and US denominated
foreign corporate debt securities and government secured mortgage-backed
securities, and to a lesser extent preferred and common stock.

         In 2001, the average balance of AFS investment securities increased
$9.2 million to $76.3 million primarily due the acquisition of Crusader Holding
Corporation's AFS portfolio and the decision by Royal Bank's investment
committee to classify most new investments as AFS. The 9 basis point decrease in
the average yield is primarily due a decline in rate of investments purchased
during 2001.

         In 2000, the average balance of AFS investment securities increased
$15.6 million to $67.2 million primarily due to the reclass of $12.2 million of
HTM investment securities to AFS investments securities on April 2000. This 45
basis point increase in the average yield is primarily due to the effect of a
full year of this level of average AFS investment securities in 2000 versus
1999.


                                       32
<PAGE>

Interest Expense on NOW and Money Market Deposits
<TABLE>
<CAPTION>

                                                       2001              2000              1999
                                                       ----              ----              ----
<S>                                                <C>               <C>               <C>
      Average NOW & Money Market deposits          $147,145,000      $92,228,000       $75,289,000
                Interest expense                     $4,900,000       $3,448,000        $2,123,000
             Average cost of funds                     3.33%            3.73%             2.82%
</TABLE>

         In 2001 the average cost of funds on NOW and money market deposits
decreased 40 basis points to 3.33% from 3.73% in 2000 primarily due to a decline
in the interest rate paid on these deposits. In 2000 the average cost of funds
on NOW and money market deposits increased 91 basis points to 3.73% from 2.82%,
as 2000 primarily due to the introduction of the Royal Treasury account in March
2000.


Interest Expense on Time Deposits
<TABLE>
<CAPTION>

                                                       2001              2000              1999
                                                       ----              ----              ----
<S>                                                <C>               <C>               <C>
             Average time deposits                 $369,680,000      $269,430,000      $192,545,000
                Interest expense                    $22,237,000       $16,939,000       $11,356,000
             Average cost of funds                     6.02%            6.29%             5.90%
</TABLE>

         In 2001 the average balance of time deposits increased $100.3 million
to $369.7 million. This increase in time deposits is primarily due to the
acquisition of Crusader Holding Corporation's time deposits. In 2000, the
average balance of time deposits increased $76.9 million to $269.4 million. This
growth in time deposits was due to the increase in the use of higher costing
brokered deposits in 2000.

          Although rates in general continued to move downward in 2001, the
reaction of deposits to rate changes (both increases and decreases) is slower
than the change in the prime rate because these time deposits must mature before
a rate adjustment would become effective. In 2001, 43% of time deposits were
comprised of certificates of deposits accounts with balances of $100,000 or
more, while in 2000, 35% of time deposits were comprised of certificates of
deposit accounts with balances of $100,000 or more. These types of deposit have
traditionally been considered more rate volatile than other types of deposits,
however Royal Bank's penalty for early redemption somewhat mitigates this
volatility.


                                       33
<PAGE>

Provision for Possible Loan Losses

         The provision for loan losses is an amount charged to expense to
provide for future losses on existing loans. In order to determine the amount of
the provision for loan loss, Royal Bank conducts a quarterly review of the loan
portfolio to evaluate overall credit quality. This evaluation consists of an
analysis of individual loans and overall risk characteristics and size of the
loan, and takes into consideration current economic and market conditions,
changes in non-performing loans, the capability of specific borrowers to repay
loan obligations as well as current collateral values.

         In 2001, no provision for loan losses was recorded as compared to $0.3
million in 2000 due to senior management assessment that the level of loan loss
reserve was adequate. Net charge-offs were $85 thousand in 2001as compared to a
credit of $14 thousand for 2000, an increase of $99 thousand.

         In 2000, a provision for loan losses of $.3 million was recorded while
in 1999, no provision for loan losses was recorded. Net charge-offs in 2000 was
$14 thousand as compared to $.2 million for 1999.

         The allowance for possible loan loss at December 31, 2001 was $11.9
million, or 1.8% of net loans as compared to $12.0 million at December 31, 2000
or 2.9% of net loans, and $11.7 million at December 31, 1999, or 3.4% of net
loans.


Non-Interest Income

         Non-interest income includes service charges on depositors' accounts,
safe deposit rentals and various services such as cashing checks, issuing money
orders and travelers checks, and redeeming US savings bonds and similar
activities. As a result of the acquisition Crusader Holding Corporation, Royal
Bank retained the residential origination department to originate residential
mortgages for resale in the secondary market. Most components of non-interest
income are a modest and stable source of income, with exceptions of one-time
gains and losses from the sale of other real estate owned, from period to period
these sources of income may vary considerably. Service charges on depositors'
accounts, safe deposit rentals and other fees are periodically reviewed by
Management to remain competitive with other local banks.

         In 2001, total non-interest income increased $1.7 million primarily due
to a decrease prior year losses associated with AFS investment securities
experienced in the fourth quarter of 2000. Gains on the sales of real estate
increased $135 thousand in 2001 as Royal Bank sold its only foreclosed property.
Also gains on the sale of residential loans through the secondary market were
$372 thousand.

                                       34
<PAGE>

 In 2000, total non-interest income decreased $2 million primarily due to losses
associated with AFS investment securities experienced in the fourth quarter of
2000. A $1 million charge to income was recorded in December 2000 relating to
the capital trust preferred portion of AFS investment securities. A $.3 million
loss was recorded on the sale of common stock in October 2000. Other income
declined $.5 million primarily to the one time receipt of nonrecurring income in
1999. Gain on sale of real estate declined $.3 million in 2000 as Royal
Bancshares sold its only foreclosed property. These decreases in non-interest
income are partially offset by a $37 thousand increase in service charges and
fees in 2000.


Non-Interest Expense

         Non-interest expense includes compensation and employee benefits,
occupancy, advertising, FDIC insurance, state taxes, depreciation, and other
expenses such as auditing, automatic teller machines (ATMs), data processing,
legal, outside service charges, postage, printing, and other expenses relating
to other real estate owned.

         Non-interest expense increased $3.8 million to $17.6 million in 2001,
from $13.8 million in 2000. This increase is primarily due to a $2.5 million
increase in salaries and employee benefits in 2001 primarily due normal merit
increases in salaries, in addition to an increase in the stock appreciation
rights reserve and bonus accrual of $1.3 million. Occupancy expense increased
$447 thousand to $1.1 million in 2001. These increases were in addition to an
increase of $0.9 million of other operating expenses, as management continues to
manage and attempt to control expenses.

         Non-interest expense increased $0.7 million to $13.8 million in 2000,
from $13.1 million in 1999. This increase is primarily due to a $0.7 million
increase in salaries and employee benefits in 2000 primarily due normal merit
increases in salaries, in addition to an increase in the bonus accrual of $.2
million. Occupancy expense increased $34 thousand to $.7 million in 2000. These
increases were partially offset by a $.1 million decrease in other operating
expenses, as management continues to manage and attempt to control expenses.


Accounting for Income Taxes

         The provision for federal income taxes was $5.8 million in 2001 as
compared to $8 million for 2000, and $5.6 million for 1999 representing an
effective tax rate of 27%, 36%, and 31%, respectively. The $2.2 million decrease
in the tax provision for 2001 was primarily due the use of tax goodwill related
to the acquisition of Knoblauch State Bank in 1995 and historical tax credits
received in the Crusader asset acquisition.


                                       35
<PAGE>

Accounting for Debt and Equity Securities

         The Company accounts for investment securities in accordance with SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
This standard requires investments in securities to be classified in one of
three categories; held to maturity, trading or available for sale. Debt
securities that Royal Bank has the positive intent and ability to hold to
maturity are classified as held to maturity and are reported at amortized cost.
As Royal Bank does not engage in security trading, the balance of its debt
securities and any equity securities are classified as available for sale. Net
unrealized gains and losses for such securities, net of tax effect, are required
to be recognized as a separate component of stockholders' equity and excluded
from the determination of net income.


Asset Liability Management

         The primary functions of asset-liability management are to assure
adequate liquidity and maintain an appropriate balance between interest earning
assets and interest bearing liabilities. This process is overseen by the
Asset-Liability Committee ("ALCO") which monitors and controls, among other
variables, the liquidity, balance sheet structure and interest rate risk of the
consolidated company within policy parameters established and outlined in the
Funds, Cash Flow and Liquidity Policies and Procedures which are reviewed by the
Board of Directors at least annually. Additionally, the ALCO committee meets
periodically and reports on liquidity, interest rate sensitivity and projects
financial performance in various interest rate scenarios.

         Liquidity. Liquidity is the ability of the financial institution to
ensure that adequate funds will be available to meet its financial commitments
as they become due. In managing its liquidity position, the financial
institution evaluates all sources of funds, the largest of which is deposits.
Also taken into consideration is the repayment of loans. These sources provide
the financial institution with alternatives to meet its short-term liquidity
needs. Longer-term liquidity needs may be met by issuing longer-term deposits
and by raising additional capital.

         Royal Bancshares generally maintains a liquidity ratio equal to or
greater than 25% of total deposits and short-term liabilities. Liquidity is
specifically defined as the ratio of net cash, short term and marketable assets
to net deposits and short-term liabilities. The liquidity ratio for the years
ended December 31, 2001, 2000 and 1999 was 33%, 53%, and 41%, respectively.
Management believes that Royal Bancshares' liquidity position continues to be
adequate, continues to be in excess of its peer group level and meets or exceeds
the liquidity target set forth in the Funds, Cash Flow and Liquidity Policies
and Procedures. Management believes that due to its financial position, it will
be able to raise deposits as needed to meet liquidity demands. However, any
financial institution could have unmet liquidity demands at any time.

         Interest-Rate Sensitivity. Interest rate sensitivity is a function of
the repricing characteristics of the financial institution's assets and
liabilities. These include the volume of assets and liabilities repricing, the
timing of repricing, and the relative levels of repricing. Attempting to
minimize the interest rate sensitivity gaps is a continual challenge in a
changing rate environment. The interest sensitivity report examines the
positioning of the interest rate risk exposure in a changing interest rate
environment. Ideally the rate sensitive assets and liabilities will be
maintained in a matched position to minimize interest rate risk.

                                       36
<PAGE>

         The interest rate sensitivity analysis is an important management tool,
however, it does have some inherent shortcomings. It is a "static" analysis.
Although certain assets and liabilities may have similar maturities or
repricing, they may react in different degrees to changes in market interest
rates. Additionally, repricing characteristics of certain assets and liabilities
may vary substantially within a given period.

         The following table summarizes repricing intervals for interest earning
assets and interest bearing liabilities as of December 31, 2001, and the
difference or "gap" between them on an actual and cumulative basis for the
periods indicated. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities.
During a period of falling interest rates, a positive gap would tend to
adversely affect net interest income, while a negative gap would tend to result
in an increase in net interest income. During a period of rising interest rates,
a positive gap would tend to result in an increase in net interest income while
a negative gap would tend to affect net interest income adversely. At December
31, 2001, Royal Bancshares is in an asset sensitive negative of $107.2 million,
which indicates liabilities will reprice somewhat faster than assets within one
year.


                                       37
<PAGE>



Interest Rate Sensitivity
(in  millions)
<TABLE>
<CAPTION>

                                                    Days
                                          --------------------------    1 to 5        Over 5       Non-rate
Assets (1)                                  0 - 90       91 - 365        Years         Years       Sensitive       Total
-------                                  ------------  ------------  ------------  ------------  ------------  ------------
<S>                                            <C>           <C>           <C>           <C>            <C>           <C>
Interest-bearing deposits in banks             $ 24.5        $   --        $   --        $   --         $  --         $24.5
Federal funds sold                                7.1            --            --            --                         7.1
Investment securities:
       Available for sale                         1.6           3.3          20.8         104.1            --         129.8
       Held to maturity                          12.3           6.9          37.9         35..8            --          92.9
                                         ------------  ------------  ------------  ------------  ------------  ------------
    Total investment securities                  13.9          10.2          58.7         139.9            --         222.7
Loans:(2)
       Fixed rate (3)                             6.5          20.4         175.1          79.9            --         281.9
       Variable rate                             91.5          70.6         119.6          71.8            --         353.5
                                         ------------  ------------  ------------  ------------  ------------  ------------
    Total loans                                  98.0          91.0         294.7         151.7            --         635.4
Other assets(4)                                    --            --            --            --          41.3          41.3
                                         ------------  ------------  ------------  ------------  ------------  ------------
    Total Assets                               $143.5        $101.2        $353.4        $291.6         $41.3        $931.0
                                         ============  ============  ============  ============  ============  ============

Liabilities & Capital
Deposits:
       Non interest bearing deposits           $   --        $   --        $   --        $   --         $52.0         $52.0
       Interest bearing deposits (5)             50.8            --         134.3            --            --         182.1
       Certificate of deposits                   75.4         195.7         163.3          30.4            --         464.8
                                         ------------  ------------  ------------  ------------  ------------  ------------
    Total deposits                              126.2         195.7         297.6          30.4          52.0         701.9
Short term borrowings                                          30.0           --             --            --          30.0
Mortgage and long term borrowings                  --            --           5.7          64.5            --          70.2
Other liabilities                                  --            --            --            .4          20.1          20.5
Capital                                            --            --            --            --         108.4         108.4
                                         ------------  ------------  ------------  ------------  ------------  ------------
    Total liabilities & capital                $126.2        $225.7        $303.3        $ 95.3        $180.5        $931.0
                                         ============  ============  ============  ============  ============  ============

Net interest rate GAP                          $ 17.3       ($124.5)        $50.1        $196.3       ($139.0)
                                         ============  ============  ============  ============  ============

Cumulative interest rate GAP                   $ 17.3       ($107.2)       ($57.1)       $139.0            --
                                         ============  ============  ============  ============  ============
GAP to total assets                                 2%          -13%
                                         ============  ============
GAP to total equity                                16%         -115%
                                         ============  ============
Cumulative GAP to total assets                      2%          -12%
                                         ============  ============
Cumulative GAP to total equity                     16%          -99%
                                         ============  ============

</TABLE>

(1)  Interest earning assets are included in the period in which the balances is
     expected to be repaid and/or repriced as a result of anticipated
     prepayments, scheduled rate adjustments, and contractual maturities.
(2)  Reflects principal maturing within the specified periods for fixed and
     repricing for variable rate loans; includes nonperforming loans.
(3)  Fixed rate loans include a portion of variable rate loans whose floors are
     in effect at December 31, 2001.
(4)  For purposes of gap analysis, other assets include the allowance for
     possible loan loss; unamortized discount on purchased loans and deferred
     fees on loans.
(5)  Based on historical analysis, Money market and Savings deposits are assumed
     to have rate sensitivity of 1 month; NOW account deposits are assumed to
     have a rate sensitivity of 4 months.


                                       38
<PAGE>

         The method of analysis of interest rate sensitivity in the table above
has a number of limitations. Certain assets and liabilities may react
differently to changes in interest rates even though they reprice or mature in
the same time periods. The interest rates on certain assets and liabilities may
change at different times than changes in market interest rates, with some
changing in advance of changes in market rates and some lagging behind changes
in market rates. Also, certain assets have provisions, which limit changes in
interest rates each time the interest rate changes and for the entire term of
the loan. Additionally, prepayments and withdrawals experienced in the event of
a change in interest rates may deviate significantly from those assumed in the
interest rate sensitivity table. Additionally, the ability of some borrowers to
service their debt may decrease in the event of an interest rate increase.


Capital Adequacy

The table shown below sets forth Royal Bancshares' consolidated capital level
and performance ratios:

                                                                      Regulatory
                                    2001        2000        1999       Minimum
                                  ---------   ---------   ---------   ----------
Capital Level
   Leverage ratio                  14.1%       17.0%       18.8%          3%
   Risk based capital ratio:
        Tier 1                     14.4%       18.1%       20.4%          4%
        Total                      15.9%       19.4%       21.6%          8%

Capital Performance
    Return on average assets        2.0%        2.5%        2.6%          --
    Return on average equity       15.0%       14.3%       12.8%          --

         Royal Bancshares' sources of capital have been derived from the
issuance of stock as well as retained earnings. While Royal Bancshares has not
had a stock offering since 1986, total stockholder's equity has increased
primarily due to steady increases in retained earnings. At December 31, 2001,
Royal Bancshares had an average equity to average asset ratio of 13.3%. Royal
Bancshares has no current plans to raise capital through new stock offerings and
indeed, seeks ways to leverage its existing capital.

                                       39
<PAGE>

         In early 1989, each of the federal bank regulatory agencies issued
risk-based capital standards, which were phased in December 31, 1992. The new
standards place assets in various categories of risk with varying weights
assigned, and consider certain off-balance sheet activities, such as letters of
credit and loan commitments in the base for purposes of determining capital
adequacy. The principal objective of establishing the risk-based capital
framework is to achieve greater convergence in the measurement and assessment of
capital adequacy due to the divergence of asset mixes maintained from one
depository institution to the next. At December 31, 2001, Royal Bancshares'
ratio using these standards was 14.6%.




Management Options to Purchase Securities

         In May 2001, the directors of the Royal Bancshares approved the amended
Royal Bancshares of Pennsylvania Non-qualified Stock Option and Appreciation
Right Plan (the Plan). The shareholders in connection with the formation of the
holding company reapproved the Plan. The Plan is an incentive program under
which Bank officers and other key employees may be awarded additional
compensation in the form of options to purchase up to 1,500,000 shares of the
Registrant's Class A common stock (but not in excess of 15% of outstanding
shares). The option price is equal to the fair market value at the date of the
grant. At December 31, 2000, 532,504 options have been granted which are
exercisable at 20% per year. At December 31, 2001, options covering 532,504
shares were exercisable by 66 employees.

         In May 2001, the directors of the Royal Bancshares approved an amended
non-qualified Outside Directors Stock Option Plan. The shareholders in
connection with the formation of the holding company reapproved the Plan. Under
the terms of the plan, 250,000 shares of Class A stock are authorized for
grants. Each director is entitled to 1,500 shares of stock annually, which is
exercisable after one year of service. The options were granted at the fair
market value at the date of the grant. At December 31, 2001, 78,249 options were
outstanding and options covering 64,766 shares were exercisable.


                                       40
<PAGE>

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

         A simulation model is therefore used to estimate the impact of various
changes, both upward and downward, in market interest rates and volumes of
assets and liabilities on the net income. This model produces an interest rate
exposure report that forecast changes in the market value of portfolio equity
under alternative interest rate environment. The market value of portfolio is
defined as the present value of existing assets and liabilities. The calculated
estimates of changes in the market value of portfolio value are as follows:

                         As of December 31, 2001 (Dollars in Thousands)

                                         Market Value of      Percent of
                 Changes in Rates       Portfolio Equity        Change
                 ----------------       ----------------        ------
                + 300 basis points          $ 54,662            -43.7%
                + 200 basis points            68,523            -29.4%
                + 100 basis points            82,528            -15.0%
                    Flat rate                 97,074               0
                - 100 basis points           111,039             14.4%
                - 200 basis points           123,990             27.7%
                - 300 basis points           137,097             41.2%

         The assumptions used in evaluating the vulnerability of earnings and
capital to changes in interest rates are based on management's considerations of
past experience, current position and anticipated future economic conditions.
The interest rate sensitivity of assets and liabilities as well as the estimated
effect of changes in interest rates on the market value of portfolio equity
could vary substantially if different assumptions are used or actual experience
differs from what the calculations may be based.



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                                       41
<PAGE>



               Report of Independent Certified Public Accountants


Board of Directors
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries


          We have audited the accompanying consolidated balance sheets of Royal
Bancshares of Pennsylvania, Inc. and Subsidiaries as of December 31, 2001 and
2000, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

          We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

          In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Royal
Bancshares of Pennsylvania, Inc. and Subsidiaries as of December 31, 2001 and
2000, and the consolidated results of their operations and their consolidated
cash flows for each of the three years in the period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States of
America.






Philadelphia, Pennsylvania
January 25, 2002





                                       42
<PAGE>


             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

                           Consolidated Balance Sheets


<TABLE>
<CAPTION>


                                                                                            December 31,
                                                                                    ----------------------------
               ASSETS                                                                  2001               2000
                                                                                    -----------      -----------
                                                                                  (In thousands, except share data)

<S>                                                                                 <C>                <C>
Cash and due from banks                                                             $  32,918          $  15,772
Federal funds sold                                                                      7,100             27,450
                                                                                    ---------          ---------
               Total cash and cash equivalents                                         40,018             43,222
                                                                                    ---------          ---------
Investment securities held to maturity (fair value of $94,625
    and $86,348 in 2001 and 2000, respectively)                                        92,903             86,110
Investment securities available for sale - at fair value                              129,755             70,144
Total loans                                                                           646,235            423,946
    Less allowance for loan losses                                                     11,888             11,973
                                                                                    ---------          ---------
               Net loans                                                              634,347            411,973
Premises and equipment, net                                                             8,512              6,615
Accrued interest receivable                                                            11,696              5,504
Other assets                                                                           13,749              6,513
                                                                                    ---------          ---------
               Total assets                                                         $ 930,980          $ 630,081
                                                                                    =========          =========

               LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
    Deposits
       Non-interest bearing                                                         $  51,991          $  47,608
       Interest bearing                                                               649,869            424,974
                                                                                    ---------          ---------
               Total deposits                                                         701,860            472,582
    Accrued interest payable                                                           11,634             11,238
    Other liabilities                                                                   8,175              9,760
    Borrowings                                                                        100,225             33,000
                                                                                    ---------          ---------
               Total liabilities                                                      821,894            526,580
                                                                                    ---------          ---------
Minority interest                                                                         637               --
Stockholders' equity
    Common stock
       Class A, par value $2.00 per share; authorized, 18,000,000 shares; issued,
         8,848,867 and 8,387,711 shares in 2001 and 2000, respectively                 17,698             16,775
       Class B, par value $0.10 per share; authorized, 2,000,000 shares; issued,
         1,804,693 and 1,730,715 shares in 2001 and 2000, respectively                    180                173
    Additional paid in capital                                                         65,011             57,768
    Retained earnings                                                                  30,457             31,640
    Accumulated other comprehensive loss                                               (2,632)              (590)
                                                                                    ---------          ---------
                                                                                      110,714            105,766
    Treasury stock - at cost, 215,388 Class A shares in 2001 and 2000                  (2,265)            (2,265)
                                                                                    ---------          ---------
               Total stockholders' equity                                             108,449            103,501
                                                                                    ---------          ---------
               Total liabilities and stockholders' equity                           $ 930,980          $ 630,081
                                                                                    =========          =========
</TABLE>

The accompanying notes are an integral part of these statements.


                                       43
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

                        Consolidated Statements of Income


<TABLE>
<CAPTION>

                                                                             Year ended December  31,
                                                                        --------------------------------
                                                                          2001        2000        1999
                                                                        --------    --------    --------
                                                                      (In thousands, except per share data)

Interest income
<S>                                                                     <C>         <C>         <C>
    Loans, including fees                                               $ 53,384    $ 46,029    $ 33,816
    Investment securities held to maturity
       Taxable                                                             7,610       5,115       5,726
       Tax-exempt                                                           --          --            54
    Investment securities available for sale
       Taxable                                                             6,945       6,177       4,268
       Tax-exempt                                                           --          --           244
    Deposits in banks                                                        533          23          16
    Federal funds sold                                                       752       1,531         558
                                                                        --------    --------    --------
          TOTAL INTEREST INCOME                                           69,224      58,875      44,682
                                                                        --------    --------    --------
Interest expense
    Deposits                                                              27,774      20,628      14,017
    Borrowings and mortgage payable                                        4,019       1,904       1,902
    Federal funds purchased                                                   15          17           3
                                                                        --------    --------    --------
          TOTAL INTEREST EXPENSE                                          31,808      22,549      15,922
                                                                        --------    --------    --------
          NET INTEREST INCOME                                             37,416      36,326      28,760
Provision for loan losses                                                   --           250        --
                                                                        --------    --------    --------
          NET INTEREST INCOME AFTER PROVISION
              FOR LOAN LOSSES                                             37,416      36,076      28,760
                                                                        --------    --------    --------
Other income
    Service charges and fees                                                 966         894         856
    Gain (losses) on sale of investment securities available for sale         60        (302)       --
    Impairment loss on investment securities available for sale             --        (1,000)       --
    Gains on other real estate                                               188          53         349
    Gains on sale of loans                                                   372        --            45
    Other income                                                             152         313         788
                                                                        --------    --------    --------
                                                                           1,738         (42)      2,038
                                                                        --------    --------    --------
Other expenses
    Salaries and employee benefits                                        10,479       7,979       7,265
    Occupancy and equipment                                                1,119         672         638
    Advertising                                                              442         424         356
    Pennsylvania bank shares tax                                             759         758         744
    Professional fees                                                        875         429         502
    Losses on investment partnership                                         267         620         623
    Travel                                                                   297         441         513
    Other operating expenses                                               3,365       2,469       2,489
                                                                        --------    --------    --------
                                                                          17,603      13,792      13,130
                                                                        --------    --------    --------
          INCOME BEFORE INCOME TAXES                                      21,551      22,242      17,668
Income taxes                                                               5,797       7,982       5,564
                                                                        --------    --------    --------
          NET INCOME                                                    $ 15,754    $ 14,260    $ 12,104
                                                                        ========    ========    ========
Per share data
    Net income - basic                                                  $   1.39    $   1.26    $   1.09
                                                                        ========    ========    ========
    Net income - diluted                                                $   1.37    $   1.24    $   1.07
                                                                        ========    ========    ========
</TABLE>


The accompanying notes are an integral part of these statements.


                                       44
<PAGE>


             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

            Consolidated Statement of Changes in Stockholders' Equity

                  Years ended December 31, 2001, 2000 and 1999

                      (In thousands, except per share data)

<TABLE>
<CAPTION>




                                                          Class A common stock       Class B common stock      Additional
                                                          --------------------       --------------------        paid in
                                                          Shares       Amount        Shares        Amount        capital
                                                          ------       ------        ------        ------        -------


<S>                                                        <C>       <C>             <C>        <C>             <C>
Balance, January 1, 1999                                   7,430     $ 14,859        1,631      $     163       $ 45,393
    Net income for the year ended December 31, 1999            -            -            -              -              -
    Conversion of Class B common stock to Class A
      common stock                                            14           29          (13)            (1)             -
    4% stock dividends declared                              289          578           65              6          4,867
    Cash in lieu of fractional shares                          -            -            -              -              -
    Purchase of treasury stock                                 -            -            -              -              -
    Stock options exercised                                  146          293            -              -            605
    Cash dividends on common stock                             -            -            -              -              -
    Other comprehensive income, net of
      reclassifications and taxes                              -            -            -              -              -
                                                           -----     --------        -----      ---------       --------
    Comprehensive income


Balance, December 31, 1999                                 7,879       15,759        1,683            168         50,865
    Net income for the year ended December 31, 2000            -            -            -              -              -
    Conversion of Class B common stock to Class A
      common stock                                            43           84          (36)            (3)             -
    5% stock dividends declared                              382          765           84              8          6,582
    Cash in lieu of fractional shares                          -            -            -              -              -
    Stock options exercised                                   84          167            -              -            321
    Cash dividends on common stock                             -            -            -              -              -
    Other comprehensive income, net of
      reclassifications and taxes                              -            -            -              -              -
                                                           -----     --------        -----      ---------       --------
    Comprehensive income

Balance, December 31, 2000                                 8,388     $ 16,775        1,731      $     173       $ 57,768

</TABLE>



<PAGE>

<TABLE>
<CAPTION>



                                                                            Accumulated
                                                                               other
                                                             Retained      comprehensive   Treasury    Comprehensive
                                                             earnings      income (loss)    stock         income
                                                             --------      -------------    -----         ------


<S>                                                         <C>                <C>          <C>
Balance, January 1, 1999                                    $  34,556          $  1,243     $  (2,145)
    Net income for the year ended December 31, 1999            12,104                 -             -     $  12,104
    Conversion of Class B common stock to Class A
      common stock                                                (28)                -             -             -
    4% stock dividends declared                                (5,451)                -             -             -
    Cash in lieu of fractional shares                              (3)                -             -             -
    Purchase of treasury stock                                      -                 -          (120)            -
    Stock options exercised                                         -                 -             -             -
    Cash dividends on common stock                             (7,849)                -             -             -
    Other comprehensive income, net of
      reclassifications and taxes                                   -            (3,265)            -        (3,265)
                                                            ---------          --------     ---------     ---------
    Comprehensive income                                                                                  $   8,839
                                                                                                          =========

Balance, December 31, 1999                                     33,329            (2,022)       (2,265)
    Net income for the year ended December 31, 2000            14,260                 -             -     $  14,260
    Conversion of Class B common stock to Class A
      common stock                                                (80)                -             -             -
    5% stock dividends declared                                (7,356)                -             -             -
    Cash in lieu of fractional shares                              (3)                -             -             -
    Stock options exercised                                         -                 -             -             -
    Cash dividends on common stock                             (8,510)                -             -             -
    Other comprehensive income, net of
      reclassifications and taxes                                   -             1,432             -         1,432
                                                            ---------          --------     ---------     ---------
    Comprehensive income                                                                                  $  15,692
                                                                                                          =========
Balance, December 31, 2000                                  $  31,640          $   (590)    $  (2,265)

</TABLE>



                                       45
<PAGE>



             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

      Consolidated Statement of Changes in Stockholders' Equity - Continued

                  Years ended December 31, 2001, 2000 and 1999

                      (In thousands, except per share data)

<TABLE>
<CAPTION>




                                                          Class A common stock       Class B common stock      Additional
                                                          --------------------       --------------------        paid in
                                                          Shares       Amount        Shares        Amount        capital
                                                          ------       ------        ------        ------        -------

<S>                                                        <C>       <C>             <C>        <C>             <C>
Balance, January 1, 2001                                   8,388     $ 16,775        1,731      $     173       $ 57,768
    Net income for the year ended December 31, 2001            -            -            -              -              -
    Conversion of Class B common stock to Class A
      common stock                                            15           29          (13)            (1)             -
    5% stock dividends declared                              408          817           87              8          7,094
    Cash in lieu of fractional shares                          -            -            -              -              -
    Stock options exercised                                   38           77            -              -            149
    Cash dividends on common stock                             -            -            -              -              -
    Other comprehensive loss, net of
      reclassifications and taxes                              -            -            -              -              -
                                                           -----     --------        -----      ---------       --------
    Comprehensive income

Balance, December 31, 2001                                 8,849     $ 17,698        1,805      $     180       $ 65,011
                                                           =====     ========        =====      =========       ========

</TABLE>


<PAGE>



<TABLE>
<CAPTION>



                                                                            Accumulated
                                                                               other
                                                             Retained      comprehensive   Treasury    Comprehensive
                                                             earnings      income (loss)    stock         income
                                                             --------      -------------    -----         ------

<S>                                                        <C>                 <C>          <C>
Balance, January 1, 2001                                   $   31,640          $   (590)    $  (2,265)
    Net income for the year ended December 31, 2001            15,754                 -             -     $  15,754
    Conversion of Class B common stock to Class A
      common stock                                                (28)                -             -             -
    5% stock dividends declared                                (7,919)                -             -             -
    Cash in lieu of fractional shares                              (6)                -             -             -
    Stock options exercised                                         -                 -             -             -
    Cash dividends on common stock                             (8,984)                -             -             -
    Other comprehensive loss, net of
      reclassifications and taxes                                   -            (2,042)            -        (2,042)
                                                            ---------          --------     ---------     ---------
    Comprehensive income                                                                                  $  13,712
                                                                                                          =========
Balance, December 31, 2001                                 $   30,457          $ (2,632)    $  (2,265)
                                                           ==========          ========     =========

</TABLE>




         The accompanying notes are an integral part of this statement.


                                       46
<PAGE>


             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows

                             Year ended December 31,

<TABLE>
<CAPTION>


                                                                              2001          2000          1999
                                                                          -----------   -----------    -----------
                                                                             (In thousands, except per share data)

Cash flows from operating activities
<S>                                                                       <C>           <C>            <C>
    Net income                                                            $    15,754   $    14,260    $    12,104
    Adjustments to reconcile net income to
          net cash (used in) provided by operating activities
       Depreciation and amortization                                              865           414            414
       Provision for loan losses                                                  -             250            -
       Amortizations of premiums and discounts on loans,
          mortgage-backed securities and investments                           (3,527)       (5,470)        (1,680)
       Provision (benefit) for deferred income taxes                           (2,779)          588         (1,257)
       Gains on other real estate                                                (188)          (53)          (349)
       Gains on sale of loans                                                    (372)          -              (45)
       Gains (losses) on sales of investment securities
          available for sale                                                      (60)          302            -
       Impairment loss on investment securities available for sale                -           1,000            -
       Decrease (increase) in accrued interest receivable                      (4,667)         (769)            62
       Decrease (increase) in other assets                                     (3,421)        2,153           (466)
       Increase in accrued interest payable                                       364         3,238            570
       Increase (decrease) in other liabilities                                (2,418)        2,392          2,095
                                                                            ---------     ---------      ---------

              Net cash (used in) provided by operating activities                (449)       18,305         11,448
                                                                            ---------     ---------      ---------

Cash flows from investing activities
    Proceeds from calls and maturities of investment
       securities held to maturity                                             78,194        14,613         13,798
    Purchases of investment securities held to maturity                       (85,000)      (30,001)       (35,555)
    Proceeds from calls, maturities and sale of investment securities
       available for sale                                                      21,169         1,076            -
    Proceeds from sales of investment securities
       available for sale                                                       4,850           610            -
    Redemption of Federal Home Loan Bank stock                                  1,420           -              -
    Cash paid for asset acquisition                                           (15,239)          -              -
    Cash borrowed for asset acquisition                                        26,548           -              -
    Purchases of investment securities available for sale                     (53,125)          -          (25,770)
    Net decrease (increase) in loans                                           46,703       (31,964)       (49,135)
    Purchase of loan portfolio                                                    -         (32,194)           -
    Purchase of premises and equipment                                         (1,706)       (1,244)          (746)
    Proceeds from sale and payments on other real estate                          -              73          1,033
                                                                            ---------     ---------      ---------

              Net cash provided by (used in) investing activities              23,814       (79,031)       (96,375)
                                                                            ---------   -----------    -----------

</TABLE>







                                   (Continued)


                                       47
<PAGE>


             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

                Consolidated Statements of Cash Flows - Continued

                             Year ended December 31,

<TABLE>
<CAPTION>



                                                                   2001        2000        1999
                                                                 --------    --------    --------
                                                               (In thousands, except per share data)

<S>                                                            <C>          <C>         <C>
Cash flows from financing activities
    Net increase in non-interest bearing and
       interest bearing demand deposits and savings accounts     $ 44,974    $ 37,773    $  4,813
    Net (decrease) increase in certificates of deposit            (66,731)     53,523      86,083
    Principal payments on mortgage                                    (49)        (48)        (47)
    Cash dividends in lieu of fractional shares                        (6)         (3)         (3)
    Purchase of treasury stock                                       --          --          (120)
    Proceeds from (repayment of) borrowings                         4,000       3,000        (365)
    Issuance of common stock under stock option plans                 227         488         898
    Cash dividends paid                                            (8,984)     (8,510)     (7,849)
                                                                 --------    --------    --------

          Net cash (used in) provided by financing activities     (26,569)     86,223      83,410
                                                                 --------    --------    --------

          Net increase (decrease) in cash and cash equivalents     (3,204)     25,497      (1,517)

Cash and cash equivalents at beginning of year                     43,222      17,725      19,242
                                                                 --------    --------    --------

Cash and cash equivalents at end of year                         $ 40,018    $ 43,222    $ 17,725
                                                                 ========    ========    ========

Supplemental disclosure of cash flow information
    Cash paid during the year for
       Interest                                                  $ 31,412    $ 19,311    $ 15,352
                                                                 ========    ========    ========

       Income taxes                                              $  6,800    $  5,650    $  4,044
                                                                 ========    ========    ========

</TABLE>



















        The accompanying notes are an integral part of these statements.


                                       48
<PAGE>


             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

                   Notes To Consolidated Financial Statements

                           December 31, 2001 and 2000




NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    Royal Bancshares of Pennsylvania, Inc. (the Company), through its subsidiary
    Royal Bank of Pennsylvania (the Bank), offers a full range of banking
    services to individual and corporate customers located in eastern
    Pennsylvania. The Bank competes with other banking and financial
    institutions in certain markets, including financial institutions with
    resources substantially greater than its own. Commercial banks, savings
    banks, savings and loan associations, credit unions and money market funds
    actively compete for savings and time deposits and for various types of
    loans. Such institutions, as well as consumer finance and insurance
    companies, may be considered competitors of the Bank with respect to one or
    more of the services it renders.

    1.  Basis of Financial Statement Presentation

    The accompanying consolidated financial statements include the accounts of
    the Company and its wholly-owned subsidiaries: Royal Investments of
    Delaware, Inc. and the Bank, including the Bank's subsidiaries, Royal Real
    Estate, Inc. and Crusader Servicing Corporation. On June 22, 2001, the Bank
    purchased a 60% ownership in Crusader Servicing Corporation from Crusader
    Holding Corporation. All significant intercompany transactions and balances
    have been eliminated.

    In preparing the consolidated financial statements, management is required
    to make estimates and assumptions that affect the reported amounts of assets
    and liabilities as of the date of the balance sheet and revenues and
    expenditures for the period. Therefore, actual results could differ
    significantly from those estimates.

    The principal estimate that is particularly susceptible to significant
    change in the near term relates to the allowance for loan losses. In
    connection with this estimate, when circumstances warrant, management
    obtains independent appraisals for significant properties. However, future
    changes in real estate market conditions and the economy could affect the
    Company's allowance for loan losses.

    In addition to being subject to competition from other financial
    institutions, the Company is subject to regulations of certain federal
    agencies and, accordingly, it is periodically examined by those regulatory
    authorities.

    Statement of Financial Accounting Standards (SFAS) No. 131, "Segment
    Reporting" establishes standards for the way public business enterprises
    report information about operating segments. Operating segments are
    components of an enterprise about which separate financial information is
    available that is evaluated regularly by the chief operating decision maker
    in deciding how to allocate resources and assess performance. The statement
    also requires that public enterprises report a measure of segment profit of
    loss, certain specific revenue and expense items and segment assets. The
    Company has one reportable segment, "Community Banking." All of the
    Company's activities are interrelated, and each activity is dependent and
    assessed based on how each of the activities of the Company supports the
    others. For example, commercial lending is dependent upon the ability of the
    Bank to fund itself with retail deposits and other borrowings and to manage
    interest rate and credit risk. This situation is also similar for consumer
    and residential mortgage lending. Accordingly, all significant operating
    decisions are based upon analysis of the Company as one operating segment or
    unit.

                                   (Continued)


                                       49
<PAGE>


             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2001 and 2000




NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    2.  Investment Securities

    Investment securities are classified in one of three categories: held to
    maturity, available for sale or trading. Debt securities that the Company
    has the positive intent and ability to hold to maturity are classified as
    held to maturity and are reported at amortized cost. As the Company does not
    engage in security trading, the balance of its debt securities and any
    equity securities are classified as available for sale. Net unrealized gains
    and losses for such investment securities available for sale, net of tax
    effect, are required to be recognized as a separate component of
    stockholders' equity and excluded from the determination of net income.
    Gains or losses on disposition are computed by the specific identification
    method.

    SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
    was amended in June 1999 by SFAS No. 137, "Accounting for Derivative
    Instruments and Hedging Activities - Deferral of the Effective Date of FASB
    Statement No. 133" and in June 2000, SFAS No. 138, "Accounting for Certain
    Derivative Instruments and Certain Hedging Activities," (collectively SFAS
    No. 133) was issued. SFAS No. 133 requires that entities recognize all
    derivatives as either assets or liabilities in the statement of financial
    condition and measure those instruments at fair value. Under SFAS No. 133,
    an entity may designate a derivative as a hedge of exposure to either
    changes in: (a) fair value of a recognized assets or liability or firm
    commitment, (b) cash flows of a recognized or forecasted transaction, or (c)
    foreign currencies of a net investment in foreign operations, firm
    commitments, available for sale securities or a forecasted transaction.
    Depending upon the effectiveness of the hedge and/or the transaction being
    hedged, any changes in the fair value of the derivative instrument is either
    recognized in earnings in the current year, deferred to future periods, or
    recognized in other comprehensive income. Changes in the fair value of all
    derivative instruments not recognized as hedge accounting are recognized in
    current year earnings. The Company adopted SFAS No. 133 effective April 1,
    2000.

    SFAS No. 133 allowed a reclassification of investment securities without
    calling into question the intent of the Company to hold other investment
    securities to maturity in the future. On April 1, 2000, the Company
    reclassified investment securities from held to maturity to available for
    sale with a fair market value of $11,135,000 resulting in an increase of
    accumulated other comprehensive income of $302,000.

    SFAS No. 119 "Disclosure About Derivative Financial Instruments and Fair
    Value of Financial Instruments," requires disclosures about financial
    instruments, which are defined as futures, forwards, swap and option
    contracts and other financial instruments with similar characteristics.
    On-balance-sheet receivables and payables are excluded from this definition.
    The Company did not hold any derivative financial instruments as defined by
    SFAS No. 119 at December 31, 2001 or 2000.

    3.  Loans and Allowance for Loan Losses

    Loans that management has the intent and ability to hold for the foreseeable
    future or until maturity or payoff are stated at the amount of unpaid
    principal, reduced by unearned income and an allowance for loan and lease
    losses.


                                   (Continued)


                                       50
<PAGE>



             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2001 and 2000




NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    3.  Loans and Allowance for Loan Losses - continued

    The allowance for loan losses is maintained at a level believed adequate by
    management to absorb potential losses in the loan portfolio. Management's
    determination of the adequacy of the allowance is based on an evaluation of
    the portfolio, past loan loss experience, current economic conditions,
    volume, growth, and composition of the loan portfolio, and other relevant
    factors. The allowance is increased by provisions for loan losses charged
    against income. Decreases in the allowance result from management's
    determination that the allowance for loan losses exceeds their estimates of
    potential loan loss.

    The Company accounts for its impaired loans in accordance with SFAS No. 114,
    "Accounting by Creditors for Impairment of a Loan", was amended by SFAS No.
    118, "Accounting by Creditors for Impairment of a Loan - Income Recognition
    and Disclosure", which requires that a creditor measure impairment based on
    the present value of expected future cash flows discounted at the loan's
    effective interest rate, except that as a practical expedient, a creditor
    may measure impairment based on a loan's observable market price, or the
    fair value of the collateral if the loan is collateral-dependent. Regardless
    of the measurement method, a creditor must measure impairment based on the
    fair value of the collateral when the creditor determines that foreclosure
    is probable.

    Interest on loans is accrued and credited to operations based upon the
    principal amount outstanding. Accretion of unearned discounts on loans has
    been added to the related interest income. Accrual of interest is
    discontinued on a loan when management believes that the borrower's
    financial condition is such that collection of interest is doubtful and
    generally when a loan becomes 90 days past due as to principal or interest.
    When interest accruals are discontinued, interest credited to income in the
    current year is reversed and interest accrued in the prior year is charged
    to the allowance for loan losses.

    In September 2000, SFAS No. 140, "Accounting for Transfers and Servicing of
    Financial Assets and Extinguishments of Liabilities," replaced SFAS No. 125,
    "Accounting for Transfers and Servicing of Financial Assets and
    Extinguishments of Liabilities," and revised the standards for accounting
    for the securitizations and other transfers of financial assets and
    collateral. This new standard also requires certain disclosures, but carries
    over most of the provisions of SFAS No. 125. SFAS No. 140 is effective for
    transfers and servicing of financial assets and extinguishments of
    liabilities occurring after March 31, 2001. The adoption of this statement
    is not expected to have a material impact on the Company's consolidated
    financial statements.

    On July 6, 2001, the Securities and Exchange Commission (SEC) issued Staff
    Accounting Bulletin (SAB) No. 102 "Selected Loan Loss Allowance Methodology
    and Documentation Issues". SAB No. 102 provides guidance on the development,
    documentation, and application of a systematic methodology for determining
    the allowance for loans and leases in accordance with US GAAP and is
    effective upon issuance. The adoption of SAB No. 102 did not have a material
    impact on the Company's financial position or results of operations.





                                   (Continued)


                                       51
<PAGE>


             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2001 and 2000




NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    4.  Other Real Estate

    Other real estate is recorded at the lower of the customer's loan balance or
    the adjusted fair market value of the real estate securing the loan. The
    adjusted fair market value is determined by reducing the fair market value
    by estimated costs for the disposition of the property. Costs relating to
    holding the property are expensed when incurred. Other real estate owned of
    approximately $884,000 and $-0- at December 31, 2001 and 2000, respectively,
    is included in other assets on the consolidated balance sheets.

    5.  Premises and Equipment

    Premises and equipment are stated at cost less accumulated depreciation,
    which is computed principally on the straight-line method over the estimated
    useful lives of the assets. Leasehold improvements are amortized on the
    straight-line method over the shorter of the estimated useful lives of the
    improvements or the terms of the related leases.

    In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
    or Disposal of Long-Lived Assets". SFAS No. 144 retains the existing
    requirements to recognize and measure the impairment of long-lived assets to
    be held and used or to be disposed of by sale. However, SFAS No. 144 makes
    changes to the scope and certain measurement requirements of existing
    accounting guidance. SFAS No. 144 is effective for financial statements
    issued for fiscal years beginning after December 15, 2001. The adoption of
    this statement is not expected to have a significant impact on the financial
    condition or results of operations of the Company.

    6.  Income Taxes

    Under the liability method, deferred tax assets and liabilities are
    determined based on the difference between the financial statement and tax
    bases of assets and liabilities as measured by the enacted tax rates which
    will be in effect when these differences reverse. Deferred tax expense is
    the result of changes in deferred tax assets and liabilities. The principal
    types of differences between assets and liabilities for financial statement
    and tax return purposes are the allowance for loan losses, asset valuation
    reserves and net operating loss carryovers.

    7.  Per Share Information

    Basic EPS excludes dilution and is computed by dividing income available to
    common shareholders by the weighted average common shares outstanding during
    the period. Diluted EPS takes into account the potential dilution that could
    occur if securities or other contracts to issue common stock were exercised
    and converted into common stock.





                                   (Continued)


                                       52
<PAGE>



             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2001 and 2000




NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    8.  Stock Option Plans

    The Company follows SFAS No. 123, which allows an entity to use a fair
    value-based method for valuing stock-based compensation, which measures
    compensation cost at the grant date based on the fair value of the award.
    Compensation is then recognized over the service period, which is usually
    the vesting period. Alternatively, the standard permits entities to continue
    accounting for employee stock options and similar instruments under
    Accounting Principles Board (APB) Opinion No. 25, and its related
    Interpretations. Entities that continue to account for stock options using
    APB Opinion No. 25 are required to make pro forma disclosures of net income
    and earnings per share (EPS), as if the fair value-based method of
    accounting defined in SFAS No. 123 had been applied. The Company's stock
    option plans are accounted for under APB Opinion No. 25.

    9.  Benefit Plans

    The Company has a noncontributory nonqualified, defined benefit pension plan
    covering certain eligible employees. Net pension expense consists of service
    costs, interest costs, return on pension assets and amortization of
    unrecognized initial net assets. The Company accrues pension costs as
    incurred.

    10.  Cash and Cash Equivalents

    For purposes of reporting cash flows, cash and cash equivalents include cash
    on hand, amounts due from banks, short-term investments and federal funds
    sold. Generally, federal funds are purchased and sold for one-day periods.

    11.  Financial Instruments

    SFAS No. 107, "Disclosures About Fair Value of Financial Instruments",
    requires all entities to disclose the estimated fair value of their assets
    and liabilities considered to be financial instruments. Financial
    instruments consist primarily of investment securities, loans and deposits.

    12.  Advertising Costs

    The Company and the Bank expense advertising costs as incurred.

    13.  Comprehensive Income

    The Company reports comprehensive income which includes net income as well
    as certain other items, which result in a change to equity during the
    period.



                                   (Continued)


                                       53
<PAGE>


             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2001 and 2000




NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    13.  Comprehensive Income - continued

    The income tax effects allocated to comprehensive income is as follows (in
thousands):
<TABLE>
<CAPTION>

                                                                                  December 31, 2001
                                                                   ---------------------------------------------
                                                                                         Tax            Net of
                                                                    Before tax        (benefit)           tax
                                                                      amount           expense          amount
                                                                   -----------       -----------     -----------
       Unrealized losses on securities
<S>                                                               <C>                <C>             <C>
          Unrealized holding losses arising during period         $     (3,213)      $    (1,131)    $    (2,082)
          Less reclassification adjustment for gains
              realized in net income                                        60               (20)             40
                                                                    ----------         ----------      ---------
          Other comprehensive loss, net                           $     (3,153)      $    (1,111)    $    (2,042)
                                                                   ===========        ==========      ==========

                                                                                  December 31, 2000
                                                                   ---------------------------------------------
                                                                                         Tax            Net of
                                                                    Before tax        (benefit)           tax
                                                                      amount           expense          amount
                                                                   -----------       -----------     -----------
       Unrealized gains on securities
          Unrealized holding gains arising during period          $      2,472       $       840     $     1,632
          Less reclassification adjustment for losses
              realized in net income                                      (302)             (102)           (200)
                                                                    ----------         ---------       ---------
          Other comprehensive income, net                         $      2,170       $       738     $     1,432
                                                                   ===========        ==========      ==========

                                                                                  December 31, 1999
                                                                   ---------------------------------------------
                                                                                         Tax            Net of
                                                                    Before tax        (benefit)          tax
                                                                      amount           expense          amount
                                                                   -----------       -----------     -----------
       Unrealized losses on securities
          Unrealized holding losses arising during period         $     (4,951)      $    (1,686)    $    (3,265)
          Less reclassification adjustment for losses
              realized in net income                                       -                 -               -
                                                                    ----------         ---------       ---------
          Other comprehensive loss, net                           $     (4,951)      $    (1,686)    $    (3,265)
                                                                   ===========        ==========      ==========
</TABLE>

    14.  Reclassifications

    Certain reclassifications of prior year amounts have been made to conform to
the current year presentation.



                                       54
<PAGE>



             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2001 and 2000




NOTE B - ACQUISITIONS

    As of June 22, 2001, Royal Bancshares of Pennsylvania completed its
    acquisition of the assets of Crusader Holding Corporation (Crusader). Under
    the terms of the acquisition, certain assets and liabilities were purchased
    for approximately $41,500,000, which represented the approximate fair value
    of the net assets acquired. Included in this purchase was approximately
    $331,300,000 of assets, of which $236,500,000 was related to the loan
    portfolio. The purchase also included the assumption of deposits in the
    approximate amount of $251,000,000. The purchase price was paid in cash.
    This transaction was accounted for under the purchase method of accounting.
    There was no goodwill recorded in connection with this transaction.

    The following represents the unaudited results of operations of the Company
    as if the acquisition has occurred the first date of the period indicated.
    This pro forma information should be read in conjunction with the related
    historical information and is not necessarily indicative of the results that
    would have been attained had the acquisition actually been consummated on
    the dates indicated, nor are they necessarily indicative of our future
    operating results.

                                                  Year ended December 31,
                                                   2001             2000
                                                 --------        --------
                                                      (in thousands)

       Interest income                             84,205        $ 88,642
       Interest expense                            40,332          42,478
                                                 --------        --------

       Net interest income                         43,873          46,164

       Provision for loan losses                      250           1,500
       Non-interest income                          2,478           1,923
       Non-interest expense                        20,926          19,605
       Income tax expense                           7,234          10,379
                                                 --------        --------

       Net income                                $ 17,941        $ 16,603
                                                 ========        ========


NOTE C - INVESTMENT SECURITIES

    The amortized cost, gross unrealized gains and losses, and fair value of the
    Company's investment securities held to maturity and available for sale are
    summarized as follows (in thousands):



                                   (Continued)

                                       55
<PAGE>


             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2001 and 2000




NOTE C - INVESTMENT SECURITIES - Continued
<TABLE>
<CAPTION>


                                                                                2001
                                                  --------------------------------------------------------------
                                                                       Gross            Gross
                                                   Amortized        unrealized       unrealized          Fair
                                                     cost              gains           losses            value
                                                  -----------      -----------       ------------    -----------

       Investment securities held to maturity
<S>                                              <C>              <C>               <C>             <C>
          Corporate securities                   $      56,826    $      2,042      $        -      $       58,868
          U.S. government agencies                      35,000              64              (385)           34,679
          Mortgage backed securities                     1,077               1               -               1,078
                                                   -----------      ----------        ----------      ------------

                                                 $      92,903    $      2,107      $       (385)   $       94,625
                                                  ============     ===========       ===========     =============

                                                                                2001
                                                  --------------------------------------------------------------
                                                                       Gross            Gross
                                                   Amortized        unrealized       unrealized          Fair
                                                     cost              gains           losses            value
                                                  -----------      -----------       ------------    -----------

       Investment securities available for sale
          Federal Home Loan Bank stock           $       4,875    $        -        $        -      $        4,875
          Preferred and common stock                        39              15               -                  54
          Corporate bonds                               60,899             268              (323)           60,844
          Trust preferred securities                    39,294             896            (5,283)           34,907
          Foreign bonds                                 16,403             470               (99)           16,774
          Mortgage backed securities                    11,942             109              (100)           11,951
          Other securities                                 350             -                 -                 350
                                                   -----------      ----------        ----------      ------------

                                                 $     133,802    $      1,758      $     (5,805)   $      129,755
                                                  ============     ===========       ===========     =============


                                                                                2000
                                                  --------------------------------------------------------------
                                                                       Gross            Gross
                                                   Amortized        unrealized        unrealized         Fair
                                                     cost              gains           losses            value
                                                  -----------      -----------       ------------    -----------

       Investment securities held to maturity
          Corporate securities                   $      63,039    $        835      $       (595)   $       63,279
          U.S. agencies                                 23,071             -                  (1)           23,070
                                                   -----------      ----------        ----------      ------------

                                                 $      86,110    $        835      $       (596)   $       86,349
                                                  ============     ===========       ===========     =============
</TABLE>


                                                    (Continued)


                                       56
<PAGE>



             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2001 and 2000




NOTE C - INVESTMENT SECURITIES - Continued
<TABLE>
<CAPTION>

                                                                                2000
                                                  --------------------------------------------------------------
                                                                       Gross            Gross
                                                   Amortized        unrealized        unrealized         Fair
                                                     cost              gains           losses            value
                                                  -----------      -----------       ------------    -----------

<S>                                              <C>              <C>               <C>             <C>
       Investment securities available for sale
          Federal Home Loan Bank stock           $       3,170    $        -        $        -      $        3,170
          Preferred and common stock                     1,040               4               -               1,044
          Corporate bonds                               33,934           1,107            (1,157)           33,884
          Trust preferred securities                    12,287             -                (874)           11,413
          Foreign bonds                                 20,607             324              (298)           20,633
                                                   -----------      ----------        ----------      ------------
                                                 $      71,038    $      1,435      $     (2,329)   $       70,144
                                                  ============     ===========       ===========     =============
</TABLE>


    The amortized cost and estimated fair value of investment securities at
    December 31, 2001, by contractual maturity, are shown below (in thousands).
    Expected maturities will differ from contractual maturities because
    borrowers may have the right to call or prepay obligations with or without
    call or prepayment penalties.
<TABLE>
<CAPTION>

                                                                               2001
                                                  --------------------------------------------------------------
                                                      Held to maturity                  Available for sale
                                                  ----------------------------       ---------------------------
                                                  Amortized           Fair            Amortized          Fair
                                                    cost              value             cost             value
                                                  -----------     ------------       -----------     -----------

<S>           <C>                                <C>              <C>               <C>             <C>
       Within 1 year                             $     19,218     $     19,388      $      5,007    $        4,903
       After 1 but within 5 years                      37,899           39,772            20,587            20,763
       After 5 but within 10 years                      5,161            5,194            31,721            31,948
       After 10 years                                  30,625           30,271            71,573            67,212

       Federal Home Loan Bank stock                       -                -               4,875             4,875
       Preferred and common stocks                        -                -                  39                54
                                                   ----------       ----------        ----------      ------------
                                                 $     92,903     $     94,625      $    133,802    $      129,755
                                                  ===========      ===========       ===========     =============
</TABLE>

    Proceeds from the sale of investment securities available for sale during
    2001, 2000 and 1999 were $6,270,000, $610,000 and $-0-, respectively,
    resulting in gross realized gain (loss) of $60,000, $(302,000) and $-0-
    during 2001, 2000 and 1999, respectively. Additionally, the Company recorded
    an impairment loss of $-0- and $1,000,000 in 2001 and 2000, respectively, on
    certain trust preferred investment securities available for sale that were
    issued by a related party.

    As of December 31, 2001 and 2000, investment securities with a book value of
    $32,878,000 and $26,455,000 respectively, were pledged as collateral to
    secure public deposits and for other purposes required or permitted by law.


                                       57
<PAGE>



             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2001 and 2000




NOTE D - LOANS

    Major classifications of loans are as follows (in thousands):
                                                        2001          2000
                                                     ----------    ----------

       Real estate                                    $ 428,223    $  233,110
       Commercial and industrial                        218,498       193,398
       Consumer                                           2,714         2,450
                                                      ---------    ----------

               Total gross loans                        649,435       428,958
       Less
          Unearned income                                (1,056)       (1,992)
          Unamortized discount on purchased loans        (2,144)       (3,020)
                                                      ---------    ----------

               Total loans                            $ 646,235    $  423,946
                                                      =========    ==========

    Loans on which the accrual of interest has been discontinued or reduced
    amounted to approximately $10,794,000 and $3,548,000 at December 31, 2001
    and 2000, respectively. If interest had been accrued, such income would have
    been approximately $526,000, $319,000 and $109,000 for the years ended
    December 31, 2001, 2000 and 1999, respectively. Management believes it has
    adequate collateral to limit its credit risk with these loans.

    The Company granted loans to the officers and directors of the Company and
    to their associates. Related party loans are made on substantially the same
    terms, including interest rates and collateral, as those prevailing at the
    time for comparable transactions with unrelated persons and do not involve
    more than normal risk of collectibility. The aggregate dollar amount of
    these loans was $8,383,000 and $13,826,000 at December 31, 2001 and 2000,
    respectively. During 2001, no new loans were made and repayments totaled
    $5,443,000.

    The balance of impaired loans, which include the loans on which the accrual
    of interest has been discontinued, was approximately $10,852,000 and
    $3,615,000 at December 31, 2001 and 2000, respectively. The Company has
    identified a loan as impaired when it is probable that interest and
    principal will not be collected according to the contractual terms of the
    loan agreements. The income recognized on impaired loans during 2001 was
    $2,000. Total cash collected on impaired loans during 2001 was $264,000, of
    which $262,000 was credited to the principal balance outstanding on such
    loans. Interest that would have been accrued on impaired loans during 2001
    was $541,000. The Company's policy for interest income recognition on
    impaired loans is to recognize income on currently performing restructured
    loans under the accrual method. The Company recognizes income on non-accrual
    loans under the cash basis when the principal payments on the loans become
    current and the collateral on the loan is sufficient to cover the
    outstanding obligation to the Company. If these factors do not exist, the
    Company does not recognize income.

    The Company primarily grants commercial and real estate loans in the greater
    Philadelphia metropolitan area. The Company has concentrations of credit
    risk in real estate development loans at December 31, 2001. A substantial
    portion of its debtors' ability to honor these contracts is dependent upon
    the economic sector.


                                   (Continued)


                                       58
<PAGE>



             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2001 and 2000




NOTE D - LOANS - Continued

    Changes in the allowance for loan losses were as follows (in thousands):
<TABLE>
<CAPTION>

                                             2001              2000              1999
                                         --------          --------          --------

<S>                                      <C>               <C>               <C>
      Balance at beginning of year       $ 11,973          $ 11,737          $ 11,919
         Charge-offs                         (517)             (628)           (1,075)
         Recoveries                           432               614               893
                                         --------          --------          --------
             Net charge-offs                  (85)              (14)             (182)
         Provision for loan losses           --                 250              --
                                         --------          --------          --------

      Balance at end of year             $ 11,888          $ 11,973          $ 11,737
                                         ========          ========          ========
</TABLE>

NOTE E - PREMISES AND EQUIPMENT

    Premises and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>


                                                                   Estimated
                                                                 useful lives         2001              2000
                                                               ---------------    -------------    -------------

<S>                                                              <C>              <C>             <C>
       Land                                                            -            $     2,396      $     1,973
       Buildings and leasehold improvements                      15 - 31.5 years          6,217            5,992
       Furniture and fixtures                                      5 - 7 years            5,132            2,720
                                                                                    -----------      -----------
                                                                                         13,745           10,685
       Less accumulated depreciation and amortization                                     5,233            4,070
                                                                                    -----------      -----------
                                                                                    $     8,512      $     6,615
                                                                                    ===========      ===========
</TABLE>

    Depreciation and amortization in expense was approximately $865,000,
    $414,000 and $414,000 for the years ended 2001, 2000 and 1999, respectively.







                                       59
<PAGE>


             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2001 and 2000




NOTE F - DEPOSITS

    Deposits are summarized as follows (in thousands):
                                                   2001              2000
                                               -------------    -------------

       Demand                                    $    51,991      $    47,608
       NOW and money market                          158,784          110,935
       Savings                                        26,312           19,948
       Time, $100,000 and over                       303,793          166,760
       Other time                                    160,980          127,331
                                                 -----------      -----------

                                                 $   701,860      $   472,582
                                                 ===========      ===========

    Maturities of certificates of deposit for the next five years and thereafter
are as follows (in thousands):

       2002                                            $    271,042
       2003                                                  72,738
       2004                                                  58,319
       2005                                                  26,913
       2006                                                   5,376
       Thereafter                                            30,385
                                                       ------------

                                                       $    464,773
                                                       ============

NOTE G - BORROWINGS

    1.  Advances from the Federal Home Loan Bank

    At December 31, 2001, advances from the Federal Home Loan Bank (FHLB)
    totaling $97,500,000 will mature within one to ten years. The advances are
    collateralized by FHLB stock and certain first mortgage loans and
    mortgage-backed securities. These advances had a weighted average interest
    rate of 5.92%.

         Outstanding borrowings mature as follows (in thousands):

              2002                                              $ 30,000
              2003                                                 3,000
              2004                                                   -
              2005                                                   -
              2006                                                   -
              Thereafter                                          64,500
                                                                --------

                                                                $ 97,500
                                                                ========

                                   (Continued)


                                       60
<PAGE>


             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2001 and 2000




NOTE G - BORROWINGS - Continued

    2.  Other Borrowings

    The Company has a borrowing arrangement with a financial institution for
    $2,725,000, interest equal to the prime rate minus 50 basis points (4.25% at
    December 31, 2001). The note matures in June, 2003 and requires monthly
    interest payments. The balance is $2,725,000 at December 31, 2001. There was
    no outstanding balance as of December 31, 2000.

NOTE H - LEASE COMMITMENTS

    The Company leases various premises under non-cancellable agreements, which
    expire through 2004 and require minimum annual rentals. The approximate
    minimum rental commitments under the leases are as follows for the year
    ended December 31, (in thousands):

                2002                             $      563
                2003                                    493
                2004                                    186
                                                 ----------
                                                 $    1,242
                                                 ==========

    Rental expense for all leases was approximately $501,000, $388,000 and
    $304,000 for the years ended December 31, 2001, 2000 and 1999, respectively.

NOTE I - COMMON STOCK

    Each holder of Class A and Class B common stock is entitled to one vote for
    each Class A share and ten votes for each Class B share held. Holders of
    either class of common stock are entitled to equal per share dividends when
    declared.

    The Class B shares may not be transferred in any manner except to the
    holder's immediate family. Class B shares have been converted to Class A
    shares at the average rate of 1.15 to 1.

    Per share information and weighted average shares outstanding have been
    restated to reflect the 6% stock dividend of January 2002, the 5% stock
    dividend of February 2001, the 5% stock dividend of January 2000, and the 4%
    stock dividend of May 1999.




                                       61
<PAGE>


             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2001 and 2000




NOTE J - INCOME TAXES

    The components of the income tax expense (benefit) included in the
    consolidated statements of income are as follows (in thousands):

                                                  2001        2000       1999
                                                --------    --------   --------

       Income tax expense (benefit)
          Current                               $  6,485    $  8,266   $  5,127
          Deferred federal tax                    (1,560)       (543)       178
       Benefit applied to reduce goodwill            872         259        259
                                                --------    --------   --------

                                                $  5,797    $  7,982   $  5,564
                                                ========    ========   ========

    The difference between the applicable income tax expense and the amount
    computed by applying the statutory federal income tax rate of 35% in 2001,
    2000 and 1999 is as follows (in thousands):

                                                  2001        2000       1999
                                                --------    --------   --------


       Computed tax expense at statutory rate   $  7,543    $  7,785   $  6,184
       Tax-exempt income                            (130)        (84)       (98)
       Low-income housing tax credit                (650)       (545)      (545)
       Other, net                                   (966)        826        123
       Effect of 34% rate bracket                    -           -         (100)
                                                --------    --------   --------

       Applicable income tax expense            $  5,797    $  7,982   $  5,564
                                                ========    ========   ========

    Deferred tax assets and liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
<S>                                                                               <C>              <C>
                                                                                      2001              2000
                                                                                  -------------    -------------

       Deferred tax assets
          Allowance for loan losses                                                 $    2,137      $     1,348
          Unrealized losses on investment securities available for sale                  1,415              304
          Accrued stock-based compensation                                                 855              521
          Asset valuation reserves                                                         812              974
          Other                                                                          1,324              435
          Net operating loss carryovers from Knoblauch State Bank                        7,449            7,620
                                                                                    ----------      -----------
                                                                                        13,992           11,202
       Less valuation allowance                                                         (7,449)          (7,620)
                                                                                    ----------      -----------
                                                                                         6,543            3,582
                                                                                    ----------      -----------
       Deferred tax liabilities
          Other                                                                            576              286
                                                                                    ----------      -----------
                                                                                           576              286
                                                                                    ----------      -----------

              Net deferred tax asset, included in other assets                      $    5,967      $     3,296
                                                                                    ==========      ===========
</TABLE>

                                   (Continued)


                                       62
<PAGE>


             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2001 and 2000



NOTE J - INCOME TAXES - Continued

    The Company has approximately $22,000,000 of net operating loss carryovers
    from the acquisition of Knoblauch State Bank (KSB). These losses will fully
    expire in 2015. The utilization of these losses is subject to limitation
    under Section 382 of the Internal Revenue Code. As a result, a valuation
    allowance has been established to eliminate the deferred tax asset
    attributable to these net operating losses.

    During 2001, 2000 and 1999, the Company realized a tax benefit related to
    the net operating loss carryovers from the acquisition of KSB. The deferred
    tax asset associated with those loss carryovers is fully offset by a
    valuation allowance. Accordingly, the realized tax benefit is reflected as a
    reduction of the goodwill associated with the acquisition and a
    corresponding reduction of deferred income tax benefit for the year.

    In addition, the Company has approximately $15,700,000 of tax goodwill from
    the acquisition of KSB. The ability to deduct this goodwill for tax purposes
    will expire in 2015. The utilization of this goodwill for tax purposes was
    subject to the limitations under Section 382 of the Internal Revenue Code.
    For 2001, approximately $1,353,000 has been deducted for tax purposes.

    For 2001, the Company has taken a recovery of $600,000 from income tax
    payable and reduced its federal income tax expense accordingly in order to
    recapture a provision established for issues that arose concerning the low
    income housing tax credits acquired from the Kearsley limited partnership in
    1994. All issues regarding this tax credit were resolved favorably and as a
    result there is no need to maintain this tax reserve.

NOTE K- EARNINGS PER SHARE

    Basic and diluted EPS are calculated as follows (in thousands, except per
share data):
<TABLE>
<CAPTION>

                                                                          2001
                                                        -----------------------------------------
                                                          Income      Average shares    Per share
                                                        (numerator)    (denominator)     amount
                                                        -----------------------------------------

<S>                                                     <C>               <C>          <C>
       Basic EPS
          Income available to common shareholders       $   15,754           11,331     $  1.39
       Effect of dilutive securities
          Stock options                                        -                166       (0.02)
                                                        ----------       ----------     -------
       Diluted EPS
          Income available to common shareholders
              plus assumed exercise of options          $   15,754           11,497     $  1.37
                                                        ==========       ==========     =======
</TABLE>

    All options to purchase shares of common stock were included in the
    computation of 2001 diluted EPS because the exercise price was less than the
    average market price of the common stock.




                                   (Continued)


                                       63
<PAGE>


             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2001 and 2000



NOTE K - EARNINGS PER SHARE - Continued
<TABLE>
<CAPTION>

                                                                            2000
                                                          -----------------------------------------
                                                            Income      Average shares    Per share
                                                          (numerator)   (denominator)      amount
                                                          ------------------------------------------
<S>                                                      <C>            <C>              <C>
       Basic EPS
          Income available to common shareholders         $  14,260         11,310        $  1.26
       Effect of dilutive securities
          Stock options                                         -              147          (0.02)
                                                          ---------     ----------        -------
       Diluted EPS
          Income available to common shareholders
              plus assumed exercise of options            $  14,260         11,457        $  1.24
                                                          =========     ==========        =======
</TABLE>

    Options to purchase 48,744 shares of common stock with an exercise price of
    $15.79 per share were not included in the computation of 2000 diluted EPS
    because the exercise price was greater than the average market price of the
    common stock.
<TABLE>
<CAPTION>

                                                                              1999
                                                         -------------------------------------------
                                                            Income    Average shares     Per share
                                                          (numerator)  (denominator)      amount
                                                         -------------------------------------------
<S>                                                       <C>            <C>             <C>
       Basic EPS
          Income available to common shareholders         $  12,105         11,148        $  1.09

       Effect of dilutive securities
          Stock options                                          -             140          (0.02)
                                                          ---------     ----------        -------

       Diluted EPS
          Income available to common shareholders
              plus assumed exercise of options            $  12,105         11,288        $  1.07
                                                          =========     ==========        =======
</TABLE>

    Options to purchase 48,744 shares of common stock with an exercise price of
    $15.79 per share were not included in the computation of 1999 diluted EPS
    because the exercise price was greater than the average market price of the
    common stock.

NOTE L - STOCK OPTION PLANS

    The Company has two stock-based compensation plans, which are described
    below. The Company accounts for these plans under APB Opinion No. 25.


                                   (Continued)


                                       64
<PAGE>


             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2001 and 2000




NOTE L - STOCK OPTION PLANS - Continued

    1.  Outside Directors' Stock Option Plan

    The Company adopted a non-qualified outside Directors' Stock Option Plan
    (the Director's Plan). Under the terms of the Director's Plan, 250,000
    shares of Class A stock are authorized for grants. Each director is entitled
    to 1,500 shares of stock annually, which are exercisable after one year of
    service. The options were granted at the fair market value at the date of
    the grant.

    Stock option transactions consist of the following:
<TABLE>
<CAPTION>

                                                2001                     2000                     1999
                                      -----------------------   -----------------------   ----------------------
                                                   Weighted                 Weighted                 Weighted
                                                    average                    average                  average
                                                   exercise                   exercise                 exercise
                                        Shares       price        Shares        price       Shares       price
                                       ---------  -----------   ---------   -----------   ---------  -----------
<S>                                      <C>        <C>             <C>       <C>             <C>       <C>
       Outstanding at beginning
             of year                     66,349     $ 11.15         74,293    $  10.57        73,453    $ 10.07
          Granted                        17,137       12.89         13,356       13.45        12,755      12.14
          Exercised                      (5,237)       9.52        (21,300)       7.25       (11,915)      7.16
          Cancelled                         -          -               -           -             -          -
                                        -------                    -------                    ------
       Outstanding at end of year        78,249     $ 11.04         66,349    $  11.15        74,293    $ 10.57
                                        =======                    =======                    ======
       Weighted average fair value
          of options granted during
          the year                                  $  3.17                   $   2.31                  $  1.89
</TABLE>

    The following table summarizes information about options outstanding and
exercisable at December 31, 2001:
<TABLE>
<CAPTION>

                                                 Options outstanding                      Options exercisable
                                -------------------------------------------------     --------------------------
                                                       Weighted
                                                        average       Weighted                         Weighted
                                                       remaining       average                          average
         Range of                    Number           contractual      exercise            Number      exercise
      exercise prices             outstanding         life (years)      price            exercisable     price
      ---------------             -----------         ------------      -----            -----------     -----

<S>                                 <C>                  <C>         <C>                 <C>           <C>
     $3.67 - 5.48                    12,123               2.6         $  5.19             12,123        $  5.19
     $7.19 - 9.89                    14,610               4.8            8.73             14,610           8.73
     $11.45 - 14.90                  51,516               7.7           13.07             38,033          13.13
                                     ------                                               ------
                                     78,249                                               64,766
                                     ======                                               ======
</TABLE>


                                   (Continued)


                                       65
<PAGE>



             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2001 and 2000




NOTE L - STOCK OPTION PLANS - Continued

    2.  Employee Stock Option and Appreciation Right Plan

    The Company adopted a Stock Option and Appreciation Right Plan (the Plan).
    The Plan is an incentive program under which Company officers and other key
    employees may be awarded additional compensation in the form of options to
    purchase up to 1,500,000 shares of the Company's Class A common stock (but
    not in excess of 15% of outstanding shares). At the time a stock option is
    issued, a stock appreciation right for an identical number of shares may
    also be granted. The option price is equal to the fair market value at the
    date of the grant. The options are exercisable at 20% per year beginning one
    year after the date of grant and must be exercised within ten years of the
    grant.

    Stock option transactions consist of the following:
<TABLE>
<CAPTION>

                                                2001                     2000                     1999
                                      -----------------------   -----------------------   ----------------------
                                                   Weighted                 Weighted                 Weighted
                                                    average                    average                  average
                                                   exercise                   exercise                 exercise
                                        Shares       price        Shares        price       Shares       price
                                       ---------  -----------   ---------   -----------   ---------  -----------
<S>                                    <C>        <C>           <C>         <C>            <C>        <C>
       Outstanding at beginning
             of year                     398,325   $  8.81        399,882     $  6.42       492,458     $ 7.67
             Granted                     185,051     12.89         71,780       12.23        95,005      12.75
             Exercised                   (35,497)     5.00        (67,078)       4.47      (143,129)      5.60
             Cancelled                   (15,375)    12.47         (6,259)      12.91       (44,452)     11.91
                                       ---------                ---------                 ---------
       Outstanding at end of year        532,504   $  9.85        398,325     $  8.81       399,882     $ 6.42
                                       =========                =========                 =========
       Weighted average fair value
       of options granted during
       the year                                    $  3.17                    $  2.31                   $ 1.89
</TABLE>

    The following table summarizes information about options outstanding and
exercisable at December 31, 2001:


<TABLE>
<CAPTION>

                                                 Options outstanding                      Options exercisable
                                -------------------------------------------------     --------------------------
                                                       Weighted
                                                        average       Weighted                         Weighted
                                                       remaining       average                          average
         Range of                    Number           contractual      exercise            Number      exercise
      exercise prices             outstanding         life (years)      price            exercisable     price
      ---------------             -----------         ------------      -----            -----------     -----

<S>                                 <C>                  <C>         <C>                 <C>           <C>

     $2.01                            8,453               0.3         $  2.01              8,453        $  2.01
     $3.66 - 5.46                   139,954               2.5            5.00            139,954           5.00
     $7.20 - 9.79                    89,327               4.7            8.25             82,384           8.10
     $11.46 - 14.92                 294,770               8.4           12.87             51,017          13.17
                                   --------                                            ---------

                                    532,504                                              281,808
                                   ========                                            =========
</TABLE>

                                  (Continued)

                                       66
<PAGE>



             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2001 and 2000




NOTE L - STOCK OPTION PLANS - Continued

    Had compensation cost for both plans been determined based on the fair value
    of the options at the grant dates consistent with the method required by
    SFAS No. 123, the Company's net income and EPS would have been reduced to
    the pro forma amounts indicated below (in thousands, except share data).

                                              2001         2000          1999
                                          ----------    ---------     ----------

       Net income
          As reported                      $15,754       $14,260        $12,104
          Pro forma                         15,658        14,196         12,059

       Earnings per share
          As reported - basic                 1.39       $  1.26        $  1.09
          As reported - diluted               1.37          1.24           1.07

          Pro forma - basic                   1.38          1.26           1.08
          Pro forma - diluted                 1.36          1.24           1.07

    The fair value of each option grant is estimated on the date of the grant
    using the Black-Scholes options-pricing model with the following weighted
    average assumptions used for grants in 2001, 2000 and 1999: dividend yield
    of 4.84%, 5.95% and 5.33% for 2001, 2000 and 1999, respectively; expected
    volatility of 30.7% for 2001, 2000 and 1999, and risk-free interest rate of
    4.94% in 2001, 5.11% in 2000 and 6.4% in 1999. Expected lives are 10 years
    for 2001, 2000 and 1999.

NOTE M - PENSION PLAN

    The Company has a noncontributory nonqualified defined benefit pension plan
    covering certain eligible employees. The Company-sponsored pension plan
    provides retirement benefits under pension trust agreements and under
    contracts with insurance companies. The benefits are based on years of
    service and the employee's compensation during the highest five consecutive
    years during the last 10 years of employment. The Company's
    policy is to fund pension costs allowable for income tax purposes. The
    following table sets forth the plan's funded status and amounts recognized
    in the Company's consolidated balance sheets (in thousands):

                                                2001       2000
                                             -------    -------
Change in benefit obligation
   Benefit obligation at beginning of year   $ 1,782    $ 2,210
   Service cost                                  488       (632)
   Interest cost                                 124         86
   Other changes                                 (17)       118
                                             -------    -------

   Benefits obligation at end of year        $ 2,377    $ 1,782
                                             =======    =======



                                   (Continued)


                                       67
<PAGE>


             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2001 and 2000




NOTE M - PENSION PLAN - Continued

    Net pension cost included the following components (in thousands):

                                       2001   2000   1999
                                       ----   ----   ----

           Service cost                $553   $341   $320
           Interest cost                124     86    132
                                       ----   ----   ----

           Net periodic benefit cost   $677   $427   $452
                                       ====   ====   ====

    The assumed discount rate and rate of increase in future compensation levels
    used in determining the actuarial present value of the projected benefit
    obligation were 7% for 2001 and 2000 and 4% for 1999. The expected long-term
    rate of return on assets was 4% for 2001, 2000 and 1999.

    The Company has a capital accumulation and salary reduction plan under
    Section 401(k) of the Internal Revenue Code of 1986, as amended. Under the
    plan, all employees are eligible to contribute from 1% to a maximum of 15%
    of their annual salary, with the Company matching 100% of any contribution
    between 1% and 5% subject to a $2,550 per employee annual limit. Matching
    contributions to the plan were approximately $167,000, $141,000 and $131,000
    for the years ended December 31, 2001, 2000 and 1999, respectively.

NOTE N -   FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS
           OF CREDIT RISK

    The Company is a party to financial instruments with off-balance-sheet risk
    in the normal course of business to meet the financing needs of its
    customers and to reduce its own exposure to fluctuations in interest rates.
    These financial instruments include commitments to extend credit and standby
    letters of credit. Such financial instruments are recorded in the financial
    statements when they become payable. Those instruments involve, to varying
    degrees, elements of credit and interest rate risk in excess of the amount
    recognized in the consolidated balance sheets. The contract amounts of those
    instruments reflect the extent of involvement the Company has in particular
    classes of financial instruments.

    The Company's exposure to credit loss in the event of non-performance by the
    other party to commitments to extend credit and standby letters of credit is
    represented by the contractual amount of those instruments. The Company uses
    the same credit policies in making commitments and conditional obligations
    as it does for on-balance-sheet instruments.






                                   (Continued)


                                       68
<PAGE>



             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2001 and 2000




NOTE N -   FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS
           OF CREDIT RISK - Continued

    The contract amounts are as follows (in thousands):
<TABLE>
<CAPTION>


                                                                                           December 31,
                                                                                  ------------------------------
                                                                                      2001              2000
                                                                                  -------------    -------------

       Financial instruments whose contract amounts represent credit risk
<S>                                                                                <C>              <C>
          Commitments to extend credit                                             $    111,643     $     74,073
          Standby letters of credit and financial guarantees written                      4,782            1,853
</TABLE>

    Commitments to extend credit are agreements to lend to a customer as long as
    there is no violation of any condition established in the contract.
    Commitments generally have fixed expiration dates or other termination
    clauses and may require payment of a fee. Since many of the commitments are
    expected to expire without being drawn upon, and others are for staged
    construction, the total commitment amounts do not necessarily represent
    immediate cash requirements.

    The Company evaluates each customer's creditworthiness on a case-by-case
    basis. The amount of collateral obtained, if deemed necessary by the Company
    upon extension of credit, is based on management's credit evaluation.
    Collateral held varies but may include personal or commercial real estate,
    accounts receivable, inventory and equipment.

    Standby letters of credit are conditional commitments issued by the Company
    to guarantee the performance of a customer to a third party. Those
    guarantees are primarily issued to support public and private borrowing
    arrangements, including commercial paper, bond financing and similar
    transactions. Most guarantees extend for one year and expire in decreasing
    amounts through 2002. The credit risk involved in issuing letters of credit
    is essentially the same as that involved in extending loan facilities to
    customers. The Company holds personal or commercial real estate, accounts
    receivable, inventory and equipment as collateral supporting those
    commitments for which collateral is deemed necessary. The extent of
    collateral held for those commitments is 80%.





                                       69
<PAGE>


             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2001 and 2000




NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS

    SFAS No. 107 requires disclosure of the estimated fair value of an entity's
    assets and liabilities considered to be financial instruments. For the
    Company, as for most financial institutions, the majority of its assets and
    liabilities are considered financial instruments as defined in SFAS No. 107.
    However, many of such instruments lack an available trading market, as
    characterized by a willing buyer and seller engaging in an exchange
    transaction. Also, it is the Company's general practice and intent to hold
    its financial instruments to maturity and not to engage in trading or sales
    activities. Therefore, the Company had to use significant estimations and
    present value calculations to prepare this disclosure.

    Changes in the assumptions or methodologies used to estimate fair value may
    materially affect the estimated amounts. Also, management is concerned that
    there may not be reasonable comparability between institutions due to the
    wide range of permitted assumptions and methodologies in the absence of
    active markets. This lack of uniformity gives rise to a high degree of
    subjectivity in estimating financial instrument fair value.

    Fair values have been estimated using data which management considered the
    best available and estimation methodologies deemed suitable for the
    pertinent category of financial instrument. The estimation methodologies,
    resulting fair values and recorded carrying amounts at December 31, 2001 and
    2000 were as follows:

    Fair values of loans and deposits with floating interest rates are generally
    presumed to approximate the recorded carrying amounts.

    Fair value of financial instruments actively traded in a secondary market
    has been estimated using quoted market prices as follows (in thousands):
<TABLE>
<CAPTION>

                                                               2001                             2000
                                                  ------------------------------    ------------------------------
                                                   Estimated                          Estimated
                                                     fair            Carrying           fair           Carrying
                                                     value            amount            value           amount
                                                 -------------    --------------    -------------   --------------
<S>                                              <C>              <C>               <C>             <C>
       Cash and cash equivalents                 $      40,018    $       40,018    $      43,222   $       43,222
       Investment securities held to maturity           94,625            92,903           86,349           86,110
       Investment securities available for sale        129,755           129,755           70,144           70,144
</TABLE>

    Fair value of financial instruments with stated maturities has been
    estimated using present value cash flow, discounted at a rate approximating
    current market for similar assets and liabilities, as follows (in
    thousands):
<TABLE>
<CAPTION>

                                                               2001                             2000
                                                  ------------------------------    ------------------------------
                                                   Estimated                          Estimated
                                                     fair            Carrying           fair           Carrying
                                                     value            amount            value           amount
                                                 -------------    --------------    -------------   --------------
<S>                                              <C>              <C>               <C>             <C>
       Deposits with stated maturities           $     454,191    $      464,773    $     316,245   $      294,090
       Long-term borrowings                             67,574            70,225           35,877           33,000
</TABLE>

                                   (Continued)


                                       70
<PAGE>


             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2001 and 2000




NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued

    Fair value of financial instrument liabilities with no stated maturities has
    been estimated to equal the carrying amount (the amount payable on demand),
    totaling approximately $237,087,000 and $178,492,000 at December 31, 2001
    and 2000, respectively.

    Fair value of the net loan portfolio has been estimated using present value
    cash flow, discounted at the treasury rate adjusted for non-interest
    operating costs and giving consideration to estimated prepayment risk and
    credit loss factors, as follows (in thousands):
<TABLE>
<CAPTION>

                                                               2001                             2000
                                                  ------------------------------    ------------------------------
                                                   Estimated                          Estimated
                                                     fair            Carrying           fair           Carrying
                                                     value            amount            value           amount
                                                 -------------    --------------    -------------   --------------
<S>                                              <C>              <C>               <C>             <C>
       Net loans                                 $     668,693    $      634,347    $     443,368   $      411,973
</TABLE>

    The fair value of commitments to extend credit is estimated based on the
    amount of unamortized deferred loan commitment fees. The fair value of
    letters of credit is based on the amount of unearned fees plus the estimated
    cost to terminate the letters of credit. Fair values of unrecognized
    financial instruments including commitments to extend credit and the fair
    value of letters of credit are considered immaterial.

    The Company's remaining assets and liabilities are not considered financial
    instruments. No disclosure of the relationship value of the Company's
    deposits is required by SFAS No. 107.

NOTE P - REGULATORY MATTERS

    1.  Payment of Dividends

    Under the Pennsylvania Business Corporation Law, the Company may pay
    dividends only if it is solvent and would not be rendered insolvent by the
    dividend payment. There are also restrictions set forth in the Pennsylvania
    Banking Code of 1965 (the Banking Code) and in the Federal Deposit Insurance
    Act (FDIA) concerning the payment of dividends by the Company. Under the
    Banking Code, no dividends may be paid except from "accumulated net
    earnings" (generally undivided profits). Under the FDIA, no dividend may be
    paid if a bank is in arrears in the payment of any insurance assessment due
    to the Federal Deposit Insurance Corporation (FDIC).

    2.  Capital Ratios

    The Bank is subject to various regulatory capital requirements administered
    by the federal banking agencies. Failure to meet minimum capital
    requirements can initiate certain mandatory--and possible additional
    discretionary--actions by regulators that, if undertaken, could have a
    direct material effect on the Bank's financial statements. Under capital
    adequacy guidelines and the regulatory framework for prompt corrective



                                   (Continued)


                                       71
<PAGE>



             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2001 and 2000




NOTE P - REGULATORY MATTERS - Continued

    action, the Bank must meet specific capital guidelines that involve
    quantitative measures of the Bank's assets, liabilities and certain
    off-balance-sheet items as calculated under regulatory accounting practices.
    The Bank's capital amounts and classification are also subject to
    qualitative judgments by the regulators about components, risk weightings
    and other factors.

    Quantitative measures established by regulations to ensure capital adequacy
    require the Company and the Bank to maintain minimum amounts and ratios (set
    forth in the table below) of total and Tier I capital (as defined in the
    regulations) to risk-weighted assets (as defined), and of Tier I capital (as
    defined) to average assets (as defined). As of December 31, 2001, management
    believes that the Bank meets all capital adequacy requirements to which it
    is subject.

    As of December 31, 2001, the Bank met all regulatory requirements for
    classification as well capitalized under the regulatory framework for prompt
    corrective action. To be categorized as well capitalized, the Bank must
    maintain minimum total risk-based, Tier I risk-based and Tier I leverage
    ratios as set forth in the table. There are no conditions or events since
    that notification that management believes have changed the institution's
    category.

    The Bank's actual capital amounts and ratios are also presented in the table
(in thousands).

<TABLE>
<CAPTION>

                                                                               2001
                                             -----------------------------------------------------------------------
                                                                                                    To be well
                                                                                                 capitalized under
                                                                           For capital           prompt corrective
                                                     Actual             adequacy purposes        action provisions
                                             ----------------------  ----------------------   ----------------------
                                                Amount       Ratio      Amount       Ratio      Amount       Ratio
                                             -----------  ---------  -----------   --------   -----------  ---------
<S>                                          <C>           <C>       <C>            <C>        <C>          <C>
    Total capital (to risk-weighted assets)
       Company (consolidated)                $  121,237     15.92%   $   60,920       8.00%        N/A         N/A
       Bank                                      87,432     11.58        60,408       8.00     $   75,510    10.00%

    Tier I capital (to risk-weighted assets)
       Company (consolidated)                   111,718     14.42        30,993       4.00         N/A         N/A
       Bank                                      77,993     10.33        30,204       4.00         45,306     6.00

    Tier I capital
    (to average assets, leverage)
       Company (consolidated)                   111,718     14.17        23,653       3.00         N/A         N/A
       Bank                                      77,993     10.08        23,214       3.00         38,690     5.00

</TABLE>






                                   (Continued)


                                       72
<PAGE>


             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2001 and 2000




NOTE P - REGULATORY MATTERS - Continued
<TABLE>
<CAPTION>

                                                                                2000
                                                                                                    To be well
                                                                                                 capitalized under
                                                                           For capital           prompt corrective
                                                     Actual             adequacy purposes        action provisions
                                             ----------------------  ----------------------   ----------------------
                                                Amount       Ratio      Amount       Ratio      Amount       Ratio
                                             -----------  ---------  -----------   --------   -----------  ---------
<S>                                          <C>          <C>         <C>          <C>        <C>           <C>
    Total capital (to risk-weighted assets)
       Company (consolidated)                $  110,403     19.40%   $   45,516     > 8.00%        N/A         N/A
       Bank                                                                         -
                                                 78,052     13.92        44,846     > 8.00     $   56,057   >10.00%
                                                                                    -                       -

    Tier I capital (to risk-weighted assets)
       Company (consolidated)                   103,219     18.14        22,758     > 4.00            N/A      N/A
       Bank                                                                         -
                                                 70,984     12.66        22,423     > 4.00         33,634   > 6.00
                                                                                    -                       -

    Tier I capital
    (to average assets, leverage)
       Company (consolidated)                   103,219     16.98        18,234     > 3.00            N/A      N/A
       Bank                                                                         -
                                                 70,984     11.85        17,972     > 3.00         29,953   > 5.00
                                                                                    -                       -

</TABLE>


NOTE Q - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY

    Condensed financial information for the parent company only follows (in
thousands).

                            CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>

                                                                                           December 31,
                                                                                  ------------------------------
                                                                                      2001              2000
                                                                                  -------------    -------------

       Assets
<S>                                                                               <C>              <C>
          Cash                                                                    $       1,444    $       1,396
          Investment in Royal Investments of Delaware, Inc. - at equity                  31,887           30,583
          Investment in Royal Bank of Pennsylvania - at equity                           74,716           71,265
          Other assets                                                                      402              257
                                                                                    -----------      -----------

                                                                                  $     108,449    $     103,501
                                                                                   ============     ============

          Stockholders' equity                                                          108,449          103,501
                                                                                    -----------      -----------

                                                                                  $     108,449    $     103,501
                                                                                   ============     ============
</TABLE>



                                   (Continued)


                                       73
<PAGE>


             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2001 and 2000




NOTE Q - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued

                         CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>

                                                              Year ended December 31,
                                                         --------------------------------
                                                           2001        2000        1999
                                                         --------    --------    --------

Income
<S>                                                      <C>         <C>         <C>
   Equity in undistributed net earnings of subsidiaries  $  6,796    $  5,763    $  4,305
   Dividends from subsidiary bank                           8,984       8,513       7,849
   Other income                                                35          50          44
                                                         --------    --------    --------

       Total income                                        15,815      14,326      12,198
                                                         --------    --------    --------

Expenses
   Other expenses                                              75          68         120
   Income tax benefit                                         (14)         (2)        (26)
                                                         --------    --------    --------

       Total expenses                                          61          66          94
                                                         --------    --------    --------

       Net income                                        $ 15,754    $ 14,260    $ 12,104
                                                         ========    ========    ========
</TABLE>
<PAGE>


                       CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                             Year ended December 31,
                                                         --------------------------------
                                                           2001        2000        1999
                                                         --------    --------    --------
Cash flows from operating activities
<S>                                                      <C>         <C>         <C>
Net income                                               $ 15,754    $ 14,260    $ 12,104
Adjustments to reconcile net income to net cash
       provided by operating activities
   Undistributed earnings from subsidiaries                (6,796)     (4,647)     (4,305)
   Operating expenses                                          75          68         120
   Rental income                                              (35)        (50)        (44)
   Non-cash income tax benefit                                (14)         (2)        (26)
                                                         --------    --------    --------

       Net cash provided by operating activities            8,984       9,629       7,849
                                                         --------    --------    --------

Cash flows from financing activities
Cash dividends paid                                        (8,984)     (8,510)     (7,849)
Other, net                                                     48        (655)        739
                                                         --------    --------    --------

       Net cash used in financing activities               (8,936)     (9,165)     (7,110)
                                                         --------    --------    --------

       Net increase in cash                                    48         464         739

Cash at beginning of year                                   1,396         932         193
                                                         --------    --------    --------

Cash at end of year                                      $  1,444    $  1,396    $    932
                                                         ========    ========    ========
</TABLE>


                                       74
<PAGE>



             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2001 and 2000




NOTE R - SUMMARY OF QUARTERLY RESULTS (UNAUDITED)

    The following summarizes the consolidated results of operations during 2001
    and 2000, on a quarterly basis, for the Company (in thousands except per
    share data):
<TABLE>
<CAPTION>

                                                                    2001
                                           ------------------------------------------------------
                                             Fourth          Third        Second          First
                                             Quarter        Quarter       Quarter        Quarter
                                           ----------     ----------    -----------    ----------

<S>                                        <C>            <C>           <C>            <C>
       Interest income                     $   19,645     $   19,901    $    14,971    $   14,708
       Net interest income                     10,199         10,031          8,597         8,589
       Provision for loan losses                  -              -              -             -
       Income before income taxes               6,449          5,423          4,108         5,572
       Net income                               4,456          3,572          3,811         3,914

       Net income per share
          Basic                            $     0.39     $     0.32    $      0.34    $     0.34
          Diluted                          $     0.39     $     0.31    $      0.33    $     0.34


                                                                    2000
                                           ------------------------------------------------------
                                             Fourth          Third        Second          First
                                             Quarter        Quarter       Quarter        Quarter
                                           ----------     ----------    -----------    ----------

       Interest income                     $   16,079     $   15,005    $    14,864    $   12,927
       Net interest income                      9,846          9,159          9,288         8,033
       Provision for loan losses                  -              -              -             250
       Income before income taxes               6,038          5,656          5,615         4,932
       Net income                               3,566          3,628          3,740         3,326

       Net income per share
          Basic                            $     0.34     $     0.32    $      0.31    $     0.29
          Diluted                          $     0.33     $     0.32    $      0.30    $     0.29

</TABLE>







                                       75
<PAGE>


ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                      AND FINANCIAL DISCLOSURE

         None.


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

         The information required in this Item, relating to directors, executive
officers, control persons is set forth in Royal Bancshares' Proxy Statement to
be used in connection with the 2002 Annual Meeting of Shareholders under the
heading "Remuneration of directors and Officers and Other Transactions", which
pages are incorporated herein by reference.

         Beneficial Ownership - Compliance. Section 16(a) of the Securities
Exchange Act of 1934, as amended, requires the Corporation's officers and
directors, and persons who own more than 10 percent of the registered class of
the Corporation's equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission ("SEC"). Officers,
directors and greater than 10 percent shareholders are required by SEC
regulation to furnish the Corporation copies of all Section 16(a) forms they
file.

         Based solely on its review of forms that were received from certain
reporting persons, the Corporation believes that during the period January 1,
2001 through December 31, 2001, its officers and directors were in compliance
with all filing requirements applicable to them.


ITEM 11.  EXECUTIVE  COMPENSATION

         The information required by this Item, relating to executive
compensation, is set forth in the Registrant's Proxy Statement to be used in
connection with the 2002 Annual Meeting of Shareholders, under the heading
"Remuneration of Directors and Officers and Other Transactions", which pages are
incorporated herein by reference.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information required by this Item, relating to beneficial ownership
of the Registrant's Common Stock, is set forth in Royal Bancshares' Proxy
Statement to be used in connection with the 2002 Annual Meeting of Shareholders,
under the heading "Information About Nominees, Continuing Directors and
Executive Officers", which pages are incorporated herein by reference.

                                       76
<PAGE>

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information required by this Item, relating to transactions with
management and others, certain business relationships and indebtedness of
management, is set forth in Royal Bancshares' Proxy Statement to be used in
connection with the 2002 Annual Meeting of Shareholders, under the heading
"Interest of Management and Others in Certain Transactions", which page are
incorporated herein by reference.

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

a.       1.  Financial Statements

               The following financial statements are included by reference in
                    Part II, Item 8 hereof.
                  Report of Independent Certified Public Accountants.
                  Consolidated Balance Sheets.
                  Consolidated Statements of Income.
                  Consolidated Statements of Changes in Stockholders' Equity.
                  Consolidated Statement of Cash Flows.
                  Notes To Consolidated Financial Statements.

         2. Financial Statement Schedules

                  Financial Statement Schedules are omitted because the required
                  information is either not applicable, not required or is shown
                  in the respective financial statements or in the notes
                  thereto.
<PAGE>

         3. The following Exhibits are files herewith or incorporated by
reference as a part of this Annual Report.

                  2         Purchase and Assumption Agreement, dated as of March
                            12, 2001, among Royal Bank of Pennsylvania, Crusader
                            Holding Corporation, Crusader Savings Bank, F.S.B.
                            and Asset Investment Corporation. (Incorporated by
                            reference to Exhibit 2 to Registrant's Report on
                            Form 8-K, filed with the Commission on March 15,
                            2001.)

                  3(i)      Articles of Incorporation. (Incorporated by
                            reference to Exhibit 3(i) to Registrant's
                            Registration Statement No. 0-26366 on Form S-4.)

                  3(ii)     By-laws. (Incorporated by reference to Exhibit 99 to
                            Registrant's Current Report on Form 8-K, filed with
                            the Commission on March 13, 2001.)

                  10.1      Stock Option and Appreciation Right Plan.
                            (Incorporated by reference to the Registrant's
                            Registration Statement N0. 333-25855, on form S-8
                            filed with the Commission on April 5, 1997).

                  10.2      Outside Directors' Stock Option Plan. (Incorporated
                            by reference to the Registrant's Registration
                            Statement N0. 333-25855, on form S-8 filed with the
                            Commission on April 5, 1997).

                  11.       Statement Re: Computation of Earnings Per Share.
                            Included at Item 8, hereof, Note A, "Per Share
                            Information".

                  12.       Statement re: Computation of Ratios. (Included at
                            Item 8 here of, Note Q, "Regulatory Matters.")

                  21.       Subsidiaries of Registrant.

                  23.       Consent of Independent Accountants.

(b)      No Current Report on Form 8-K was filed by the Registrant during the
         fourth quarter of the fiscal year December 31, 2001.

(c)      The exhibits required to be filed by this Item are listed under Item
         14(a)3 above.

(d)      Not applicable.

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of l934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.



                                       77
<PAGE>


                     ROYAL BANCSHARES OF PENNSYLVANIA, INC.
                     --------------------------------------
<TABLE>
<CAPTION>

                DATE                       TITLE                              SIGNATURE
                ----                       -----                              ---------


<S>                                     <C>                     <C>
March 20, 2002                            Chairman              /s/ Daniel M. Tabas
------------------------------                                  -------------------------------------
                                                                Daniel M. Tabas


March 20, 2002                         President/CEO             /s/ Joseph P. Campbell
------------------------------                                  -------------------------------------
                                          Director              Joseph P. Campbell


March 20, 2002                         Treasurer/CFO            /s/ James J. McSwiggan
------------------------------                                  -------------------------------------
                                                                James J. McSwiggan


March 20, 2002                            Director              /s/ Albert Ominsky
------------------------------                                  -------------------------------------
                                                                Albert Ominsky


March 20, 2002                            Director              /s/ Anthony J. Micale
------------------------------                                  -------------------------------------
                                                                Anthony J. Micale

                                       Vice Chairman/
March 20, 2002                     Senior Vice President/       /s/ Robert R. Tabas
------------------------------            Director              --------------------------------------
                                                                Robert R. Tabas


March 20, 2002                            Director              /s/ Gregory T. Reardon
------------------------------                                  -------------------------------------
                                                                Gregory T. Reardon


March 20, 2002                            Director              /s/ Carl M. Cousins
------------------------------                                  -------------------------------------
                                                                Carl M. Cousins


March 20, 2002                            Director              /s/ Lee E. Tabas
------------------------------                                  -------------------------------------
                                                                Lee E. Tabas


March 20, 2002                            Director              /s/ Howard Wurzak
------------------------------                                  -------------------------------------
                                                                Howard Wurzak


March 20, 2002                     Senior Vice President/       /s/ John M. Decker
------------------------------            Director              -------------------------------------
                                                                John M. Decker


March 20, 2002                     Senior Vice President/       /s/ Murray Stempel
------------------------------            Director              -------------------------------------
                                                                Murray Stempel


March 20, 2002                            Director              /s/ Jack R. Loew
------------------------------                                  -------------------------------------
                                                                Jack R. Loew


March 20, 2002                            Director              /s/ Edward B. Tepper
------------------------------                                  -------------------------------------
                                                                Edward B. Tepper


March 20, 2002                            Director              /s/ Evelyn Rome Tabas
------------------------------                                  -------------------------------------
                                                                Evelyn Rome Tabas
</TABLE>

                                       78
<PAGE>


                     ROYAL BANCSHARES OF PENNSYLVANIA, INC.
                           ANNUAL REPORT ON FORM 10-K
                                  EXHIBIT INDEX

2        Purchase and Assumption Agreement, dated as of March 12, 2001, among
         Royal Bank of Pennsylvania, Crusader Holding Corporation, Crusader
         Savings Bank, F.S.B. and Asset Investment Corporation. (Incorporated by
         reference to Exhibit 2 to Registrant's Report on Form 8-K, filed with
         the Commission on March 15, 2001.)

3(i)     Articles of Incorporation. (Incorporated by reference to Exhibit 3(i)
         to Registrant's Registration Statement No. 0-26366 on Form S-4.)

3(ii)    By-laws. (Incorporated by reference to Exhibit 99 to Registrant's
         Current Report on Form 8-K, filed with the Commission on March 13,
         2001.)

10.1     Stock Option and Appreciation Right Plan. (Incorporated by reference to
         the Registrant's Registration Statement N0. 333-25855, on form S-8
         filed with the Commission on April 5, 1997).

10.2     Outside Directors' Stock Option Plan. (Incorporated by reference to the
         Registrant's Registration Statement N0. 333-25855, on form S-8 filed
         with the Commission on April 5, 1997).

11.      Statement Re: Computation of Earnings Per Share. (Included at Item 8,
         hereof, Note A, "Per Share Information".)

12.      Statements re: Computation of Ratios. (Included at Item 8 here of, Note
         Q, "Regulatory Matters.")

21.      Subsidiaries of Registrant.

23.      Consent of Independent Accountants.