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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D. C. 20549
 
 FORM 10-K
 (Mark One)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2008
 or
 o
    
    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.
  Pennsylvania
    
    23-2812193(State of other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)732 Montgomery Avenue, Narberth, Pennsylvania
    
    19072(Address of principal executive offices)
    
    (Zip Code)
 (610) 668-4700  (Issuers
telephone number, including area code)
    Name of Each Exchange on Which Registered
    
    Title of Each ClassThe NASDAQ Stock Market, LLC
    
    Class A Common Stock ($2.00 par value)
  Name of Each Exchange on Which Registered
    
    Title of Each ClassNone
    
    Class B Common Stock ($0.10 par value)
 o þ
 o þ
 þ o
 þ
  Large accelerated filer o
    
    Accelerated filer
o
    
    Non-accelerated filer
þ
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
   Documents Incorporated by Reference




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TABLE OF CONTENTS  PART IITEM 1. BUSINESSITEM 1A. RISK FACTORSITEM 1B. SEC STAFF COMMENTSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, AND RELATED SECURITY HOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIESITEM 6. SELECTED FINANCIAL DATAITEM 7. MANAGEMENTS DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREITEM 9A(T). CONTROLS AND PROCEDURESPART IIIITEM 10. DIRECTORS, EXECUTIVE OFFICERS OF REGISTRANT AND CORPORATE GOVERNANCEITEM 11. EXECUTIVE COMPENSATIONITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERSITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCEITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICESPART IVITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-KSIGNATURESEX-3(i)EX-3(ii)EX-10.14EX-21EX-23EX-31.1EX-31.2EX-32.1EX-32.2    Table of Contents  Forward Looking Statements
  2




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PART I
 
 ITEM 1. BUSINESS
 Royal Bancshares
   Royal Bank America
     3




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Service Area:
 Competition:
   Employees:
 Deposits:
  4




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Lending:
 Royal Asian Bank
   Service Area:
  Competition:
  Employees:
 Deposits:
 Lending:
  5




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Non-Bank Subsidiaries
      6




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Website Access to Company Reports
  Products and Services with Reputation Risk
  Future Acquisitions
  Concentrations, Seasonality
  8




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Environmental Compliance
  Supervision and Regulation
    Holding Company
      9




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Royal Bank and Royal Asian
     10




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Federal Deposit Insurance Corporation Improvement Act of 1991
 General:
    11




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Real Estate Lending Guidelines:
  Loan Category
    
    LTV limitRaw land
    
    
    65
    %Land development
    
    
    65
    %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
    %
  Truth in Savings Act:
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Gramm-Leach-Bliley Act of 1999
  §
    
    Section 20, which restricted the affiliation of Federal Reserve Member Banks with
firms engaged principally in specified securities activities; and§
    
    Section 32, which restricts officer, director, or employee, interlocks between a
member bank and any company or person primarily engaged in specified securities
activities.
   §
    
    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;§
    
    Provides a uniform framework for the functional regulation of the activities of
banks, savings institutions and their holding companies;§
    
    Broadens the activities that may be conducted by national banks, banking
subsidiaries of bank holding companies, and their financial subsidiaries;§
    
    Provides an enhanced framework for protecting the privacy of consumer information;§
    
    Adopts a number of provisions related to the capitalization, membership, corporate
governance, and other measures designed to modernize the Federal Home Loan Bank system;§
    
    Modifies the laws governing the implementation of the CRA; and§
    
    Addresses a variety of other legal and regulatory issues affecting both day-to-day
operations and long-term activities of financial institutions.
  13




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USA Patriot Act of 2001
  Sarbanes-Oxley Act of 2002
  §
    
    Requirements for audit committees of reporting companies, including independence,
expertise, and responsibilities;§
    
    Certification of financial statements by the chief executive officer and chief
financial officer;§
    
    The forfeiture of bonuses or other incentive-based compensation and profits from the
sale of an issuers securities by directors and senior officers in the twelve month
period following initial publication of any financial statements that later require
restatement;§
    
    Increased disclosure and reporting obligations for the reporting company and their
directors and executive officers, including disclosure requirements of off-balance
sheet transactions;§
    
    A prohibition on personal loans to directors and officers, except certain loans made
by insured financial institutions on non-preferential terms and in compliance with
other bank regulatory requirements;§
    
    Disclosure of a code of ethics and filing a Form 8-K for a change or waiver of such
code;§
    
    The formation of an independent public accounting oversight board;
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§
    
    Standards for auditors and regulation of audits, including independence provisions
that restrict non-audit services that accountants may provide to their audit clients;
and§
    
    Various increased civil and criminal penalties for fraud and other violations of
securities laws.
 Emergency Economic Stabilization Act of 2008
   American Recovery and Reinvestment Act of 2009
   §
    
    Limits on compensation incentives for risks by senior executive officers;§
    
    A requirement for recovery of any compensation paid based on inaccurate financial
information;§
    
    A prohibition on golden parachute payments to specified officers or employees,
which term is generally defined as any payment for departure from a company for any
reason;§
    
    A prohibition on compensation plans that would encourage manipulation of reported
earnings to enhance the compensation of employees;
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§
    
    A prohibition on bonus, retention award, or incentive compensation to designated
employees, except in the form of long-term restricted stock;§
    
    A requirement that the board of directors adopt a luxury expenditures policy;§
    
    A requirement that shareholders be permitted a separate nonbinding vote on executive
compensation;§
    
    A requirement that the chief executive officer and the chief financial officer
provide a written certification of compliance with the standards, when established, to
the SEC.
  Regulation W
  §
    
    To an amount equal to 10% of either Banks capital and surplus, in the case of
covered transactions with any one affiliate; and§
    
    To an amount equal to 20% of either Banks capital and surplus, in the case of
covered transactions with all affiliates.
  §
    
    A loan or extension of credit to an affiliate;§
    
    A purchase of, or an investment in, securities issued by an affiliate;§
    
    A purchase of assets from an affiliate, with some exceptions;§
    
    The acceptance of securities issued by an affiliate as collateral for a loan or
extension of credit to any party; and§
    
    This issuance of a guarantee, acceptance or letter of credit on behalf of an
affiliate.
  §
    
    A bank and its subsidiaries may not purchase a low-quality asset from an affiliate;§
    
    Covered transactions and other specified transactions between a bank or its
subsidiaries and an affiliate must be on terms and conditions that are consistent with
safe and sound banking practices; and
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§
    
    With some exceptions, each loan or extension of credit by a bank to an affiliate
must be secured by collateral with a market value ranging from 100% to 130%, depending
on the type of collateral, of the amount of the loan or extension of credit.
  FDIC Insurance Assessments
       17




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Other Legislation
   Monetary Policy
   Effects of Inflation
  Available Information
 www.royalbankamerica.com.
 18




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ITEM 1A. RISK FACTORS
 An investment in our common stock involves risks. Before making an investment decision, investors
should carefully consider the risks described below in conjunction with the other information in
this report, including our consolidated financial statements and related notes. If any of the
following risks or other risks, which have not been identified or which we may believe are
immaterial or unlikely, actually occurs, our business, financial condition and results of
operations could be harmed. In such a case, the trading price of our common stock could decline,
and investors may lose all or part of their investment.
 Risks Related to Our Business
 Our business is subject to the success of the local economies and real estate markets in which we
operate.
  Our concentration of non-residential real estate and construction loans is subject to unique risks
that could adversely affect our earnings.
  Our ability to pay dividends depends primarily on dividends from our banking subsidiary, which are
subject to regulatory limits.
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Competition from other financial institutions may adversely affect our profitability.
    Our allowance for loan and lease losses may not be adequate to cover actual losses.
  We may suffer losses in our loan portfolio despite our underwriting practices.
  Our future growth may require us to raise additional capital in the future, but that capital may
not be available when it is needed.
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Our ability to manage liquidity is always critical in our operation, but more so today given the
uncertainty within the capital markets.
  Negative publicity could damage our reputation and adversely impact our business and financial
results.
  Risks Related to Our Industry
 Recent legislative and regulatory initiatives to address difficult market and economic conditions
may not stabilize the U.S. banking system.
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Difficult market conditions and economic trends have adversely affected our industry and our
business.
  §
    
    We expect to face increased regulation of our industry. Compliance with such
regulation may increase our costs and limit our ability to pursue business
opportunities.§
    
    Our ability to assess the creditworthiness of customers and to estimate the losses
inherent in our credit exposure is made more complex by these difficult market and
economic conditions.§
    
    We also may be required to pay even higher Federal Deposit Insurance Corporation
premiums than the recently increased level, because financial institution failures
resulting from the depressed market conditions have depleted and may continue to
deplete the deposit insurance fund and reduce its ratio of reserves to insured
deposits.§
    
    Our ability to borrow from other financial institutions or the Federal Home Loan
Bank on favorable terms or at all could be adversely affected by further disruptions in
the capital markets or other events.§
    
    We may experience a prolonged decrease in dividend income from our investment in
Federal Home Loan Bank stock.§
    
    We may experience increases in foreclosures, delinquencies and customer
bankruptcies, as well as more restricted access to funds.§
    
    The unrealized losses in our investment portfolio may increase or be deemed other
than temporary.
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Our business is subject to interest rate risk and variations in interest rates may negatively
affect our financial performance.
 Future governmental regulation and legislation could limit our future growth.
  Changes in consumer use of banks and changes in consumer spending and saving habits could adversely
affect the Companys financial results.
  Acts or threats of terrorism and political or military actions taken by the United States or other
governments could adversely affect general economic or industry conditions.
  Other Risks
 Our directors, executive officers and principal shareholders own a significant portion of our
common stock and can influence shareholder decisions .
  23




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ITEM 1B. SEC STAFF COMMENTS
    
 ITEM 2. PROPERTIES
  15th Street Office
    
    Bala Plaza Office (3)
    
    Bridgeport Office (1)30 South Street
    
    231 St. Asaphs Road
    
    105 W. 4th StreetPhiladelphia, PA 19102
    
    Bala Cynwyd, PA 19004
    
    Bridgeport, PA  19406Castor Office (1)
    
    Fairmont Office (1)
    
    Grant Avenue Office (1)6331 Castor Avenue
    
    401 Fairmont Avenue
    
    1650 Grant AvenuePhiladelphia, PA 19149
    
    Philadelphia, PA  19123
    
    Philadelphia, PA  19115Henderson Road Office
    
    Jenkintown Office (1)
    
    King of Prussia Office (1)Bielder and Henderson Roads
    
    600 Old York Road
    
    Rt. 202 at Wilson RoadKing of Prussia, PA 19406
    
    Jenkintown, PA 19046
    
    King of Prussia, PA  19406Narberth Office (1)
    
    Narberth Training Center (1)(2)
    
    Phoenixville Office (1)732 Montgomery Avenue
    
    814 Montgomery Avenue
    
    808 Valley Forge RoadNarberth, PA 19072
    
    Narberth, PA   19072
    
    Phoenixville, PA  19460Shillington Office
    
    Trooper Office (1)
    
    Turnersville Office516 East Lancaster Avenue
    
    Trooper and Egypt Roads
    
    3501 Black Horse PikeShillington, PA 19607
    
    Trooper, PA  19401
    
    Turnersville, NJ  08012Villanova Office
    
    Walnut Street Office
    
    Storage Facility (1)801 East Lancaster Avenue
    
    1230 Walnut Street
    
    3836 Spring Garden StreetVillanova, PA 19085
    
    Philadelphia, PA 19107
    
    Philadelphia, PA 19104
  Cheltenham Office
    
    Flushing
    
    Fort Lee Office418 Oak Lane
    
    136-52 37th Avenue
    
    1550 Lemoine AvenuePhiladelphia, PA 19126
    
    Flushing, NY 11354
    
    Fort Lee, NJ 07024Northeast Office
    
    Palisades Park
    
    Upper Darby Office6526 Castor Avenue
    
    232 Broad Street
    
    7001 West Chester PikePhiladelphia, PA 19149
    
    Palisades Park, NJ 07650
    
    Upper Darby, PA 19082
 
 (1)
    
    Owned(2)
    
    Used for employee training(3)
    
    Loan production office 24




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ITEM 3. LEGAL PROCEEDINGS
   
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 PART II
 
 ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, AND RELATED SECURITY HOLDER MATTERS, AND ISSUER
PURCHASES OF EQUITY SECURITIES
  Closing Prices2008
    
    High
    
    LowFirst Quarter
    
    $
    15.88
    
    
    $
    9.14Second Quarter
    
    
    15.34
    
    
    
    8.87Third Quarter
    
    
    9.44
    
    
    
    4.81Fourth Quarter
    
    
    6.41
    
    
    
    3.33
 2007
    
    High
    
    LowFirst Quarter
    
    $
    26.79
    
    
    $
    22.92Second Quarter
    
    
    23.93
    
    
    
    19.10Third Quarter
    
    
    24.44
    
    
    
    18.02Fourth Quarter
    
    
    23.61
    
    
    
    10.38
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Title of Class
    
    Number of record holdersClass A Common stock
    
    
    299Class B Common stock
    
    
    147
 Securities Authorized for Issuance Under Equity Compensation Plans
  (a)
    
    (b)
    
    (c)Number of securitiesremaining available forNumber of securities to be
    
    
    
    
    
    future issuance underissued upon exercise of
    
    Weighted-average exercise
    
    equity compensation plansoutstanding options,
    
    price of outstanding
    
    (excluding securitiesOutside Director Stock Option Plan
    
    warrants and rights
    
    options, warrants and rights
    
    reflected in column (a))Equity compensation plan approved by stockholders
    
    
    100,294
    
    
    
    $     18.82
    
    
    
    Equity compensation plan not approved by stockholders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    100,294
    
    
    
    $     18.82
    
    
    
    
 (a)
    
    (b)
    
    (c)Number of securitiesremaining available forNumber of securities to be
    
    
    
    
    
    future issuance underissued upon exercise of
    
    Weighted-average exercise
    
    equity compensation plansoutstanding options,
    
    price of outstanding
    
    (excluding securitiesEmployee Stock Option Plan
    
    warrants and rights
    
    options, warrants and rights
    
    reflected in column (a))Equity compensation plan approved by stockholders
    
    
    799,831
    
    
    
    $     19.72
    
    
    
    Equity compensation plan not approved by stockholders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    799,831
    
    
    
    $     19.72
    
    
    
    
 (a)
    
    (b)
    
    (c)Number of securitiesremaining available forNumber of securities to be
    
    
    
    
    
    future issuance underissued upon exercise of
    
    Weighted-average exercise
    
    equity compensation plansoutstanding options,
    
    price of outstanding
    
    (excluding securitiesLong Term Incentive Plan
    
    warrants and rights
    
    options, warrants and rights
    
    reflected in column (a))Equity compensation plan approved by stockholders
    
    
    191,072
    
    
    
    $     11.45
    
    
    
    808,928Equity compensation plan not approved by stockholders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    191,072
    
    
    
    $     11.45
    
    
    
    808,928
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Dividends
  Stock dividends:
    Cash Dividends:
 Cash Dividends Per Share2008
    
    Class A
    
    Class BFirst Quarter
    
    $
    0.15000
    
    $
0.172500Second Quarter
    
    $
0.15000

    
    $
0.172500Third Quarter
    
    $


    
    $
Fourth Quarter
    
    $


    
    $
    
 Cash Dividends Per Share2007
    
    Class A
    
    Class BFirst Quarter
    
    $
0.28750

    
    $
0.330625Second Quarter
    
    $
0.28750

    
    $
0.330625Third Quarter
    
    $
0.28750

    
    $
0.330625Fourth Quarter
    
    $
0.28750

    
    $
0.330625
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COMMON STOCK PERFORMANCE GRAPH
  §
    
    Royal Bancshares of Pennsylvania, Inc. Class A common stock;§
    
    The stock of all United States companies trading on the NASDAQ Global Market;§
    
    Common stock of 2008 Peer Group consists of seventeen banks headquartered in the
Mid-Atlantic region, trade on the major exchange and have total assets between $750
million and $1.5 billion.§
    
    SNL Bank and Thrift Index
 
 Period EndingIndex
    
    
    12/31/03
    
    
    12/31/04
    
    
    12/31/05
    
    
    12/31/06
    
    
    12/31/07
    
    
    12/31/08Royal Bancshares of Pennsylvania, Inc.
    
    
    
    100.00
    
    
    
    
    114.66
    
    
    
    
    104.60
    
    
    
    
    130.17
    
    
    
    
    57.54
    
    
    
    
    17.89NASDAQ Composite
    
    
    
    100.00
    
    
    
    
    108.59
    
    
    
    
    110.08
    
    
    
    
    120.56
    
    
    
    
    132.39
    
    
    
    
    78.72SNL Bank and Thrift
    
    
    
    100.00
    
    
    
    
    111.98
    
    
    
    
    113.74
    
    
    
    
    132.90
    
    
    
    
    101.34
    
    
    
    
    58.28Royal Bancshares Peer Group*
    
    
    
    100.00
    
    
    
    
    105.40
    
    
    
    
    102.13
    
    
    
    
    111.22
    
    
    
    
    89.65
    
    
    
    
    78.56
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ITEM 6. SELECTED FINANCIAL DATA
  Income Statement Data
    
    For the years ended December 31,(In thousands, except share data)
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004Interest income
    
    $
    72,764
    
    
    $
    86,736
    
    
    $
    93,006
    
    
    $
    76,460
    
    
    $
    67,541Interest expense
    
    
    38,109
    
    
    
    48,873
    
    
    
    46,372
    
    
    
    31,796
    
    
    
    27,301Net interest income
    
    
    34,655
    
    
    
    37,863
    
    
    
    46,634
    
    
    
    44,664
    
    
    
    40,240Provision for loan losses
    
    
    21,841
    
    
    
    13,026
    
    
    
    1,803
    
    
    
    1
    
    
    
    6Net interest income after loan losses
    
    
    12,814
    
    
    
    24,837
    
    
    
    44,831
    
    
    
    44,663
    
    
    
    40,234Gain on sale of premises & equipment
    
    
    1,991
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gain on sale of premises & equipment related
to real estate owned via equity investments
    
    
    1,679
    
    
    
    1,860
    
    
    
    3,036
    
    
    
    16,779
    
    
    
    Income from bank owned life insurance
    
    
    1,233
    
    
    
    875
    
    
    
    847
    
    
    
    845
    
    
    
    966Service charges and fees
    
    
    1,186
    
    
    
    1,348
    
    
    
    1,404
    
    
    
    1,293
    
    
    
    1,496Gains on sales related to real estate joint
ventures
    
    
    1,092
    
    
    
    350
    
    
    
    
    
    
    
    
    
    
    
    Income related to real estate owned
via equity investments
    
    
    965
    
    
    
    1,384
    
    
    
    3,591
    
    
    
    747
    
    
    
    7,133Gains on sale of real estate
    
    
    429
    
    
    
    1,111
    
    
    
    2,129
    
    
    
    2,494
    
    
    
    2,102Gains on sale of loans
    
    
    190
    
    
    
    404
    
    
    
    379
    
    
    
    508
    
    
    
    480Impairment loss on available-for-sale (AFS)
securities
    
    
    (23,388
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (Losses) gains on investment securities
    
    
    (1,313
    )
    
    
    5,358
    
    
    
    383
    
    
    
    227
    
    
    
    810Gain from refinance of assets related to real
estate owned via equity investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,892
    
    
    
    Other income
    
    
    148
    
    
    
    198
    
    
    
    202
    
    
    
    41
    
    
    
    173Total other (loss) income
    
    
    (15,788
    )
    
    
    12,888
    
    
    
    11,971
    
    
    
    24,826
    
    
    
    13,160(Loss) income before other expenses & income taxes
    
    
    (2,974
    )
    
    
    37,725
    
    
    
    56,802
    
    
    
    69,489
    
    
    
    53,394Non-interest expenseSalaries and benefits
    
    
    15,044
    
    
    
    12,215
    
    
    
    13,451
    
    
    
    13,488
    
    
    
    10,767Impairment related to real estate owned via
equity investments
    
    
    1,500
    
    
    
    8,500
    
    
    
    
    
    
    
    
    
    
    
    Expenses related to real estate owned via
equity investments
    
    
    966
    
    
    
    1,590
    
    
    
    1,606
    
    
    
    262
    
    
    
    4,780Impairment related to real estate joint venture
    
    
    
    
    
    
    5,927
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    15,023
    
    
    
    11,800
    
    
    
    9,595
    
    
    
    10,981
    
    
    
    9,345Total operating expenses
    
    
    32,533
    
    
    
    40,032
    
    
    
    24,652
    
    
    
    24,731
    
    
    
    24,892Minority interest
    
    
    (68
    )
    
    
    (1,303
    )
    
    
    567
    
    
    
    68
    
    
    
    555(Loss) income before tax expense (benefit)
    
    
    (35,439
    )
    
    
    (1,004
    )
    
    
    31,583
    
    
    
    44,690
    
    
    
    27,947Income tax expense (benefit)
    
    
    2,643
    
    
    
    (1,568
    )
    
    
    10,015
    
    
    
    12,637
    
    
    
    7,914Net (loss) income
    
    $
    (38,082
    )
    
    $
    564
    
    
    $
    21,568
    
    
    $
    32,053
    
    
    $
    20,033Basic (loss) earnings per share (1)
    
    $
    (2.86
    )
    
    $
    0.04
    
    
    $
    1.60
    
    
    $
    2.39
    
    
    $
    1.50Diluted (loss) earnings per share (1)
    
    $
    (2.86
    )
    
    $
    0.04
    
    
    $
    1.59
    
    
    $
    2.37
    
    
    $
    1.48
 
 (1)
    
    Earnings per share has the weighted average number of shares used in the calculation adjusted
to reflect a 5% stock dividend in December 2006, a 2% stock dividend in December 2005, a 2% stock
dividend in December 2004, and a 2% stock dividend in January 2004.  30




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##### Table of Contents



Balance Sheet Data
    
    For the years ended December 31,(In thousands)
    
    2008
    
    2007
    
    2006
    
    2005
    
    2004Total Assets
    
    
    1,175,586
    
    
    
    1,278,475
    
    
    
    1,356,311
    
    
    
    1,301,019
    
    
    
    1,205,274Total average assets (2)
    
    
    1,189,518
    
    
    
    1,314,361
    
    
    
    1,317,688
    
    
    
    1,258,137
    
    
    
    1,194,008Loans, net
    
    
    671,814
    
    
    
    625,193
    
    
    
    580,759
    
    
    
    539,360
    
    
    
    454,775Total deposits
    
    
    760,068
    
    
    
    770,152
    
    
    
    859,457
    
    
    
    697,409
    
    
    
    742,382Total average deposits
    
    
    724,384
    
    
    
    869,884
    
    
    
    761,267
    
    
    
    699,540
    
    
    
    761,899Total borrowings (1)
    
    
    313,805
    
    
    
    339,251
    
    
    
    301,203
    
    
    
    427,130
    
    
    
    304,023Total average borrowings (1)
    
    
    307,597
    
    
    
    254,757
    
    
    
    377,139
    
    
    
    350,662
    
    
    
    281,747Total stockholders equity
    
    
    79,687
    
    
    
    146,367
    
    
    
    163,254
    
    
    
    155,508
    
    
    
    140,876Total average stockholders equity
    
    
    131,155
    
    
    
    158,695
    
    
    
    158,372
    
    
    
    145,601
    
    
    
    137,622Return on average assets
    
    
    (3.20
    %)
    
    
    0.04
    %
    
    
    1.64
    %
    
    
    2.55
    %
    
    
    1.68
    %Return on average equity
    
    
    (29.04
    %)
    
    
    0.36
    %
    
    
    13.62
    %
    
    
    22.01
    %
    
    
    14.56
    %Average equity to average assets
    
    
    11.03
    %
    
    
    12.07
    %
    
    
    12.10
    %
    
    
    11.57
    %
    
    
    11.53
    %Dividend payout ratio
    
    
    (10.52
    %)
    
    
    2743.40
    %
    
    
    66.10
    %
    
    
    40.10
    %
    
    
    60.90
    %
 
 (1)
    
    Includes obligations through VIE equity investments and subordinated debt.(2)
    
    Includes premises and equipment of VIE. 
 ITEM 7. MANAGEMENTS DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
  Results of Operations
 General:
 Net Loss/Income:
  Impairment losses on investment securities
    
    $23.4 millionProvision for loan and lease losses
    
    $21.8 millionNon-cash charge to establish valuation
allowance for deferred tax asset
    
    $15.5 millionDecreased net interest income
    
    $  3.2 millionPayout of former Presidents contract
    
    $  2.1 million
  31




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##### Table of Contents



Net Interest Income:
    Other:
 Business Segments:
 32




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##### Table of Contents



§
    
    Community Bank segment: At December 31, 2008, the Community Bank had total
assets of $1.0 billion, a decrease of $130.4 million or 11% from $1.2 billion at
December 31, 2007. Total deposits declined $10.1 million or 1% from $770.2 million
at December 31, 2007 to $760.1 million at December 31, 2008. Net interest income
for 2008 was $27.4 million compared to $34.4 million for 2007 representing a $7.0
million, or 20%, decline. The reduction in net interest income is primarily
related to the 400 basis point drop in the prime rate coupled with the increase in
non-performing assets. For 2008, non-interest income was a loss of $19.1 million
compared to non-interest income of $8.5 million for 2007. This loss is mostly
attributed to $23.4 million in impairment charges recorded on the
available-for-sale investment portfolio. In 2008 non-interest expense was $26.1
million, an increase of $4.8 million, or 23%, from $21.3 million in 2007. The
increase is mostly attributed to the $2.1 million payout of the formers Presidents
contract and $1.3 million increase in legal and professional fees. The net loss
for 2008 was $38.3 million compared to net income of $3.6 million.§
    
    Tax Lien segment: At December 31, 2008, the Tax Lien segment had total assets
of $85 million compared to $63.2 million at December 31, 2007 representing an
increase of $21.8 million, or 34%. Net interest income doubled from $2.4 million
in 2007 to $4.8 million in 2008. The provision for losses grew from $150,000 in
2007 to $2.6 million in 2008. The increase in the provision was related to a
specific reserve for a portfolio described under Credit Quality in the
non-accrual loan section. Non-interest income was $560,000 in 2008 compared to $1.1
million in 2007. Non-interest income is derived mostly from the gains on sale of
OREO property. Non-interest expense was $2.0 million for 2008 compared to $1.6
million for 2007. Net income was $781,000 in 2008 compared to $979,000 for 2007.§
    
    Equity Investment segment: At December 31, 2008 the Equity Investment segment
had total assets of $17.4 million compared to $22.7 million at December 31, 2007
representing a decline of $5.3 million, or 23%. Net losses were $351,000 for 2008
compared to net losses of $4.2 million for 2007. The losses reflect impairment
charges resulting from the downturn in the real estate market that continued into
2008.
 Impairment of Investments in Real Estate Joint Ventures:
 Interest Income:
  33




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##### Table of Contents



Interest Expense:
   Net Interest Margin:
  34




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##### Table of Contents



Average Balances
  For the years ended December 31,2008
    
    
    2007
    
    
    2006Average
    
    
    
    
    
    
    Yield /
    
    
    Average
    
    
    
    
    
    
    Yield /
    
    
    Average
    
    
    
    
    
    
    Yield /(Dollars in thousands)
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateAssetsInterest bearing deposits
    
    $
    23,788
    
    
    $
    495
    
    
    
    2.08
    %
    
    $
    35,158
    
    
    $
    1,896
    
    
    
    5.39
    %
    
    $
    7,361
    
    
    $
    377
    
    
    
    5.12
    %Federal funds
    
    
    1,323
    
    
    
    24
    
    
    
    1.81
    %
    
    
    2,900
    
    
    
    147
    
    
    
    5.07
    %
    
    
    844
    
    
    
    43
    
    
    
    5.09
    %Investment securitiesHeld to maturity
    
    
    56,658
    
    
    
    3,241
    
    
    
    5.72
    %
    
    
    205,686
    
    
    
    10,032
    
    
    
    4.88
    %
    
    
    255,448
    
    
    
    11,830
    
    
    
    4.63
    %Available for sale
    
    
    341,982
    
    
    
    19,141
    
    
    
    5.60
    %
    
    
    338,620
    
    
    
    18,143
    
    
    
    5.36
    %
    
    
    323,172
    
    
    
    17,377
    
    
    
    5.38
    %Total investment securities
    
    
    398,640
    
    
    
    22,382
    
    
    
    5.61
    %
    
    
    544,306
    
    
    
    28,175
    
    
    
    5.18
    %
    
    
    578,620
    
    
    
    29,207
    
    
    
    5.05
    %LoansCommercial demand loans
    
    
    395,109
    
    
    
    25,270
    
    
    
    6.40
    %
    
    
    376,002
    
    
    
    31,874
    
    
    
    8.48
    %
    
    
    372,623
    
    
    
    33,889
    
    
    
    9.09
    %Real estate secured
    
    
    256,124
    
    
    
    22,153
    
    
    
    8.65
    %
    
    
    238,929
    
    
    
    22,187
    
    
    
    9.29
    %
    
    
    233,816
    
    
    
    28,158
    
    
    
    12.04
    %Other loans
    
    
    25,528
    
    
    
    2,440
    
    
    
    9.56
    %
    
    
    21,681
    
    
    
    2,457
    
    
    
    11.33
    %
    
    
    12,152
    
    
    
    1,332
    
    
    
    10.96
    %Total loans
    
    
    676,761
    
    
    
    49,863
    
    
    
    7.37
    %
    
    
    636,612
    
    
    
    56,518
    
    
    
    8.88
    %
    
    
    618,591
    
    
    
    63,379
    
    
    
    10.25
    %Total interest earnings assets
    
    
    1,100,512
    
    
    
    72,764
    
    
    
    6.61
    %
    
    
    1,218,976
    
    
    
    86,736
    
    
    
    7.12
    %
    
    
    1,205,416
    
    
    
    93,006
    
    
    
    7.72
    %Non interest earnings assetsCash & due from banks
    
    
    7,552
    
    
    
    
    
    
    
    
    
    
    
    12,369
    
    
    
    
    
    
    
    
    
    
    
    16,559Other assets
    
    
    106,447
    
    
    
    
    
    
    
    
    
    
    
    97,649
    
    
    
    
    
    
    
    
    
    
    
    109,031Allowance for loan loss
    
    
    (23,301
    )
    
    
    
    
    
    
    
    
    
    
    (12,405
    )
    
    
    
    
    
    
    
    
    
    
    (11,066
    )Unearned discount
    
    
    (1,692
    )
    
    
    
    
    
    
    
    
    
    
    (2,228
    )
    
    
    
    
    
    
    
    
    
    
    (2,252
    )Total non-interest earning assets
    
    
    89,006
    
    
    
    
    
    
    
    
    
    
    
    95,385
    
    
    
    
    
    
    
    
    
    
    
    112,272Total assets
    
    $
    1,189,518
    
    
    
    
    
    
    
    
    
    
    $
    1,314,361
    
    
    
    
    
    
    
    
    
    
    $
    1,317,688Liabilities & Shareholders EquityDepositsSavings
    
    $
    15,125
    
    
    $
    76
    
    
    
    0.50
    %
    
    $
    16,461
    
    
    $
    85
    
    
    
    0.52
    %
    
    $
    18,549
    
    
    $
    98
    
    
    
    0.53
    %Now
    
    
    48,414
    
    
    
    894
    
    
    
    1.85
    %
    
    
    52,975
    
    
    
    1,185
    
    
    
    2.24
    %
    
    
    59,472
    
    
    
    1,473
    
    
    
    2.48
    %Money market
    
    
    168,972
    
    
    
    4,947
    
    
    
    2.93
    %
    
    
    199,921
    
    
    
    8,486
    
    
    
    4.24
    %
    
    
    226,920
    
    
    
    7,454
    
    
    
    3.28
    %Time deposits
    
    
    434,662
    
    
    
    19,497
    
    
    
    4.49
    %
    
    
    531,965
    
    
    
    27,384
    
    
    
    5.15
    %
    
    
    393,685
    
    
    
    18,503
    
    
    
    4.70
    %Total interest bearing deposits
    
    
    667,173
    
    
    
    25,414
    
    
    
    3.81
    %
    
    
    801,322
    
    
    
    37,140
    
    
    
    4.63
    %
    
    
    698,626
    
    
    
    27,528
    
    
    
    3.94
    %Federal funds
    
    
    
    
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    Borrowings
    
    
    266,284
    
    
    
    11,008
    
    
    
    4.13
    %
    
    
    205,823
    
    
    
    9,374
    
    
    
    4.55
    %
    
    
    308,236
    
    
    
    14,051
    
    
    
    4.56
    %Obligation through VIE equity investments
    
    
    15,539
    
    
    
    251
    
    
    
    1.62
    %
    
    
    23,160
    
    
    
    623
    
    
    
    2.69
    %
    
    
    43,129
    
    
    
    3,108
    
    
    
    7.21
    %Subordinated debt
    
    
    25,774
    
    
    
    1,436
    
    
    
    5.57
    %
    
    
    25,774
    
    
    
    1,736
    
    
    
    6.74
    %
    
    
    25,774
    
    
    
    1,685
    
    
    
    6.54
    %Total interest bearing liabilities
    
    
    974,770
    
    
    
    38,109
    
    
    
    3.91
    %
    
    
    1,056,079
    
    
    
    48,873
    
    
    
    4.63
    %
    
    
    1,075,765
    
    
    
    46,372
    
    
    
    4.31
    %Non interest bearing deposits
    
    
    57,211
    
    
    
    
    
    
    
    
    
    
    
    68,562
    
    
    
    
    
    
    
    
    
    
    
    62,641Other liabilities
    
    
    26,382
    
    
    
    
    
    
    
    
    
    
    
    31,025
    
    
    
    
    
    
    
    
    
    
    
    20,550Total liabilities
    
    
    1,058,363
    
    
    
    
    
    
    
    
    
    
    
    1,155,666
    
    
    
    
    
    
    
    
    
    
    
    1,158,956Stockholders equity
    
    
    131,155
    
    
    
    
    
    
    
    
    
    
    
    158,695
    
    
    
    
    
    
    
    
    
    
    
    158,732Total liabilities and stockholders equity
    
    $
    1,189,518
    
    
    
    
    
    
    
    
    
    
    $
    1,314,361
    
    
    
    
    
    
    
    
    
    
    $
    1,317,688Net interest income
    
    
    
    
    
    $
    34,655
    
    
    
    
    
    
    
    
    
    
    $
    37,863
    
    
    
    
    
    
    
    
    
    
    $
    46,634Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.15
    %
    
    
    
    
    
    
    
    
    
    
    3.11
    %
    
    
    
    
    
    
    
    
    
    
    3.87
    %
 
 (1)
    
    Non-accrual loans have been included in the appropriate average loan balance category, but
interest on these loans has not been included.(2)
    
    Portions of interest related to obligations through VIE are capitalized on the VIEs books.  35




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##### Table of Contents



2008 versus 2007
    
    
    2007 versus 2006Changes due to:
    
    
    Changes due to:(In thousands)
    
    Volume
    
    
    Rate
    
    
    Total
    
    
    Volume
    
    
    Rate
    
    
    TotalInterest incomeShort term earning assetsInterest bearing deposits in banks
    
    $
    (237
    )
    
    $
    (1,164
    )
    
    $
    (1,401
    )
    
    $
    1,504
    
    
    $
    15
    
    
    $
    1,519Federal funds sold
    
    
    (28
    )
    
    
    (95
    )
    
    
    (123
    )
    
    
    104
    
    
    
    
    
    
    
    104Total short term earning assets
    
    
    (265
    )
    
    
    (1,259
    )
    
    
    (1,524
    )
    
    
    1,608
    
    
    
    15
    
    
    
    1,623Investments securitiesHeld to maturity
    
    
    (8,583
    )
    
    
    1,790
    
    
    
    (6,793
    )
    
    
    (2,256
    )
    
    
    458
    
    
    
    (1,798
    )Available for sale
    
    
    255
    
    
    
    745
    
    
    
    1,000
    
    
    
    814
    
    
    
    (48
    )
    
    
    766Total Investments securities
    
    
    (8,328
    )
    
    
    2,535
    
    
    
    (5,793
    )
    
    
    (1,442
    )
    
    
    410
    
    
    
    (1,032
    )LoansCommercial demand loans
    
    
    1,329
    
    
    
    (6,984
    )
    
    
    (5,655
    )
    
    
    380
    
    
    
    (6,962
    )
    
    
    (6,582
    )Commercial mortgages
    
    
    634
    
    
    
    (2,161
    )
    
    
    (1,527
    )
    
    
    278
    
    
    
    (33
    )
    
    
    245Residential and home equity loans
    
    
    (267
    )
    
    
    (147
    )
    
    
    (414
    )
    
    
    (340
    )
    
    
    (17
    )
    
    
    (357
    )Leases receivables
    
    
    459
    
    
    
    (380
    )
    
    
    79
    
    
    
    892
    
    
    
    256
    
    
    
    1,148Real estate tax liens
    
    
    1,900
    
    
    
    7
    
    
    
    1,907
    
    
    
    649
    
    
    
    557
    
    
    
    1,206Other loans
    
    
    (26
    )
    
    
    (70
    )
    
    
    (96
    )
    
    
    (18
    )
    
    
    (4
    )
    
    
    (22
    )Loan fees
    
    
    (949
    )
    
    
    
    
    
    
    (949
    )
    
    
    (2,499
    )
    
    
    
    
    
    
    (2,499
    )Total loans
    
    
    3,080
    
    
    
    (9,735
    )
    
    
    (6,655
    )
    
    
    (658
    )
    
    
    (6,203
    )
    
    
    (6,861
    )Total increase (decrease) in interest income
    
    $
    (5,513
    )
    
    $
    (8,459
    )
    
    $
    (13,972
    )
    
    $
    (492
    )
    
    $
    (5,778
    )
    
    $
    (6,270
    )Interest expenseDepositsNOW and money market
    
    $
    (1,227
    )
    
    $
    (2,603
    )
    
    $
    (3,830
    )
    
    $
    (842
    )
    
    $
    1,578
    
    
    $
    736Savings
    
    
    (7
    )
    
    
    (2
    )
    
    
    (9
    )
    
    
    (8
    )
    
    
    (5
    )
    
    
    (13
    )Time deposits
    
    
    (4,633
    )
    
    
    (3,254
    )
    
    
    (7,887
    )
    
    
    5,227
    
    
    
    3,662
    
    
    
    8,889Total deposits
    
    
    (5,867
    )
    
    
    (5,859
    )
    
    
    (11,726
    )
    
    
    4,377
    
    
    
    5,235
    
    
    
    9,612BorrowingsBorrowings
    
    
    2,558
    
    
    
    (928
    )
    
    
    1,630
    
    
    
    (4,307
    )
    
    
    (367
    )
    
    
    (4,674
    )Trust preferred
    
    
    
    
    
    
    (296
    )
    
    
    (296
    )
    
    
    
    
    
    
    48
    
    
    
    48Total Borrowings
    
    
    2,558
    
    
    
    (1,224
    )
    
    
    1,334
    
    
    
    (4,307
    )
    
    
    (319
    )
    
    
    (4,626
    )Total increase (decrease) in interest expense
    
    
    (3,309
    )
    
    
    (7,083
    )
    
    
    (10,392
    )
    
    
    70
    
    
    
    4,916
    
    
    
    4,986Total increase (decrease) in net interest income
    
    $
    (2,204
    )
    
    $
    (1,376
    )
    
    $
    (3,580
    )
    
    $
    (562
    )
    
    $
    (10,694
    )
    
    $
    (11,256
    )
 Provision for Possible Loan and Lease Losses
    36




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##### Table of Contents



Non-Interest (Loss) Income
    Non-Interest Expense
  37




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##### Table of Contents



Accounting for Income Tax Expense (Benefit)
     Accounting for Debt and Equity Securities
  Financial Condition
  Cash and Cash Equivalents:
 38




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##### Table of Contents



Investment Securities Held to Maturity (HTM):
 Investment Securities Available for Sale (AFS) :
 Loans :
  Allowance for loan and lease losses:
 39




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##### Table of Contents



40




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##### Table of Contents



For the years ended December 31,(In thousands)
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004Total Loans
    
    $
    700,722
    
    
    $
    644,475
    
    
    $
    602,958
    
    
    $
    549,636
    
    
    $
    467,294Daily average loan balance
    
    $
    676,761
    
    
    $
    636,612
    
    
    $
    618,591
    
    
    $
    510,349
    
    
    $
    471,526Allowance for loan and lease losses:Balance at the beginning of the year
    
    $
    19,282
    
    
    $
    11,455
    
    
    $
    10,276
    
    
    $
    12,519
    
    
    $
    12,426Charge offs by loan type:Single family residential
    
    
    37
    
    
    
    195
    
    
    
    631
    
    
    
    142
    
    
    
    197Single family residential-mezzanine
    
    
    2,220
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Construction and land development
    
    
    3,852
    
    
    
    2,408
    
    
    
    
    
    
    
    
    
    
    
    Construction and land develop-mezzanine
    
    
    1,540
    
    
    
    1,579
    
    
    
    
    
    
    
    
    
    
    
    Real Estate  non-residential
    
    
    1,330
    
    
    
    294
    
    
    
    5
    
    
    
    2,162
    
    
    
    1Real Estate  non-residential-mezzanine
    
    
    1,675
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Leases
    
    
    642
    
    
    
    286
    
    
    
    11
    
    
    
    
    
    
    
    Commercial and industrial
    
    
    1,009
    
    
    
    704
    
    
    
    
    
    
    
    28
    
    
    
    Tax certificates
    
    
    22
    
    
    
    
    
    
    
    25
    
    
    
    1
    
    
    
    6Other
    
    
    
    
    
    
    
    
    
    
    73
    
    
    
    2
    
    
    
    Total charge offs
    
    
    12,327
    
    
    
    5,466
    
    
    
    745
    
    
    
    2,335
    
    
    
    204Recoveries by loan type:Construction and land development
    
    
    
    
    
    
    34
    
    
    
    
    
    
    
    
    
    
    
    Single family residential
    
    
    6
    
    
    
    28
    
    
    
    100
    
    
    
    68
    
    
    
    249Real Estate  non-residential
    
    
    
    
    
    
    4
    
    
    
    14
    
    
    
    7
    
    
    
    1Commercial and industrial
    
    
    106
    
    
    
    201
    
    
    
    2
    
    
    
    12
    
    
    
    37Other
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    4
    
    
    
    4Total recoveries
    
    
    112
    
    
    
    267
    
    
    
    121
    
    
    
    91
    
    
    
    291Net loan (charge offs) recoveries
    
    
    (12,215
    )
    
    
    (5,199
    )
    
    
    (624
    )
    
    
    (2,244
    )
    
    
    87Provision for loan and lease losses
    
    
    21,841
    
    
    
    13,026
    
    
    
    1,803
    
    
    
    1
    
    
    
    6Balance at end of year
    
    $
    28,908
    
    
    $
    19,282
    
    
    $
    11,455
    
    
    $
    10,276
    
    
    $
    12,519Net (charge-offs) recoveries to average loans
    
    
    (1.80
    %)
    
    
    (0.82
    %)
    
    
    (0.10
    %)
    
    
    (0.44
    %)
    
    
    0.02
    %Allowance to total loans at year-end
    
    
    4.13
    %
    
    
    2.99
    %
    
    
    1.90
    %
    
    
    1.87
    %
    
    
    2.68
    %
  41




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##### Table of Contents



As of December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent ofoutstanding
    
    
    
    
    
    
    outstanding
    
    
    
    
    
    
    outstanding
    
    
    
    
    
    
    outstanding
    
    
    
    
    
    
    outstandingloans in each
    
    
    
    
    
    
    loans in each
    
    
    
    
    
    
    loans in each
    
    
    
    
    
    
    loans in each
    
    
    
    
    
    
    loans in eachReserve
    
    
    category to
    
    
    Reserve
    
    
    category to
    
    
    Reserve
    
    
    category to
    
    
    Reserve
    
    
    category to
    
    
    Reserve
    
    
    category to(In thousands, except percentages)
    
    Amount
    
    
    total loans
    
    
    Amount
    
    
    total loans
    
    
    Amount
    
    
    total loans
    
    
    Amount
    
    
    total loans
    
    
    Amount
    
    
    total loansCommercial and industrial
    
    $
    2,403
    
    
    
    12.3
    %
    
    $
    2,124
    
    
    
    12.0
    %
    
    $
    559
    
    
    
    7.0
    %
    
    $
    494
    
    
    
    5.0
    %
    
    $
    964
    
    
    
    8.0
    %Construction
    
    
    11,548
    
    
    
    23.8
    %
    
    
    7,674
    
    
    
    14.4
    %
    
    
    4,117
    
    
    
    29.0
    %
    
    
    3,230
    
    
    
    31.0
    %
    
    
    1,699
    
    
    
    23.0
    %Land development (1)
    
    
    2,359
    
    
    
    10.6
    %
    
    
    
    
    
    
    12.2
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Construction and land development 
mezzanine
    
    
    1,415
    
    
    
    0.3
    %
    
    
    2,493
    
    
    
    1.0
    %
    
    
    409
    
    
    
    1.0
    %
    
    
    167
    
    
    
    1.0
    %
    
    
    19
    
    
    
    0.0
    %Single family residential
    
    
    747
    
    
    
    3.9
    %
    
    
    1,014
    
    
    
    6.5
    %
    
    
    845
    
    
    
    7.0
    %
    
    
    925
    
    
    
    8.0
    %
    
    
    1,163
    
    
    
    10.0
    %Real Estate  non-residential
    
    
    5,172
    
    
    
    33.4
    %
    
    
    4,746
    
    
    
    40.5
    %
    
    
    4,941
    
    
    
    46.0
    %
    
    
    4,758
    
    
    
    41.0
    %
    
    
    6,761
    
    
    
    46.0
    %Real Estate  non-residential 
mezzanine
    
    
    1,188
    
    
    
    0.6
    %
    
    
    204
    
    
    
    1.4
    %
    
    
    224
    
    
    
    1.0
    %
    
    
    374
    
    
    
    1.0
    %
    
    
    351
    
    
    
    2.0
    %Real Estate  multi-family
    
    
    133
    
    
    
    2.0
    %
    
    
    59
    
    
    
    1.1
    %
    
    
    36
    
    
    
    1.0
    %
    
    
    145
    
    
    
    4.0
    %
    
    
    99
    
    
    
    3.0
    %Real Estate  multi-family  mezzanine
    
    
    
    
    
    
    0.0
    %
    
    
    6
    
    
    
    0.5
    %
    
    
    20
    
    
    
    1.0
    %
    
    
    132
    
    
    
    1.0
    %
    
    
    
    
    
    
    0.0
    %Tax certificates
    
    
    2,735
    
    
    
    9.1
    %
    
    
    185
    
    
    
    7.1
    %
    
    
    
    
    
    
    5.0
    %
    
    
    
    
    
    
    6.0
    %
    
    
    
    
    
    
    7.0
    %Lease financing
    
    
    1,183
    
    
    
    3.7
    %
    
    
    763
    
    
    
    3.1
    %
    
    
    293
    
    
    
    2.0
    %
    
    
    75
    
    
    
    1.0
    %
    
    
    
    
    
    
    0.0
    %Other
    
    
    15
    
    
    
    0.2
    %
    
    
    14
    
    
    
    0.2
    %
    
    
    11
    
    
    
    0.0
    %
    
    
    41
    
    
    
    1.0
    %
    
    
    63
    
    
    
    1.0
    %Unallocated
    
    
    10
    
    
    
    0.0
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (65
    )
    
    
    
    
    
    
    1,400
    
    
    
    Total
    
    $
    28,908
    
    
    
    100.0
    %
    
    $
    19,282
    
    
    
    100.0
    %
    
    $
    11,455
    
    
    
    100.0
    %
    
    $
    10,276
    
    
    
    100.0
    %
    
    $
    12,519
    
    
    
    100.0
    %
 
 (1)
    
    Beginning in 2008, the Company began segregating land development loans from the rest of the
loan portfolio.    42




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##### Table of Contents



Deposits:
 43




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##### Table of Contents



FHLB Borrowings:
 Other Borrowings:
 Other Liabilities:
 Stockholders Equity :
 Asset Liability Management
  Liquidity:
   44




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##### Table of Contents



Contractual Obligations and Other Commitments:
 For the year ended December 31, 2008Less than one
    
    
    one to three
    
    
    four to five
    
    
    More than five(In thousands)
    
    Total
    
    
    year
    
    
    years
    
    
    years
    
    
    yearsFHLB advances
    
    $
    230,569
    
    
    $
    37,000
    
    
    $
    92,500
    
    
    $
    101,069
    
    
    $
    Operating leases
    
    
    2,737
    
    
    
    1,079
    
    
    
    1,272
    
    
    
    386
    
    
    
    PNC Bank
    
    
    45,112
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,112Benefit obligations
    
    
    7,306
    
    
    
    57
    
    
    
    1,014
    
    
    
    1,262
    
    
    
    4,973Commitments to extend credit
    
    
    1,840
    
    
    
    1,840
    
    
    
    
    
    
    
    
    
    
    
    Standby letters of credit
    
    
    4,563
    
    
    
    4,563
    
    
    
    
    
    
    
    
    
    
    
    Subordinated debt
    
    
    25,774
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,774Non-interest bearing deposits
    
    
    50,886
    
    
    
    50,886
    
    
    
    
    
    
    
    
    
    
    
    Interest bearing deposits
    
    
    209,040
    
    
    
    90,642
    
    
    
    118,398
    
    
    
    
    
    
    
    Time deposits
    
    
    500,142
    
    
    
    257,004
    
    
    
    226,013
    
    
    
    12,655
    
    
    
    4,470Total
    
    $
    1,077,969
    
    
    $
    443,071
    
    
    $
    439,197
    
    
    $
    115,372
    
    
    $
    80,329
 Interest-Rate Sensitivity:
   Interest Rate Swaps:
 45




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##### Table of Contents



Interest Rate Sensitivity  (In millions)
 For the year ended December 31, 200891  365
    
    One to five
    
    Over five
    
    Non-rate(In millions)
    
    0  90 days
    
    days
    
    years
    
    years
    
    sensitive
    
    TotalAssets (1)Interest-bearing deposits in banks
    
    $
    7.4
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    5.9
    
    
    $
    13.3Federal funds sold
    
    
    1.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.0Investment securities
    
    
    111.0
    
    
    
    85.9
    
    
    
    130.3
    
    
    
    56.6
    
    
    
    (33.5
    )
    
    
    350.3Loans: (2)Fixed rate
    
    
    26.3
    
    
    
    56.3
    
    
    
    181.1
    
    
    
    17.4
    
    
    
    
    
    
    
    281.1Variable rate
    
    
    300.3
    
    
    
    73.2
    
    
    
    36.4
    
    
    
    10.0
    
    
    
    (28.9
    )
    
    
    391.0Total loans
    
    
    326.6
    
    
    
    129.5
    
    
    
    217.5
    
    
    
    27.4
    
    
    
    (28.9
    )
    
    
    672.1Other assets (3)
    
    
    11.0
    
    
    
    30.0
    
    
    
    
    
    
    
    
    
    
    
    97.9
    
    
    
    138.9Total Assets
    
    $
    457.0
    
    
    $
    245.4
    
    
    $
    347.8
    
    
    $
    84.0
    
    
    $
    41.4
    
    
    $
    1,175.6Liabilities & CapitalDeposits:Non interest bearing deposits
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    50.9
    
    
    $
    50.9Interest bearing deposits
    
    
    22.1
    
    
    
    68.6
    
    
    
    118.4
    
    
    
    
    
    
    
    
    
    
    
    209.1Certificate of deposits
    
    
    42.5
    
    
    
    214.5
    
    
    
    238.7
    
    
    
    4.4
    
    
    
    
    
    
    
    500.1Total deposits
    
    
    64.6
    
    
    
    283.1
    
    
    
    357.1
    
    
    
    4.4
    
    
    
    50.9
    
    
    
    760.1Borrowings (1)
    
    
    81.5
    
    
    
    19.5
    
    
    
    187.5
    
    
    
    12.9
    
    
    
    12.4
    
    
    
    313.8Other liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22.0
    
    
    
    22.0Capital
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    79.7
    
    
    
    79.7Total liabilities & capital
    
    $
    146.1
    
    
    $
    302.6
    
    
    $
    544.6
    
    
    $
    17.3
    
    
    $
    165.0
    
    
    $
    1,175.6Net interest rate GAP
    
    $
    310.9
    
    
    $
    (57.2
    )
    
    $
    (196.8
    )
    
    $
    66.7
    
    
    $
    (123.6
    )Cumulative interest rate GAP
    
    $
    310.9
    
    
    $
    253.7
    
    
    $
    56.9
    
    
    $
    123.6GAP to total assets
    
    
    26
    %
    
    
    (5
    %)GAP to total equity
    
    
    390
    %
    
    
    (72
    %)Cumulative GAP to total assets
    
    
    26
    %
    
    
    22
    %Cumulative GAP to total equity
    
    
    390
    %
    
    
    318
    %
 46




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##### Table of Contents



(1)
    
    Interest earning assets are included in the period in which the balances are 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 non-performing loans.(3)
    
    Includes FHLB stock.  Capital Adequacy
  For the years ended December 31,Regulatory2008
    
    2007
    
    2006
    
    MinimumCapital levelLeverage ratio
    
    
    10.3
    %
    
    
    13.6
    %
    
    
    14.9
    %
    
    
    3.0
    %Risk based capital ratio:Tier 1
    
    
    11.8
    %
    
    
    17.0
    %
    
    
    19.2
    %
    
    
    4.0
    %Total
    
    
    13.0
    %
    
    
    18.3
    %
    
    
    20.4
    %
    
    
    8.0
    %Capital performanceReturn on average assets
    
    
    (3.20
    %)
    
    
    0.04
    %
    
    
    1.60
    %Return on average equity
    
    
    (29.04
    %)
    
    
    0.36
    %
    
    
    13.60
    %
    47




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##### Table of Contents



Management Options to Purchase Securities
     48




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##### Table of Contents



Loans
  As of December 31,(Dollars in thousands)
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004Commercial and industrial
    
    $
    86,278
    
    
    
    12.3
    %
    
    $
    77,856
    
    
    
    12.1
    %
    
    $
    43,019
    
    
    
    7.2
    %
    
    $
    30,075
    
    
    
    5.5
    %
    
    $
    37,468
    
    
    
    8.0
    %Construction
    
    
    167,204
    
    
    
    23.8
    %
    
    
    92,779
    
    
    
    14.4
    %
    
    
    172,745
    
    
    
    29.1
    %
    
    
    173,757
    
    
    
    31.5
    %
    
    
    108,749
    
    
    
    23.1
    %Construction and land development 
mezzanine
    
    
    2,421
    
    
    
    0.3
    %
    
    
    6,443
    
    
    
    1.0
    %
    
    
    5,177
    
    
    
    0.9
    %
    
    
    3,345
    
    
    
    0.6
    %
    
    
    380
    
    
    
    0.1
    %Land development (1)
    
    
    74,168
    
    
    
    10.6
    %
    
    
    78,874
    
    
    
    12.2
    %
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0
    %
    
    
    
    
    
    
    0
    %Single family residential
    
    
    27,480
    
    
    
    3.9
    %
    
    
    42,286
    
    
    
    6.5
    %
    
    
    43,338
    
    
    
    7.3
    %
    
    
    41,900
    
    
    
    7.6
    %
    
    
    48,020
    
    
    
    10.2
    %Real Estate  non-residential
    
    
    234,573
    
    
    
    33.4
    %
    
    
    261,350
    
    
    
    40.5
    %
    
    
    268,162
    
    
    
    45.2
    %
    
    
    228,222
    
    
    
    41.4
    %
    
    
    216,396
    
    
    
    45.9
    %Real Estate  non-residential 
mezzanine
    
    
    4,111
    
    
    
    0.6
    %
    
    
    8,749
    
    
    
    1.4
    %
    
    
    8,283
    
    
    
    1.4
    %
    
    
    7,477
    
    
    
    1.4
    %
    
    
    7,028
    
    
    
    1.5
    %Real Estate  multi-family
    
    
    14,059
    
    
    
    2.0
    %
    
    
    6,887
    
    
    
    1.1
    %
    
    
    3,953
    
    
    
    0.7
    %
    
    
    22,158
    
    
    
    4.0
    %
    
    
    15,256
    
    
    
    3.2
    %Real Estate  1-4 family  mezzanine
    
    
    335
    
    
    
    0.0
    %
    
    
    3,504
    
    
    
    0.5
    %
    
    
    2,129
    
    
    
    0.4
    %
    
    
    2,646
    
    
    
    0.5
    %
    
    
    
    
    
    
    0.0
    %Tax certificates
    
    
    64,168
    
    
    
    9.1
    %
    
    
    46,090
    
    
    
    7.1
    %
    
    
    32,235
    
    
    
    5.4
    %
    
    
    35,548
    
    
    
    6.4
    %
    
    
    34,419
    
    
    
    7.3
    %Lease financing
    
    
    26,123
    
    
    
    3.7
    %
    
    
    19,778
    
    
    
    3.1
    %
    
    
    13,404
    
    
    
    2.3
    %
    
    
    2,623
    
    
    
    0.5
    %
    
    
    
    
    
    
    0.0
    %Other
    
    
    1,243
    
    
    
    0.2
    %
    
    
    1,424
    
    
    
    0.2
    %
    
    
    1,333
    
    
    
    0.2
    %
    
    
    3,868
    
    
    
    0.7
    %
    
    
    3,322
    
    
    
    0.7
    %Total gross loans
    
    $
    702,163
    
    
    
    100
    %
    
    $
    646,020
    
    
    
    100
    %
    
    $
    593,778
    
    
    
    100
    %
    
    $
    551,619
    
    
    
    100
    %
    
    $
    471,038
    
    
    
    100
    %Unearned income
    
    
    (1,441
    )
    
    
    
    
    
    
    (1,545
    )
    
    
    
    
    
    
    (1,564
    )
    
    
    
    
    
    
    (1,983
    )
    
    
    
    
    
    
    (1,540
    )$
    700,722
    
    
    
    
    
    
    $
    644,475
    
    
    
    
    
    
    $
    592,214
    
    
    
    
    
    
    $
    549,636
    
    
    
    
    
    
    $
    469,498Allowance for loan loss
    
    
    (28,908
    )
    
    
    
    
    
    
    (19,282
    )
    
    
    
    
    
    
    (11,455
    )
    
    
    
    
    
    
    (10,276
    )
    
    
    
    
    
    
    (12,519
    )Total net loans
    
    $
    671,814
    
    
    
    
    
    
    $
    625,193
    
    
    
    
    
    
    $
    580,759
    
    
    
    
    
    
    $
    539,360
    
    
    
    
    
    
    $
    456,979
 
 (1)
    
    Land development balances were segregated only from construction and land development for
2008 and 2007. Credit Quality
  For the years ended December 31,(Dollars in thousands)
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004Non-accrual loans (1)
    
    $
    85,830
    
    
    $
    25,401
    
    
    $
    6,748
    
    
    $
    4,371
    
    
    $
    4,526Other real estate owned
    
    
    10,346
    
    
    
    1,048
    
    
    
    924
    
    
    
    3,834
    
    
    
    5,424Total non-performing assets
    
    $
    96,176
    
    
    $
    26,449
    
    
    $
    7,672
    
    
    $
    8,205
    
    
    $
    9,950Non-performing assets to total assets
    
    
    8.18
    %
    
    
    2.07
    %
    
    
    0.57
    %
    
    
    0.63
    %
    
    
    0.83
    %Non-performing loans to total loans
    
    
    12.25
    %
    
    
    3.94
    %
    
    
    1.14
    %
    
    
    0.79
    %
    
    
    0.96
    %Allowance for loan loss to non-accrual loans
    
    
    33.68
    %
    
    
    75.91
    %
    
    
    169.75
    %
    
    
    235.09
    %
    
    
    276.54
    %Total Loans
    
    
    700,722
    
    
    
    644,475
    
    
    
    592,214Total Assets
    
    
    1,175,586
    
    
    
    1,278,475
    
    
    
    1,356,311Allowance for loan and lease losses
    
    
    28,908
    
    
    
    19,282
    
    
    
    11,455ALL / Loans & Leases (MD & A)
    
    
    4.13
    %
    
    
    2.99
    %
    
    
    1.93
    %
 
 (1)
    
    Generally, a loan is placed in non-accrual 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. 49




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##### Table of Contents



First Quarter 2008 new non-accrual loans:
 §
    
    One loan of RBA Capital in the amount of $2.8 million was related to one borrower
extending loans to third-party buyers of new construction single family residences. During
the first quarter of 2008, the borrower failed to meet certain loan covenants and terms and
the loan was classified as impaired. RBA Capital has commenced foreclosure on this loan.
The collateral for this loan collateral is mostly single family housing as well as some
lots for single family housing, secured by the assigned mortgages. An evaluation of the
fair market value of the real estate based on appraisals and other independent information
obtained during the first quarter of 2008 resulted in a specific reserve of $545,000. In
the fourth quarter, $545,000 was charged off and the outstanding balance was reduced to
$2.2 million.§
    
    Various small ticket leases in the aggregate amount of $759,000 became 90 days
delinquent during the first quarter. Following an evaluation of the lessees ability to
pay and the estimation of the fair market value of the leased property, a specific reserve
of $120,000 was established during the first quarter of 2008. At the end of the fourth
quarter there were small ticket leases in the aggregate amount of $711,000 resulting in an
increase in the impairment resulting in a specific reserve of $113,000. The Company had
lease charge-offs of $642,000 during 2008.§
    
    During April 2008 a borrower on a non-residential real estate loan of $1.4 million and a
non-residential real estate mezzanine loan of $430,000 in Chesapeake Beach, Maryland
notified the Company that they could not continue making loan payments. New appraisals
received in April resulted in the loans being classified as impaired and a specific reserve
in the amount of $1.4 million was established during the first quarter. During the fourth
quarter $1.4 million was charged off. A foreclosure sale is anticipated to occur in March
of 2009. The borrower also had related loans in King George, Virginia of $923,000 for a
non-residential real estate loan, $485,000 for a residential construction loan and $246,000
for a non-residential mezzanine loan. New appraisals for these loans received in April
resulted in the loans being classified as impaired and a specific reserve of $411,000 was
established during the first quarter. During the fourth quarter $411,000 was charged off.
The Company took possession of the property and transferred it to other real estate owned
during the fourth quarter as a result of foreclosure proceedings.§
    
    A new appraisal for a $2.0 million residential construction loan in Philadelphia,
Pennsylvania the Company had previously identified as a potential problem loan was received
during April 2008. Based on an evaluation of this appraisal, the Company classified the
loan as impaired during the first quarter 2008 and established a specific reserve for loan
loss of $229,000, which was increased to $355,000 during the fourth quarter. The Company is
currently pursuing the possibility of a new forbearance agreement.§
    
    New appraisals for two residential construction loans in the aggregate amount of $1.9
million (originally $2.9 million) in Wildwood, New Jersey were received on April 24, 2008.
These loans were previously identified as potential problem loans. Based on an evaluation
of these appraisals, the Company classified these loans as impaired during the first
quarter and established a specific reserves for loan loss in the aggregate amount of
$365,000, which was increased to $464,000 in the fourth quarter. The current forbearance
agreement has been extended until May of 2009.§
    
    A borrower on $1.0 million residential construction mezzanine loan in northern New
Jersey notified the Company that the sale of real estate not associated with this loan
would be used repay it. The closing of the sale was scheduled for April 2008 but did not
take place. The Company established a specific reserve of $298,000 in the first quarter of
2008 based upon current market data and an existing out of date appraisal. The
 50




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##### Table of Contents



loan is secured by a mortgage in a second lien position, subordinate to a senior loan from a
third party lender in the amount of $8.5 million. A new appraisal for the collateral for
this loan was received by the Company during the second quarter of 2008 resulting in an
increase to the specific reserve to $1.0 million. This loan was charged-off in the third
quarter of 2008.§
    
    Two loans in the aggregate amount of $4.7 million for a residential construction project
in Las Vegas, Nevada, are loan participations in larger loans in the aggregate amount of
$34.1 million, and were to be repaid from a $38 million sale of the property. The buyer
withdrew from the agreement of sale during March 2008. The Company classified these loans
as impaired during the first quarter of 2008 and established a specific reserve of $1.0
million for these loans. During the fourth quarter the impairment was increased to $2.9
million and foreclosure is dependent upon the agreement of all five banks that have
participated in this loan.
 Second Quarter 2008 new non-accrual loans:
 §
    
    A $5.8 million land development loan ($6.5 million originally) in Purcellville, Virginia
that is participated with another bank, consists of 834 acres of land subdivided into 50
lots for single family detached development, a 147 acre parcel, two open space parcels and
one small house. Based upon the delay in the developers re-subdivision plan, a zoning
issue and the weak housing market, the Company has classified this loan participation as
impaired during the second quarter of 2008 and has established a specific reserve for loan
loss of $2.3 million based upon the current estimated sales prices less estimated expenses.
During the fourth quarter, the Company charged-off the specific reserve of $2.3 million.
In February 2009 the collateral was taken back at a foreclosure sale. The participating
banks are discussing at strategy for moving forward with disposition of the collateral.§
    
    A land development loan amounting to $3.8 million in Lehigh County, Pennsylvania,
consists of 113 lots under agreement to a national home builder. 20 lots have been sold
with 93 remaining and the builder has been selling 1.5 lots per month. A new appraisal was
ordered in June of 2008 and the loan has been classified as impaired. Based upon the
current estimated sales price less estimated expenses the specific reserve was increased to
$594,000 in the fourth quarter of 2008 from $171,000 in the second quarter. The outstanding
balance was reduced to $3.4 million at December 2008 and reduced another $404,000 in
January of 2009 when additional lots were sold.§
    
    Two loans, one a residential construction loan of $7.0 million and the other a $1.7
million construction mezzanine loan, in Raleigh, North Carolina, for the construction of
the first two buildings of a five building condominium project and certain site
improvements. The project consists of 198 units and to date there have been minimal sales
therefore, during the second quarter of 2008 the Company classified these loans as impaired
and established a specific reserve of $772,000. During the fourth quarter, the Company
transferred the property to other real estate owned as a result of a foreclosure and is
having the borrower move forward with completion of the project under outside supervision.§
    
    A residential construction mezzanine loan in Rochelle Park, New Jersey, amounting to
$2.2 million to finance the borrowers ongoing real estate activities. The Company has a
second lien position on an 80 condominium unit project that consists of 32 units that are
near completion and a second lien on a commercial property in New Jersey. The Company has
filed a complaint against the guarantor and has been requested a six month extension on
this loan, which has not yet been approved pending a review of guarantors intentions. The
Company has classified this loan as impaired during the second quarter of 2008 and had
established a specific reserve for this loan of $428,000 in the third quarter. In the
fourth quarter, the Company charged-off the $2.2 million remaining outstanding balance.§
    
    Two residential construction loans totaling $2.4 million for a single family residence
in suburban Philadelphia, Pennsylvania was classified as impaired in the second quarter of
2008. The loan is secured by a first mortgage and second mortgage lien on the land and the
construction has been completed. During July of 2008 the property was sold and the Company
was repaid in full.§
    
    Two commercial mezzanine loans totaling $3.7 million for a real estate development
project in Jupiter, Florida, for the development of a two acre parcel of commercial
waterfront land with two rental homes, two
 51




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##### Table of Contents



vacant commercial structures and eight boat slips into a concept plan as follows: 40 room
hotel, three waterfront restaurants, 75,000 square feet of retail space and 15,000 square
feet of office space and 109 fractional ownership villas. Based upon the last appraisal and
the projects estimated sales price, the Company classified this loan as impaired during the
second quarter of 2008 and established a specific reserve of $462,000, which was increased
to $1.2 million during the fourth quarter. The Company has begun foreclosure proceedings on
the collateral in Annapolis, Maryland.
 Third Quarter 2008 new non-accrual loans:
 §
    
    Two residential construction participation loans amounting to $3.8 million became
non-accrual in the third quarter. The project is a 161 acre site in Montgomery County,
Pennsylvania and calls for the development of 104 single family homes and 59 townhouses.
The lead bank has requested additional collateral from the borrower. The Company has
classified this loan as impaired and has established a specific reserve for this loan of
$1.4 million. The lead bank and participating banks need to determine whether its possible
to finalize a forbearance agreement or proceed with foreclosure.§
    
    A residential loan of $1.8 million in Villanova, Pennsylvania is collateralized by a
single family residence which was completed and listed for sale.  The Company was exploring
the possibility of a forbearance agreement with the borrower.  Absent an acceptable
forbearance proposal on or before the close of business on October 29, 2008, foreclosure
proceedings will be initiated.  During the fourth quarter, the borrower brought the loan
current and it is back on accrual status.§
    
    A $1.6 million construction loan in Easton, Maryland is collateralized by two commercial
building lots.  Both lots are approved and site improvements have been completed.  The loan
has matured and the borrower has failed to put forth a realistic forbearance proposal.  As
a result, the matter has been referred to outside counsel for the commencement of
foreclosure proceedings.§
    
    Two loans, a $4.8 million construction loan and a $1.3 construction mezzanine loan in
Luzerne County, Pennsylvania, were placed on non-accrual during the third quarter.  The
project is for a 55 rental unit in an age restricted community. The foreclosure sale is
scheduled for April of 2009 and the Company has identified a property management firm to
manage the project once they become mortgagee in possession.§
    
    Two loans, a $5.5 million construction loan and a $335,000 mezzanine loan to acquire
property and obtain site improvements for the eventual development of a 42 unit
condo-hotel. The loan matured during the third quarter and the borrower failed to repay
the loan. During the fourth quarter, the borrower signed a forbearance agreement and
brought the loans current. Consequently, the loans are now performing.
 Fourth Quarter 2008 new non-accrual loans:
 §
    
    A $2.8 million line of credit that was used for the borrowers normal course of
business.  The loan is collateralized by a first mortgage lien position on 3 single family
waterfront lots located in Ocean City, Maryland.  The borrower represented to the Company
that he is neither in a position to make monthly payments, nor to post additional
collateral.  The property was taken back at a foreclosure sale in February 2009 and will be
transferred to other real estate owned.§
    
    A loan in the amount of $6.6 million collateralized by a tax lien portfolio held by the
Companys subsidiary, Crusader Servicing Corporation. This portfolio is comprised of
numerous tax liens, primarily Alabama, and based upon a recent detailed review of the
individual liens within the portfolio an impairment of $2.5 million was established during
the fourth quarter. Management intends to eventually collect on some but not all of the tax
liens and anticipates future charge-offs.§
    
    Construction loan in Townsend, Delaware amounting to $3.5 million for a completed
18-hole golf course and a club house, pool and tennis courts that are currently under
construction. The loan is collateralized by a first insured lien on the property and
discussions with the borrower are on-going for additional collateral to complete the
project. The Company impaired the loan and established a specific reserve of $685,000
during the fourth quarter of 2008.
 52




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##### Table of Contents



§
    
    A participation in a $600 million timeshare hotel project in Las Vegas, Nevada has $7.9
million outstanding with a total commitment of $10 million. The project is a 52 story
hotel with 26 stories completed and capped. As a result of the contraction of timeshare
interval sales, the Company has impaired the loan and established a specific reserve of
$685,000 during the fourth quarter of 2008.§
    
    A loan participation of $10 million in a timeshare receivable line in Orlando, Florida
amounting to $250 million. Sales have recently contracted, although cash flow remains
positive at year end 2008. The Company has impaired the loan and established a specific
reserve of $423,000 during the fourth quarter of 2008.
  Potential Problem Loans
  Non-Accrual Loans:
    
    
    
    
    
    2008 Quarterly Additions12/31/07
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Payments and
    
    
    
    
    
    Transfer to
    
    12/31/08(In thousands)
    
    Balance
    
    First
    
    Second
    
    Third
    
    Fourth
    
    other decreases
    
    Charge-offs
    
    OREO
    
    BalanceConstruction
    
    $
    6,904
    
    
    $
    7,844
    
    
    $
    11,550
    
    
    $
    12,443
    
    
    $
    16,284
    
    
    $
    (5,015
    )
    
    $
    (1,521
    )
    
    $
    (7,004
    )
    
    $
    41,485Land development
    
    
    8,296
    
    
    
    2,279
    
    
    
    10,777
    
    
    
    9,628
    
    
    
    (4,500
    )
    
    
    (10,744
    )
    
    
    (3,450
    )
    
    
    (1,242
    )
    
    
    11,044Construction and land development 
mezzanine
    
    
    2,280
    
    
    
    1,001
    
    
    
    1,294
    
    
    
    
    
    
    
    297
    
    
    
    
    
    
    
    (1,540
    )
    
    
    (911
    )
    
    
    2,421Real Estate-Non-Residential
    
    
    6,342
    
    
    
    
    
    
    
    
    
    
    
    (3,585
    )
    
    
    3,825
    
    
    
    (47
    )
    
    
    (211
    )
    
    
    
    
    
    
    6,324Real Estate-Non-Residential
mezzanine
    
    
    
    
    
    
    676
    
    
    
    4,753
    
    
    
    
    
    
    
    
    
    
    
    (142
    )
    
    
    (1,675
    )
    
    
    
    
    
    
    3,612Commercial & Industrial
    
    
    617
    
    
    
    2,902
    
    
    
    101
    
    
    
    5
    
    
    
    10,098
    
    
    
    (569
    )
    
    
    (1,009
    )
    
    
    
    
    
    
    12,145Residential real estate
    
    
    532
    
    
    
    99
    
    
    
    
    
    
    
    576
    
    
    
    522
    
    
    
    (220
    )
    
    
    (37
    )
    
    
    
    
    
    
    1,472Real Estate  residential 
mezzanine
    
    
    
    
    
    
    
    
    
    
    2,233
    
    
    
    
    
    
    
    
    
    
    
    (13
    )
    
    
    (2,220
    )
    
    
    
    
    
    
    Leasing
    
    
    430
    
    
    
    329
    
    
    
    130
    
    
    
    311
    
    
    
    176
    
    
    
    (23
    )
    
    
    (642
    )
    
    
    
    
    
    
    711Consumer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    (8
    )
    
    
    
    
    
    
    
    
    
    
    Tax Certificates
    
    
    
    
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    6,616
    
    
    
    
    
    
    
    (22
    )
    
    
    
    
    
    
    6,616Total
    
    $
    25,401
    
    
    $
    15,130
    
    
    $
    30,860
    
    
    $
    19,386
    
    
    $
    33,318
    
    
    $
    (16,781
    )
    
    $
    (12,327
    )
    
    $
    (9,157
    )
    
    $
    85,830
    53




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##### Table of Contents



As of December 31,(In thousands)
    
    2008
    
    
    2007Impaired loans with a valuation allowance
    
    $
    69,350
    
    
    $
    22,052Impaired loans without a valuation allowance
    
    
    16,480
    
    
    
    3,349Total impaired loans
    
    $
    85,830
    
    
    $
    25,401Valuation allowance related to impaired loans
    
    $
    12,882
    
    
    $
    4,560
 For the years ended December 31,(In thousands)
    
    2008
    
    2007
    
    2006Average investment in impaired loans
    
    $
    55,134
    
    
    $
    24,741
    
    
    $
    13,500Interest income recognized on impaired loans
    
    $
    302
    
    
    $
    763
    
    
    $
    641Interest income recognized on a cash basis on impaired loans
    
    $
    302
    
    
    $
    763
    
    
    $
    641
       54




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##### Table of Contents



Loans and Lease Financing Receivables
  As of December 31,(In thousands)
    
    2008
    
    
    2007
    
    
    2006Loans secured by real estate:Construction and land development
    
    $
    167,204
    
    
    $
    92,779
    
    
    $
    172,745Construction and land development  mezzanine
    
    
    2,421
    
    
    
    6,443
    
    
    
    5,177Land development
    
    
    74,168
    
    
    
    78,874Secured by 1-4 family residential properties:Revolving, open-end loans secured by 1-4 family residential
properties and extended under lines of credit
    
    
    1,322
    
    
    
    2,094
    
    
    
    4,585All other loans secured by 1-4 family residential properties:Secured by first liens
    
    
    21,607
    
    
    
    32,485
    
    
    
    33,868Secured by junior liens
    
    
    4,551
    
    
    
    7,707
    
    
    
    4,885Secured by multi family (5 or more) residential properties
    
    
    14,059
    
    
    
    6,887
    
    
    
    3,953Secured by multi family (5 or more) res. Properties  mezzanine
    
    
    335
    
    
    
    275
    
    
    
    2,129Secured by non-farm nonresidential properties
    
    
    234,573
    
    
    
    262,550
    
    
    
    268,162Secured by non-farm nonresidential properties  mezzanine
    
    
    4,111
    
    
    
    10,778
    
    
    
    8,283Tax certificates
    
    
    64,168
    
    
    
    46,090
    
    
    
    32,235Commercial and industrial loans
    
    
    86,278
    
    
    
    77,793
    
    
    
    43,019Loans to individuals for household, family, and other personal
expenditures
    
    
    1,031
    
    
    
    1,157
    
    
    
    1,088Obligations of state and political subdivisions in the U.S.
    
    
    47
    
    
    
    63
    
    
    
    78Lease financing receivables (net of unearned income)
    
    
    26,123
    
    
    
    19,778
    
    
    
    13,404All other loans
    
    
    165
    
    
    
    267
    
    
    
    167Less: Net deferred loan fees
    
    
    1,441
    
    
    
    1,545
    
    
    
    1,564Total loans and leases, net of unearned income
    
    $
    700,722
    
    
    $
    644,475
    
    
    $
    592,214
 Credit Classification Process
   
  55




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##### Table of Contents



Investment Securities
  As of December 31, 2008After one year, but
    
    
    After five years, butWithin one year
    
    
    within five years
    
    
    within ten years
    
    
    After ten years
    
    
    Total(In thousands, except percentages)
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    RateMortgage-backed securities
    
    $
    3
    
    
    
    11.00
    %
    
    $
    55,032
    
    
    
    5.38
    %
    
    $
    25
    
    
    
    5.46
    %
    
    $
    
    
    
    
    
    
    
    $
    55,061
    
    
    
    5.38
    %U.S. government agencies
    
    
    48,191
    
    
    
    4.88
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48,191
    
    
    
    4.88
    %Collateralized mortgage obligations
    
    
    20,125
    
    
    
    5.11
    %
    
    
    89,411
    
    
    
    5.39
    %
    
    
    7,379
    
    
    
    4.36
    %
    
    
    
    
    
    
    
    
    
    
    116,915
    
    
    
    5.27
    %Collateralized debt obligations
    
    
    5,807
    
    
    
    5.73
    %
    
    
    20,353
    
    
    
    6.10
    %
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    
    
    
    
    26,160
    
    
    
    6.00
    %Corporate bonds
    
    
    500
    
    
    
    2.34
    %
    
    
    49,498
    
    
    
    5.58
    %
    
    
    1,340
    
    
    
    6.00
    %
    
    
    
    
    
    
    
    
    
    
    51,338
    
    
    
    5.56
    %Trust preferred securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,144
    
    
    
    9.48
    %
    
    
    30,144
    
    
    
    9.48
    %Total AFS debt securities
    
    $
    74,626
    
    
    
    2.90
    %
    
    $
    214,294
    
    
    
    4.60
    %
    
    $
    8,744
    
    
    
    5.90
    %
    
    $
    30,144
    
    
    
    6.10
    %
    
    $
    327,809
    
    
    
    5.20
    %
  As of December 31, 2008Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealized(In thousands)
    
    cost
    
    
    gains
    
    
    losses
    
    
    Fair valueAFS investment securitiesMortgage-backed securities
    
    $
    53,871
    
    
    $
    1,190
    
    
    $
    
    
    
    $
    55,061U.S. government agencies
    
    
    48,109
    
    
    
    82
    
    
    
    
    
    
    
    48,191Preferred and common stock
    
    
    23,907
    
    
    
    8
    
    
    
    (8,911
    )
    
    
    15,004Collateralized mortgage obligations
    
    
    121,559
    
    
    
    1,649
    
    
    
    (6,293
    )
    
    
    116,915Collateralized debt obligations
    
    
    35,000
    
    
    
    
    
    
    
    (8,840
    )
    
    
    26,160Corporate bonds
    
    
    57,445
    
    
    
    641
    
    
    
    (6,748
    )
    
    
    51,338Trust preferred securities
    
    
    36,316
    
    
    
    606
    
    
    
    (6,778
    )
    
    
    30,144Other securities
    
    
    7,631
    
    
    
    54
    
    
    
    (196
    )
    
    
    7,489Total AFS investment securities
    
    $
    383,838
    
    
    $
    4,230
    
    
    $
    (37,766
    )
    
    $
    350,302
 56




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##### Table of Contents



As of December 31, 2007Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    
    
    
    
    Carrying(In thousands)
    
    cost
    
    
    gains
    
    
    losses
    
    
    Fair value
    
    
    valueHTM investment securitiesMortgage-backed securities
    
    $
    105
    
    
    $
    
    
    
    $
    
    
    
    $
    105
    
    
    $
    105U.S. government agencies
    
    
    80,000
    
    
    
    13
    
    
    
    (234
    )
    
    
    79,779
    
    
    
    80,000Collateralized debt obligations
    
    
    60,000
    
    
    
    1,200
    
    
    
    (740
    )
    
    
    60,460
    
    
    
    60,000Other debt securities
    
    
    2,800
    
    
    
    312
    
    
    
    
    
    
    
    3,112
    
    
    
    2,800Total HTM investment securities
    
    $
    142,905
    
    
    $
    1,525
    
    
    $
    (974
    )
    
    $
    143,456
    
    
    $
    142,905AFS investment securitiesMortgage-backed securities
    
    $
    33,090
    
    
    $
    383
    
    
    $
    (187
    )
    
    $
    33,285
    
    
    $
    33,285U.S. government agencies
    
    
    104,982
    
    
    
    51
    
    
    
    (153
    )
    
    
    104,880
    
    
    
    104,880Preferred and common stock
    
    
    20,696
    
    
    
    17
    
    
    
    (821
    )
    
    
    19,892
    
    
    
    19,892Collateralized mortgage obligations
    
    
    82,316
    
    
    
    965
    
    
    
    (155
    )
    
    
    83,126
    
    
    
    83,126Corporate bonds
    
    
    86,205
    
    
    
    464
    
    
    
    (1,241
    )
    
    
    85,428
    
    
    
    85,428Trust preferred securities
    
    
    44,118
    
    
    
    2,151
    
    
    
    (2,169
    )
    
    
    44,100
    
    
    
    44,100Other securities
    
    
    4,557
    
    
    
    60
    
    
    
    
    
    
    
    4,617
    
    
    
    4,617Total AFS investment securities
    
    $
    375,964
    
    
    $
    4,091
    
    
    $
    (4,726
    )
    
    $
    375,328
    
    
    $
    375,328
  57




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##### Table of Contents



As of December 31, 2006Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    
    
    
    
    Carrying(In thousands)
    
    cost
    
    
    gains
    
    
    losses
    
    
    Fair value
    
    
    valueHTM investment securitiesMortgage-backed securities
    
    $
    129
    
    
    $
    
    
    
    $
    
    
    
    $
    129
    
    
    $
    129U.S. government agencies
    
    
    195,000
    
    
    
    
    
    
    
    (2,820
    )
    
    
    192,180
    
    
    
    195,000Other debt securities
    
    
    60,300
    
    
    
    2,065
    
    
    
    (425
    )
    
    
    61,940
    
    
    
    60,300Total HTM investment securities
    
    $
    255,429
    
    
    $
    2,065
    
    
    $
    (3,245
    )
    
    $
    254,249
    
    
    $
    255,429Investment securities available-for-saleMortgage-backed securities
    
    $
    27,630
    
    
    $
    
    
    
    $
    (709
    )
    
    $
    26,921
    
    
    $
    26,921U.S. government agencies
    
    
    104,980
    
    
    
    
    
    
    
    (3,408
    )
    
    
    101,572
    
    
    
    101,572Preferred and common stock
    
    
    15,961
    
    
    
    1,703
    
    
    
    (62
    )
    
    
    17,602
    
    
    
    17,602Collateralized mortgage obligations
    
    
    20,071
    
    
    
    10
    
    
    
    (295
    )
    
    
    19,786
    
    
    
    19,786Corporate bonds
    
    
    81,247
    
    
    
    174
    
    
    
    (382
    )
    
    
    81,039
    
    
    
    81,039Trust preferred securities
    
    
    38,657
    
    
    
    2,828
    
    
    
    
    
    
    
    41,485
    
    
    
    41,485Other securities
    
    
    13,135
    
    
    
    496
    
    
    
    
    
    
    
    13,631
    
    
    
    13,631Total AFS investment securities
    
    $
    301,681
    
    
    $
    5,211
    
    
    $
    (4,856
    )
    
    $
    302,036
    
    
    $
    302,036
    58




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##### Table of Contents



Deposits
  As of December 31,2008
    
    
    2007
    
    
    2006Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    Average(In thousands, except percentages)
    
    Balance
    
    
    Rate
    
    
    Balance
    
    
    Rate
    
    
    Balance
    
    
    RateDemand depositsNon interest bearing
    
    $
    57,211
    
    
    
    
    
    
    $
    68,562
    
    
    
    
    
    
    $
    62,641
    
    
    
    Interest bearing (NOW)
    
    
    48,414
    
    
    
    1.85
    %
    
    
    52,975
    
    
    
    2.24
    %
    
    
    59,472
    
    
    
    2.48
    %Money market deposits
    
    
    168,972
    
    
    
    2.93
    %
    
    
    199,921
    
    
    
    4.24
    %
    
    
    226,920
    
    
    
    3.28
    %Savings deposits
    
    
    15,125
    
    
    
    0.50
    %
    
    
    16,461
    
    
    
    0.52
    %
    
    
    18,549
    
    
    
    0.53
    %Certificate of deposit
    
    
    434,662
    
    
    
    4.49
    %
    
    
    531,965
    
    
    
    5.15
    %
    
    
    393,685
    
    
    
    4.70
    %Total deposits
    
    $
    724,384
    
    
    
    
    
    
    $
    869,884
    
    
    
    
    
    
    $
    761,267
  As of December 31,2008
    
    
    2007Three months or less
    
    $
    12,575
    
    
    $
    48,139Over three months through twelve months
    
    
    123,555
    
    
    
    98,630Over twelve months through five years
    
    
    188,068
    
    
    
    117,787Over five years
    
    
    1,760
    
    
    
    694Total
    
    $
    325,958
    
    
    $
    265,250
 Short and Long Term Borrowings
 For the years ended December 31,(In thousands)
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004Short term borrowings
    
    $
    37,000
    
    
    $
    102,000
    
    
    $
    53,000
    
    
    $
    104,500
    
    
    $
    17,500Long term borrowingsOther borrowings
    
    
    45,112
    
    
    
    5,411
    
    
    
    5,587
    
    
    
    
    
    
    
    Obligations through RE owned via equity invest(1)
    
    
    12,350
    
    
    
    18,566
    
    
    
    29,342
    
    
    
    47,356
    
    
    
    56,249Subordinated debt
    
    
    25,774
    
    
    
    25,774
    
    
    
    25,774
    
    
    
    25,774
    
    
    
    25,774FHLB advances
    
    
    193,569
    
    
    
    187,500
    
    
    
    187,500
    
    
    
    249,500
    
    
    
    204,500Total borrowings
    
    $
    313,805
    
    
    $
    339,251
    
    
    $
    301,203
    
    
    $
    427,130
    
    
    $
    304,023
 
 (1)
    
    This obligation is consolidated from requirements under FIN (46) R of which $0 is guaranteed
by the Company.  59




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##### Table of Contents



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
  (In thousands, except percentages)
    
    As of December 31, 2008Market Value of
    
    Percent ofChanges in Rates
    
    Portfolio Equity
    
    Change+ 200 basis points
    
    $
    77,089
    
    
    
    (3.26
    %)+ 100 basis points
    
    
    81,622
    
    
    
    2.43
    %Flat rate
    
    
    79,687
    
    
    
    0.00
    %- 100 basis points
    
    
    77,730
    
    
    
    (2.46
    %)- 200 basis points
    
    
    71,676
    
    
    
    (10.05
    %)
  Critical Accounting Policies, Judgments and Estimates
    60




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##### Table of Contents



Level 1:
    
    Unadjusted quoted prices in active markets that are accessible at the measurement
date for identical, unrestricted assets or liabilities.Level 2:
    
    Quoted prices in markets that are not active, or inputs that are observable either
directly or indirectly, for substantially the full term of the asset or liabilityLevel 3:
    
    Prices or valuation techniques that require inputs that are both significant to the
fair value measurement and unobservable (i.e., supported with little or no market activity).
 -
  RECENT ACCOUNTING PRONOUNCEMENTS
   61




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##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
 December 31, 2008 and 2007
 62




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
      
 63




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
 December 31,2008
    
    
    2007(In thousands, except share data)ASSETSCash and due from banks
    
    $
    5,910
    
    
    $
    8,785Interest bearing deposits
    
    
    7,349
    
    
    
    1,120Federal funds sold
    
    
    1,000
    
    
    
    1,000Total cash and cash equivalents
    
    
    14,259
    
    
    
    10,905Investment securities held to maturity (fair value of
$143,456 in 2007)
    
    
    
    
    
    
    142,905Investment securities available for sale at fair value
    
    
    350,302
    
    
    
    375,328Federal Home Loan Bank stock, at cost
    
    
    10,952
    
    
    
    13,462Total investment securities and FHLB stock
    
    
    361,254
    
    
    
    531,695Leases held for sale
    
    
    267
    
    
    
    Loans and leases
    
    
    700,722
    
    
    
    644,475Less allowance for loan and lease losses
    
    
    28,908
    
    
    
    19,282Net loans and leases
    
    
    671,814
    
    
    
    625,193Bank owned life insurance
    
    
    30,016
    
    
    
    23,781Real estate owned via equity investment
    
    
    18,927
    
    
    
    23,967Accrued interest receivable
    
    
    13,580
    
    
    
    15,256Other real estate owned
    
    
    10,346
    
    
    
    1,048Premises and equipment, net
    
    
    6,926
    
    
    
    7,441Investment in real estate joint ventures
    
    
    2,520
    
    
    
    7,739Other assets
    
    
    45,677
    
    
    
    31,450Total assets
    
    $
    1,175,586
    
    
    $
    1,278,475LIABILITIES AND STOCKHOLDERS EQUITYLiabilitiesDepositsNon-interest bearing
    
    $
    50,886
    
    
    $
    59,573Interest bearing
    
    
    709,182
    
    
    
    710,579Total deposits
    
    
    760,068
    
    
    
    770,152Accrued interest payable
    
    
    6,102
    
    
    
    8,600Short-term borrowings
    
    
    22,000
    
    
    
    102,000Long-term borrowings
    
    
    253,681
    
    
    
    192,911Obligations related to real estate owned via equity investment
    
    
    12,350
    
    
    
    18,566Subordinated debentures
    
    
    25,774
    
    
    
    25,774Other liabilities
    
    
    14,026
    
    
    
    12,238Total liabilities
    
    
    1,094,001
    
    
    
    1,130,241Minority interests
    
    
    1,898
    
    
    
    1,867Stockholders equityCommon stockClass A, par value $2 per share, authorized 18,000,000 shares;
issued, 11,345,127 and 11,329,431 shares
in 2008 and 2007, respectively
    
    
    22,690
    
    
    
    22,659Class B, par value $0.10 per share; authorized, 3,000,0000
shares; issued, 2,095,681 and 2,096,646 in
2008 and 2007, respectively
    
    
    210
    
    
    
    210Additional paid in capital
    
    
    123,425
    
    
    
    122,578(Accumulated deficit) retained earnings
    
    
    (33,561
    )
    
    
    8,527Accumulated other comprehensive loss
    
    
    (26,106
    )
    
    
    (1,582
    )86,658
    
    
    
    152,392Treasury
stock  498,488 and 398,488 Class A shares,
at cost, in 2008 and 2007, respectively
    
    
    (6,971
    )
    
    
    (6,025
    )Total stockholders equity
    
    
    79,687
    
    
    
    146,367Total liabilities and stockholders equity
    
    $
    1,175,586
    
    
    $
    1,278,475
  64




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Statements of Income
 Year ended December 31,2008
    
    
    2007
    
    
    2006(In thousands, except per share data)Interest incomeLoans and leases, including fees
    
    $
    49,863
    
    
    $
    56,518
    
    
    $
    63,379Investment securities held to maturity, taxable
    
    
    3,241
    
    
    
    10,032
    
    
    
    11,830Investment securities available for sale:Taxable interest
    
    
    19,066
    
    
    
    18,068
    
    
    
    17,302Tax exempt interest
    
    
    75
    
    
    
    75
    
    
    
    75Deposits in banks
    
    
    495
    
    
    
    1,896
    
    
    
    377Federal funds sold
    
    
    24
    
    
    
    147
    
    
    
    43Total Interest Income
    
    
    72,764
    
    
    
    86,736
    
    
    
    93,006Interest expenseDeposits
    
    
    25,414
    
    
    
    37,140
    
    
    
    27,528Short-term borrowings
    
    
    674
    
    
    
    530
    
    
    
    2,907Long-term borrowings
    
    
    11,770
    
    
    
    10,580
    
    
    
    12,829Obligations related to real estate owned via equity investments
    
    
    251
    
    
    
    623
    
    
    
    3,108Total Interest Expense
    
    
    38,109
    
    
    
    48,873
    
    
    
    46,372Net Interest Income
    
    
    34,655
    
    
    
    37,863
    
    
    
    46,634Provision for loan and lease losses
    
    
    21,841
    
    
    
    13,026
    
    
    
    1,803Net Interest Income after Provision for Loan and Lease Losses
    
    
    12,814
    
    
    
    24,837
    
    
    
    44,831Other (loss) incomeGains on sales of premises and equipment
    
    
    1,991
    
    
    
    
    
    
    
    Gains on sale of premises and equipment related to real estate
owned via equity investments
    
    
    1,679
    
    
    
    1,860
    
    
    
    3,036Income from bank owned life insurance
    
    
    1,233
    
    
    
    875
    
    
    
    847Service charges and fees
    
    
    1,186
    
    
    
    1,348
    
    
    
    1,404Gains on sales related to real estate joint ventures
    
    
    1,092
    
    
    
    350
    
    
    
    Income related to real estate owned via equity investments
    
    
    965
    
    
    
    1,384
    
    
    
    3,591Gains on sales of other real estate owned
    
    
    429
    
    
    
    1,111
    
    
    
    2,129Gains on sales of loans and leases
    
    
    190
    
    
    
    404
    
    
    
    379Net (losses) gains on investment securities available for sale
    
    
    (1,313
    )
    
    
    5,358
    
    
    
    383Impairment loss on available for sale securities
    
    
    (23,388
    )
    
    
    
    
    
    
    Other income
    
    
    148
    
    
    
    198
    
    
    
    202Total Other (Loss) Income
    
    
    (15,788
    )
    
    
    12,888
    
    
    
    11,971Other expensesSalaries and wages
    
    
    11,697
    
    
    
    9,220
    
    
    
    9,931Professional and legal fees
    
    
    3,783
    
    
    
    1,997
    
    
    
    1,371Employee benefits
    
    
    3,347
    
    
    
    2,995
    
    
    
    2,787Occupancy and equipment
    
    
    2,860
    
    
    
    2,506
    
    
    
    2,462Impairment of real estate owned via equity investments
    
    
    1,500
    
    
    
    8,500
    
    
    
    Pennsylvania shares tax
    
    
    1,369
    
    
    
    1,158
    
    
    
    1,082Expenses related to real estate owned via equity investments
    
    
    966
    
    
    
    1,590
    
    
    
    1,606Stock option expense
    
    
    703
    
    
    
    657
    
    
    
    733Directors fees
    
    
    675
    
    
    
    643
    
    
    
    603Impairment of real estate joint venture
    
    
    
    
    
    
    5,927
    
    
    
    Other operating expenses
    
    
    5,633
    
    
    
    4,839
    
    
    
    4,077Total Other Expense
    
    
    32,533
    
    
    
    40,032
    
    
    
    24,652Minority interests
    
    
    (68
    )
    
    
    (1,303
    )
    
    
    567(Loss) Income Before Income Tax (Benefit) Expense
    
    
    (35,439
    )
    
    
    (1,004
    )
    
    
    31,583Income tax expense (benefit)
    
    
    2,643
    
    
    
    (1,568
    )
    
    
    10,015Net (Loss) Income
    
    $
    (38,082
    )
    
    $
    564
    
    
    $
    21,568Per share dataNet (loss) income  basic
    
    $
    (2.86
    )
    
    $
    0.04
    
    
    $
    1.60Net (loss) income  diluted
    
    $
    (2.86
    )
    
    $
    0.04
    
    
    $
    1.59Cash
dividends  Class A shares
    
    $
    0.30
    
    
    $
    1.15
    
    
    $
    1.11Cash
dividends  Class B shares
    
    $
    0.35
    
    
    $
    1.32
    
    
    $
    1.28
  65




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders Equity and Comprehensive Loss
For the year ended December 31, 2008
 Retained
    
    
    AccumulatedAdditional
    
    
    earnings
    
    
    otherClass A common stock
    
    
    Class B common stock
    
    
    paid in
    
    
    (accumulated
    
    
    comprehensive
    
    
    Treasury
    
    
    Comprehensive(In thousands, except dividend per share data)
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    capital
    
    
    deficit)
    
    
    loss
    
    
    stock
    
    
    lossBalance, January 1, 2008
    
    
    11,329
    
    
    $
    22,659
    
    
    
    2,097
    
    
    $
    210
    
    
    $
    122,578
    
    
    $
    8,527
    
    
    $
    (1,582
    )
    
    $
    (6,025
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (38,082
    )
    
    
    
    
    
    
    
    
    
    
    (38,082
    )Stock conversion
    
    
    1
    
    
    
    2
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    (1
    )Cash dividends on common stock
(Class A $0.30; Class B $0.345)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,005
    )Purchase of treasury stock (100 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (946
    )Stock options exercised
    
    
    15
    
    
    
    29
    
    
    
    
    
    
    
    
    
    
    
    144Stock option expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    703Other comprehensive loss, net of
reclassification and taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,524
    )
    
    
    
    
    
    
    (24,524
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (62,606
    )Balance December 31, 2008
    
    
    11,345
    
    
    $
    22,690
    
    
    
    2,096
    
    
    $
    210
    
    
    $
    123,425
    
    
    $
    (33,561
    )
    
    $
    (26,106
    )
    
    $
    (6,971
    )
  66




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders Equity and Comprehensive Income
For the year ended December 31, 2007
 AccumulatedAdditional
    
    
    
    
    
    
    otherClass A common stock
    
    
    Class B common stock
    
    
    paid in
    
    
    Retained
    
    
    comprehensive
    
    
    Treasury
    
    
    Comprehensive(In thousands, except dividend per share data)
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    capital
    
    
    earnings
    
    
    loss
    
    
    stock
    
    
    incomeBalance, January 1, 2007
    
    
    11,287
    
    
    $
    22,575
    
    
    
    2,108
    
    
    $
    211
    
    
    $
    121,542
    
    
    $
    23,464
    
    
    $
    (2,273
    )
    
    $
    (2,265
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    564
    
    
    
    
    
    
    
    
    
    
    $
    564Adjustment related to adoption of
FASB No. 158, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,006Conversion of Class B common stock
to Class A common stock
    
    
    14
    
    
    
    28
    
    
    
    (12
    )
    
    
    (1
    )
    
    
    
    
    
    
    (27
    )Cash in lieu of fractional shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14
    )Stock dividend adjustment
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    (13
    )
    
    
    13Stock options exercised
    
    
    28
    
    
    
    56
    
    
    
    
    
    
    
    
    
    
    
    278Stock option expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    657Tax benefit stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    114Purchase of treasury stock (183 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,760
    )Cash dividends on common stock
(Class A $1.15, Class B $1.3225)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,473
    )Other comprehensive loss, net of
reclassifications and taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (315
    )
    
    
    
    
    
    
    (315
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    249Balance, December 31, 2007
    
    
    11,329
    
    
    $
    22,659
    
    
    
    2,097
    
    
    $
    210
    
    
    $
    122,578
    
    
    $
    8,527
    
    
    $
    (1,582
    )
    
    $
    (6,025
    )
  67




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders Equity and Comprehensive Income
For the year ended December 31, 2006
 AccumulatedUn-
    
    
    Additional
    
    
    
    
    
    
    otherClass A common stock
    
    
    Class B common stock
    
    
    Distributed
    
    
    paid in
    
    
    Retained
    
    
    comprehensive
    
    
    Treasury
    
    
    Comprehensive(In thousands, except dividend per share data)
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    B-Shares
    
    
    capital
    
    
    earnings
    
    
    loss
    
    
    stock
    
    
    incomeBalance, January 1, 2006
    
    
    10,700
    
    
    $
    21,400
    
    
    
    1,993
    
    
    $
    199
    
    
    $
    2
    
    
    $
    104,285
    
    
    $
    32,827
    
    
    $
    (940
    )
    
    $
    (2,265
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,568
    
    
    
    
    
    
    
    
    
    
    $
    21,568Conversion of Class B common stock
to Class A common stock
    
    
    5
    
    
    
    11
    
    
    
    (5
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    (10
    )Stock Dividend, 5%, declared
(December)
    
    
    527
    
    
    
    1,054
    
    
    
    100
    
    
    
    11
    
    
    
    
    
    
    
    15,588
    
    
    
    (16,653
    )Undistributed shares registered
(20 shares)
    
    
    
    
    
    
    
    
    
    
    20
    
    
    
    2
    
    
    
    (2
    )
    
    
    22Cash in lieu of fractional shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12
    )Stock option exercised
    
    
    55
    
    
    
    110
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    556Stock options expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    733Tax benefit stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    358Adjustment, to initially apply
FASB No. 158, net of
tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,504
    )Cash dividends on common stock
(Class A $1.11, Class
B $1.28)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,256
    )Other comprehensive income, net
of reclassifications and taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,171
    
    
    
    
    
    
    
    1,171Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    22,739Balance, December 31, 2006
    
    
    11,287
    
    
    $
    22,575
    
    
    
    2,108
    
    
    $
    211
    
    
    $
    
    
    
    $
    121,542
    
    
    $
    23,464
    
    
    $
    (2,273
    )
    
    $
    (2,265
    )
  68




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
 Consolidated Statements of Cash Flows
 For the years ended December 31,(In thousands)
    
    2008
    
    
    2007
    
    
    2006Cash flows from operating activitiesNet (loss) income
    
    $
    (38,082
    )
    
    $
    564
    
    
    $
    21,568Adjustments to reconcile net (loss) income to net cash
provided by operating activities:Depreciation and amortization
    
    
    1,059
    
    
    
    1,306
    
    
    
    1,454Stock compensation expense
    
    
    703
    
    
    
    657
    
    
    
    733Provision for loan and lease losses
    
    
    21,841
    
    
    
    13,026
    
    
    
    1,803Amortization of premiums and discounts on loans,
mortgage-backed securities and investments
    
    
    (2,242
    )
    
    
    (2,793
    )
    
    
    (2,415
    )Provision (Benefit) for deferred income taxes
    
    
    10,462
    
    
    
    (4,118
    )
    
    
    (1,937
    )Gains on sales of other real estate owned
    
    
    (429
    )
    
    
    (1,111
    )
    
    
    (2,129
    )Gain on sales of real estate joint ventures
    
    
    (1,092
    )
    
    
    (350
    )
    
    
    Proceeds from sales of loans and leases
    
    
    2,613
    
    
    
    
    
    
    
    Gains on sales of premises and equipment
    
    
    (1,991
    )
    
    
    
    
    
    
    Gains on sales of loans
    
    
    (190
    )
    
    
    (404
    )
    
    
    (379
    )Net losses (gains) on sales of investment securities
    
    
    1,313
    
    
    
    (5,358
    )
    
    
    (383
    )Distributions from investments in real estate
    
    
    (241
    )
    
    
    (167
    )
    
    
    (645
    )Gain from sale of premises of real estate owned via equity
investment
    
    
    (1,679
    )
    
    
    (2,124
    )
    
    
    (3,036
    )Impairment of real estate owned via equity investments
    
    
    1,500
    
    
    
    8,500
    
    
    
    Impairment of available-for-sale investment securities
    
    
    23,388
    
    
    
    
    
    
    
    Income from bank owned life insurance
    
    
    (1,233
    )
    
    
    (875
    )
    
    
    (847
    )Impairment of real estate joint venture
    
    
    
    
    
    
    5,927
    
    
    
    Changes in assets and liabilities:Decrease (increase) in accrued interest receivable
    
    
    1,676
    
    
    
    1,238
    
    
    
    (1,651
    )(Increase) decrease in other assets
    
    
    (10,766
    )
    
    
    (2,502
    )
    
    
    9,938(Decrease) increase in accrued interest payable
    
    
    (2,498
    )
    
    
    (2,054
    )
    
    
    4,048Minority Interest
    
    
    31
    
    
    
    (1,283
    )
    
    
    Increase (decrease) in other liabilities
    
    
    3,333
    
    
    
    (4,235
    )
    
    
    3,614Net cash provided by operating activities
    
    
    7,476
    
    
    
    3,844
    
    
    
    29,736Cash flows from investing activitiesProceeds from calls and maturities of investment securities
held to maturity
    
    
    105,265
    
    
    
    115,024
    
    
    
    38Purchases of investment securities held to maturity
    
    
    
    
    
    
    (2,500
    )
    
    
    Proceeds from calls/maturities of investment securities available
for sale
    
    
    169,901
    
    
    
    105,041
    
    
    
    40,408Proceeds from sales of investment securities available for sale
    
    
    15,775
    
    
    
    20,773
    
    
    
    4,613Purchase of investment securities available for sale
    
    
    (179,257
    )
    
    
    (194,839
    )
    
    
    (19,363
    )Redemption (purchase) Federal Home Loan Bank stock
    
    
    2,510
    
    
    
    (2,186
    )
    
    
    5,797Net increase in loans
    
    
    (81,207
    )
    
    
    (57,524
    )
    
    
    (57,404
    )Proceeds from sale of foreclosed assets
    
    
    1,186
    
    
    
    2,174
    
    
    
    6,376Proceeds from sale of premises and equipment
    
    
    2,065
    
    
    
    
    
    
    
    Purchase of premises and equipment
    
    
    (692
    )
    
    
    (728
    )
    
    
    (848
    )Purchase of life insurance
    
    
    (5,000
    )
    
    
    
    
    
    
    Net proceeds from sale of premises of real estate owned via
equity investments
    
    
    9,064
    
    
    
    19,368
    
    
    
    26,303Distributions from real estate owned via equity investments
    
    
    241
    
    
    
    167
    
    
    
    645Net decrease (increase) in real estate joint ventures
    
    
    5,219
    
    
    
    (2,572
    )
    
    
    Net decrease in real estate owned via equity investments
    
    
    (8,885
    )
    
    
    (7,451
    )
    
    
    (7,572
    )Net cash provided by (used) in investing activities
    
    
    36,185
    
    
    
    (5,253
    )
    
    
    (1,007
    )
 69




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
 For the years ended December 31,2008
    
    
    2007
    
    
    2006Cash flows from financing activities:Decrease in non-interest bearing and interest bearing
demand deposits and savings accounts
    
    
    (65,443
    )
    
    
    (29,009
    )
    
    
    (21,088
    )Increase (decrease) in certificates of deposit
    
    
    55,359
    
    
    
    (60,296
    )
    
    
    183,135Principal payments on mortgage
    
    
    
    
    
    
    (67
    )
    
    
    (65
    )Net (decrease) increase in short-term borrowings
    
    
    (80,000
    )
    
    
    49,000
    
    
    
    (21,500
    )Proceeds from long-term borrowings
    
    
    65,000
    
    
    
    
    
    
    
    5,625Repayments of long-term borrowings
    
    
    (4,230
    )
    
    
    (175
    )
    
    
    (92,038
    )Repayment of mortgage debt of real estate owned via equity investments
    
    
    (6,216
    )
    
    
    (10,776
    )
    
    
    (18,014
    )Income tax benefit on stock options
    
    
    
    
    
    
    114
    
    
    
    358Cash dividends paid
    
    
    (4,005
    )
    
    
    (15,473
    )
    
    
    (14,256
    )Cash in lieu of fractional shares
    
    
    
    
    
    
    (14
    )
    
    
    (11
    )Purchase of treasury stock
    
    
    (946
    )
    
    
    (3,760
    )
    
    
    Issuance of common stock under stock option plans
    
    
    174
    
    
    
    334
    
    
    
    666Net cash (used in) provided by financing activities
    
    
    (40,307
    )
    
    
    (70,122
    )
    
    
    22,812Net increase (decrease) in cash and cash equivalents
    
    
    3,354
    
    
    
    (71,531
    )
    
    
    51,541Cash and cash equivalents at beginning of period
    
    
    10,905
    
    
    
    82,436
    
    
    
    30,895Cash and cash equivalents at end of period
    
    $
    14,259
    
    
    $
    10,905
    
    
    $
    82,436Supplemental DisclosureCash paid during the year forInterest
    
    $
    40,607
    
    
    $
    50,927
    
    
    $
    42,324Income taxes
    
    $
    
    
    
    $
    6,814
    
    
    $
    8,958Transfer of loans to foreclosed assets
    
    $
    10,055
    
    
    $
    1,188
    
    
    $
    1,285
   70




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
   Basis of Financial Statement Presentation
       71




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
  Recent Accounting Pronouncements
       72




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
         73




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
         74




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
       75




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
  Investment Securities
   Transfer of Financial Assets
   Loans and Allowance for Loan and Lease Losses
   76




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
        77




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
   Other Real Estate Owned
  Premises and Equipment
  Investments in Real Estate Joint Ventures
  Bank-Owned Life Insurance
   78




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
  Income Taxes
  Per Share Information
   Stock Compensation
    Benefit Plans
   79




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
   Cash and Cash Equivalents
  Financial Instruments
  Advertising Costs
  Comprehensive Income (Loss)
  Year ended December 31, 2008TaxBefore tax
    
    
    expense
    
    
    Net of tax(In thousands)
    
    amount
    
    
    (benefit)
    
    
    amountUnrealized losses on investment securities:Unrealized holding losses arising during period
    
    $
    (54,527
    )
    
    $
    (19,084
    )
    
    $
    (35,443
    )Less deferred tax valuation allowance related to
preferred and common stock
    
    
    
    
    
    
    3,119
    
    
    
    (3,119
    )Market value adjustment on transfer of held-to-maturity
securities to available-for-sale
    
    
    (2,987
    )
    
    
    (1,045
    )
    
    
    (1,942
    )Less adjustment for impaired investments
    
    
    23,388
    
    
    
    8,184
    
    
    
    15,204Less reclassification adjustment for losses
realized in net loss
    
    
    1,313
    
    
    
    460
    
    
    
    853Unrealized losses on investment securities
    
    
    (32,813
    )
    
    
    (8,366
    )
    
    
    (24,447
    )Unrecognized benefit obligation expense:Actuarial loss
    
    
    (235
    )
    
    
    (82
    )
    
    
    (153
    )Less reclassification adjustment for amortization
    
    
    117
    
    
    
    41
    
    
    
    76(118
    )
    
    
    (41
    )
    
    
    (77
    )Other comprehensive loss, net
    
    $
    (32,931
    )
    
    $
    (8,407
    )
    
    $
    (24,524
    )
 80




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
  Year ended December 31, 2007TaxBefore tax
    
    
    expense
    
    
    Net of tax(In thousands)
    
    amount
    
    
    (benefit)
    
    
    amountUnrealized losses on investment securities:Unrealized holding gains arising during period
    
    $
    4,369
    
    
    $
    1,529
    
    
    $
    2,840Less reclassification adjustment for gains
realized in net income
    
    
    5,358
    
    
    
    1,875
    
    
    
    3,483Unrealized losses on investment securities
    
    
    (989
    )
    
    
    (346
    )
    
    
    (643
    )Unrecognized benefit obligation expense:Actuarial gain
    
    
    333
    
    
    
    117
    
    
    
    216Less reclassification adjustment for amortization
    
    
    172
    
    
    
    60
    
    
    
    112505
    
    
    
    177
    
    
    
    328Other comprehensive loss, net
    
    $
    (484
    )
    
    $
    (169
    )
    
    $
    (315
    )
 Year ended December 31, 2006Before tax
    
    
    Tax
    
    
    Net of tax(In thousands)
    
    amount
    
    
    expense
    
    
    amountUnrealized gains on investment securities:Unrealized holding gains arising during period
    
    $
    2,185
    
    
    $
    765
    
    
    $
    1,420Less reclassification adjustment for gains
realized in net income
    
    
    383
    
    
    
    134
    
    
    
    249Other comprehensive income, net
    
    $
    1,802
    
    
    $
    631
    
    
    $
    1,171
  (In thousands)
    
    2008
    
    
    2007
    
    
    2006Unrecognized benefit obligation
    
    $
    (1,189
    )
    
    $
    (1,267
    )
    
    $
    (2,504
    )Unrealized (losses) gains on AFS investments
    
    
    (24,917
    )
    
    
    (643
    )
    
    
    231Adjustment to net periodic pension cost
    
    
    
    
    
    
    328
    
    
    
    Accumulated other comprehensive loss
    
    $
    (26,106
    )
    
    $
    (1,582
    )
    
    $
    (2,273
    )
   81




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
  Reclassifications
   Variable Interest Entities (VIE)
 Real estate owned via equity investments
    82




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
       83




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
  Trust Preferred Securities
  Interest Rate Swaps
     84




---



##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
   December 31,(In thousands, except percentages)
    
    2008
    
    2007Notional amounts
    
    $
    
    
    
    $
    60,502Weighted average pay rate
    
    
    
    
    
    
    5.53
    %Weighted average receive rate
    
    
    
    
    
    
    4.75
    %Weighted average maturity (years)
    
    
    
    
    
    
    3.6Fair value relating to interest rate swaps
    
    $
    
    
    
    $
    336
  Restrictions on Cash and Amounts Due From Banks
  Federal Home Loan Bank Stock
     85




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
  Significant Concentration of Credit Risk
      Community banking
  86




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
  Tax lien operation
  Equity investments
  Other segments
   (In thousands)
    
    Community
    
    
    Tax Lien
    
    
    EquityDecember 31, 2008
    
    Banking
    
    
    Operation
    
    
    Investment
    
    
    Other
    
    
    ConsolidatedTotal assets
    
    $
    1,009,992
    
    
    $
    84,965
    
    
    $
    17,405
    
    
    $
    63,224
    
    
    $
    1,175,586Total deposits
    
    
    760,068
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    760,068Interest income
    
    $
    59,001
    
    
    $
    8,289
    
    
    $
    
    
    
    $
    5,474
    
    
    $
    72,764Interest expense
    
    
    31,620
    
    
    
    3,499
    
    
    
    251
    
    
    
    2,739
    
    
    
    38,109Net interest income (loss)
    
    
    27,381
    
    
    
    4,790
    
    
    
    (251
    )
    
    
    2,735
    
    
    
    34,655Provision for loan losses
    
    
    17,424
    
    
    
    2,607
    
    
    
    
    
    
    
    1,810
    
    
    
    21,841Total non-interest (loss) income
    
    
    (19,095
    )
    
    
    560
    
    
    
    2,177
    
    
    
    570
    
    
    
    (15,788
    )Total non-interest expense
    
    
    26,089
    
    
    
    1,960
    
    
    
    966
    
    
    
    2,018
    
    
    
    31,033Impairment -real estate owned via equity investment
    
    
    
    
    
    
    
    
    
    
    1,500
    
    
    
    
    
    
    
    1,500Minority interest
    
    
    
    
    
    
    57
    
    
    
    
    
    
    
    (125
    )
    
    
    (68
    )Income tax expense (benefit)
    
    
    3,070
    
    
    
    (55
    )
    
    
    (189
    )
    
    
    (183
    )
    
    
    2,643Net (loss) income
    
    $
    (38,297
    )
    
    $
    781
    
    
    $
    (351
    )
    
    $
    (215
    )
    
    $
    (38,082
    )
  87




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
  (In thousands)
    
    Community
    
    
    Tax Lien
    
    
    EquityDecember 31, 2007
    
    Banking
    
    
    Operation
    
    
    Investment
    
    
    Other
    
    
    ConsolidatedTotal assets
    
    $
    1,140,373
    
    
    $
    63,211
    
    
    $
    22,711
    
    
    $
    52,180
    
    
    $
    1,278,475Total deposits
    
    
    770,152
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    770,152Interest income
    
    $
    77,022
    
    
    $
    5,702
    
    
    $
    
    
    
    $
    4,012
    
    
    $
    86,736Interest expense
    
    
    42,649
    
    
    
    3,289
    
    
    
    623
    
    
    
    2,312
    
    
    
    48,873Net interest income (loss)
    
    
    34,373
    
    
    
    2,413
    
    
    
    (623
    )
    
    
    1,700
    
    
    
    37,863Provision for loan losses
    
    
    11,964
    
    
    
    150
    
    
    
    
    
    
    
    912
    
    
    
    13,026Total non-interest income
    
    
    8,498
    
    
    
    1,069
    
    
    
    2,814
    
    
    
    507
    
    
    
    12,888Total non-interest expense
    
    
    21,283
    
    
    
    1,644
    
    
    
    1,590
    
    
    
    1,088
    
    
    
    25,605Impairment -real estate joint venture
    
    
    5,927
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,927Impairment -real estate owned via equity investment
    
    
    
    
    
    
    
    
    
    
    8,500
    
    
    
    
    
    
    
    8,500Minority interest
    
    
    
    
    
    
    173
    
    
    
    (1,510
    )
    
    
    34
    
    
    
    (1,303
    )Income tax expense (benefit)
    
    
    60
    
    
    
    536
    
    
    
    (2,236
    )
    
    
    72
    
    
    
    (1,568
    )Net income (loss)
    
    $
    3,637
    
    
    $
    979
    
    
    $
    (4,153
    )
    
    $
    101
    
    
    $
    564
 (In thousands)
    
    Community
    
    
    Tax Lien
    
    
    EquityDecember 31, 2006
    
    Banking
    
    
    Operation
    
    
    Investment
    
    
    Other
    
    
    ConsolidatedTotal assets
    
    $
    1,255,115
    
    
    $
    43,672
    
    
    $
    44,535
    
    
    $
    12,989
    
    
    $
    1,356,311Total deposits
    
    
    859,457
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    859,457Interest income
    
    $
    87,435
    
    
    $
    4,547
    
    
    $
    
    
    
    $
    1,024
    
    
    $
    93,006Interest expense
    
    
    39,416
    
    
    
    3,323
    
    
    
    3,108
    
    
    
    525
    
    
    
    46,372Net interest income (loss)
    
    
    48,019
    
    
    
    1,224
    
    
    
    (3,108
    )
    
    
    499
    
    
    
    46,634Provision for loan losses
    
    
    1,393
    
    
    
    25
    
    
    
    
    
    
    
    385
    
    
    
    1,803Total non-interest income
    
    
    3,778
    
    
    
    1,473
    
    
    
    6,627
    
    
    
    93
    
    
    
    11,971Total non-interest expense
    
    
    20,323
    
    
    
    2,164
    
    
    
    1,606
    
    
    
    559
    
    
    
    24,652Minority interest
    
    
    (86
    )
    
    
    111
    
    
    
    634
    
    
    
    (92
    )
    
    
    567Income tax (benefit) expense
    
    
    9,460
    
    
    
    230
    
    
    
    448
    
    
    
    (123
    )
    
    
    10,015Net income (loss)
    
    $
    20,707
    
    
    $
    167
    
    
    $
    831
    
    
    $
    (137
    )
    
    $
    21,568
     88




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
   As of December 31, 2008Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealized(In thousands)
    
    cost
    
    
    gains
    
    
    losses
    
    
    Fair valueInvestment securities available-for-saleMortgage-backed securities
    
    $
    53,871
    
    
    $
    1,190
    
    
    $
    
    
    
    $
    55,061U.S. government agencies
    
    
    48,109
    
    
    
    82
    
    
    
    
    
    
    
    48,191Preferred and common stock
    
    
    23,907
    
    
    
    8
    
    
    
    (8,911
    )
    
    
    15,004Collateralized mortgage obligations
    
    
    121,559
    
    
    
    1,649
    
    
    
    (6,293
    )
    
    
    116,915Collateralized debt obligations
    
    
    35,000
    
    
    
    
    
    
    
    (8,840
    )
    
    
    26,160Corporate bonds
    
    
    57,445
    
    
    
    641
    
    
    
    (6,748
    )
    
    
    51,338Trust preferred securities
    
    
    36,316
    
    
    
    606
    
    
    
    (6,778
    )
    
    
    30,144Other securities
    
    
    7,631
    
    
    
    54
    
    
    
    (196
    )
    
    
    7,489Total available-for-sale
    
    $
    383,838
    
    
    $
    4,230
    
    
    $
    (37,766
    )
    
    $
    350,302
 As of December 31, 2007Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    
    
    
    
    Carrying(In thousands)
    
    cost
    
    
    gains
    
    
    losses
    
    
    Fair value
    
    
    valueInvestment securities held-to-maturityMortgage-backed securities
    
    $
    105
    
    
    $
    
    
    
    $
    
    
    
    $
    105
    
    
    $
    105U.S. government agencies
    
    
    80,000
    
    
    
    13
    
    
    
    (234
    )
    
    
    79,779
    
    
    
    80,000Collateralized debt obligations
    
    
    60,000
    
    
    
    1,200
    
    
    
    (740
    )
    
    
    60,460
    
    
    
    60,000Other debt securities
    
    
    2,800
    
    
    
    312
    
    
    
    
    
    
    
    3,112
    
    
    
    2,800Total held-to-maturity
    
    $
    142,905
    
    
    $
    1,525
    
    
    $
    (974
    )
    
    $
    143,456
    
    
    $
    142,905Investment securities available-for-saleMortgage-backed securities
    
    $
    33,090
    
    
    $
    383
    
    
    $
    (187
    )
    
    $
    33,285
    
    
    $
    33,285U.S. government agencies
    
    
    104,982
    
    
    
    51
    
    
    
    (153
    )
    
    
    104,880
    
    
    
    104,880Preferred and common stock
    
    
    20,696
    
    
    
    17
    
    
    
    (821
    )
    
    
    19,892
    
    
    
    19,892Collateralized mortgage obligations
    
    
    82,316
    
    
    
    965
    
    
    
    (155
    )
    
    
    83,126
    
    
    
    83,126Corporate bonds
    
    
    86,205
    
    
    
    464
    
    
    
    (1,241
    )
    
    
    85,428
    
    
    
    85,428Trust preferred securities
    
    
    44,118
    
    
    
    2,151
    
    
    
    (2,169
    )
    
    
    44,100
    
    
    
    44,100Other securities
    
    
    4,557
    
    
    
    60
    
    
    
    
    
    
    
    4,617
    
    
    
    4,617Total available-for-sale
    
    $
    375,964
    
    
    $
    4,091
    
    
    $
    (4,726
    )
    
    $
    375,328
    
    
    $
    375,328
  89




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
    As of December 31, 2008Amortized(In thousands)
    
    cost
    
    
    Fair valueWithin 1 year
    
    $
    10,500
    
    
    $
    6,307After 1 but within 5 years
    
    
    95,695
    
    
    
    84,895After 5 but within 10 years
    
    
    34,359
    
    
    
    34,487After 10 years
    
    
    36,316
    
    
    
    30,144Mortgage-backed securities
    
    
    53,871
    
    
    
    55,061Collateralized mortgage obligations
    
    
    121,559
    
    
    
    116,915Total available for sale debt securities
    
    
    352,300
    
    
    
    327,809No contractual maturity
    
    
    31,538
    
    
    
    22,493Total available for sale securities
    
    $
    383,838
    
    
    $
    350,302
    Less than 12 months
    
    
    12 months or longer
    
    
    TotalNumberUnrealized
    
    
    Number of
    
    
    
    
    
    
    Unrealized
    
    
    of
    
    
    
    
    
    
    Unrealized
    
    
    Number of(In thousands)
    
    Fair value
    
    
    losses
    
    
    positions
    
    
    Fair value
    
    
    losses
    
    
    positions
    
    
    Fair value
    
    
    losses
    
    
    positionsInvestment securities available for saleMortgage-backed securities
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    U.S. government agencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Preferred and common stock
    
    
    14,597
    
    
    
    (7,768
    )
    
    
    8
    
    
    
    357
    
    
    
    (1,143
    )
    
    
    1
    
    
    
    14,954
    
    
    
    (8,911
    )
    
    
    9Collateralized mortgage obligations
    
    
    30,711
    
    
    
    (5,400
    )
    
    
    10
    
    
    
    12,008
    
    
    
    (893
    )
    
    
    5
    
    
    
    42,719
    
    
    
    (6,293
    )
    
    
    15Collateralized debt obligations
    
    
    20,353
    
    
    
    (4,647
    )
    
    
    1
    
    
    
    5,807
    
    
    
    (4,193
    )
    
    
    2
    
    
    
    26,160
    
    
    
    (8,840
    )
    
    
    3Corporate bonds
    
    
    23,794
    
    
    
    (5,902
    )
    
    
    10
    
    
    
    8,643
    
    
    
    (846
    )
    
    
    2
    
    
    
    32,437
    
    
    
    (6,748
    )
    
    
    12Trust preferred securities
    
    
    22,818
    
    
    
    (6,484
    )
    
    
    13
    
    
    
    1,720
    
    
    
    (294
    )
    
    
    1
    
    
    
    24,538
    
    
    
    (6,778
    )
    
    
    14Other securities
    
    
    1,470
    
    
    
    (196
    )
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,470
    
    
    
    (196
    )
    
    
    2Total available for sale
    
    $
    113,743
    
    
    $
    (30,397
    )
    
    
    44
    
    
    $
    28,535
    
    
    $
    (7,369
    )
    
    
    11
    
    
    $
    142,278
    
    
    $
    (37,766
    )
    
    
    55
  90




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
   Preferred and Common Stock:
 Collateralized Mortgage Obligations (CMOs):
 Collateralized Debt Obligations (CDOs):
 Corporate Bonds:
 91




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
  Trust Preferred Securities:
  Less than 12 months
    
    
    12 months or longer
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    Unrealized(In thousands)
    
    Fair value
    
    
    losses
    
    
    Fair value
    
    
    losses
    
    
    Fair value
    
    
    lossesInvestment securities held to maturityU.S. government Agencies
    
    $
    
    
    
    $
    
    
    
    $
    69,767
    
    
    $
    (234
    )
    
    $
    69,767
    
    
    $
    (234
    )Collateralized debt obligations
    
    
    9,260
    
    
    
    (740
    )
    
    
    
    
    
    
    
    
    
    
    9,260
    
    
    
    (740
    )Total held to maturity
    
    $
    9,260
    
    
    $
    (740
    )
    
    $
    69,767
    
    
    $
    (234
    )
    
    $
    79,027
    
    
    $
    (974
    )Investment securities available for saleU.S. government agencies
    
    $
    
    
    
    $
    
    
    
    $
    59,847
    
    
    $
    (153
    )
    
    $
    59,847
    
    
    $
    (153
    )Mortgage backed securities
    
    
    
    
    
    
    
    
    
    
    22,987
    
    
    
    (188
    )
    
    
    22,987
    
    
    
    (188
    )Preferred and common stock
    
    
    19,048
    
    
    
    (699
    )
    
    
    786
    
    
    
    (122
    )
    
    
    19,834
    
    
    
    (821
    )Collateralized mortgage obligations
    
    
    3,187
    
    
    
    (1
    )
    
    
    16,218
    
    
    
    (154
    )
    
    
    19,405
    
    
    
    (155
    )Corporate bonds
    
    
    33,226
    
    
    
    (1,135
    )
    
    
    7,406
    
    
    
    (106
    )
    
    
    40,632
    
    
    
    (1,241
    )Trust Preferreds
    
    
    5,096
    
    
    
    (2,168
    )
    
    
    
    
    
    
    
    
    
    
    5,096
    
    
    
    (2,168
    )Total Available for Sale
    
    $
    60,557
    
    
    $
    (4,003
    )
    
    $
    107,244
    
    
    $
    (723
    )
    
    $
    167,801
    
    
    $
    (4,726
    )Total temporarily impaired securities
    
    $
    69,817
    
    
    $
    (4,743
    )
    
    $
    177,011
    
    
    $
    (957
    )
    
    $
    246,828
    
    
    $
    (5,700
    )
  92




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
   As of December 31,(In thousands)
    
    2008
    
    
    2007Loans secured by real estate:Construction
    
    $
    167,204
    
    
    $
    92,779Construction and land development  mezzanine
    
    
    2,421
    
    
    
    6,443Land development
    
    
    74,168
    
    
    
    78,874Secured by 1-4 family residential properties:Revolving, open-end loans secured by 1-4 family residential
properties and extended under lines of credit
    
    
    1,322
    
    
    
    2,094All other loans secured by 1-4 family residential properties:Secured by first liens
    
    
    21,607
    
    
    
    32,485Secured by junior liens
    
    
    4,551
    
    
    
    7,707Secured by multi family (5 or more) residential properties
    
    
    14,059
    
    
    
    6,887Secured by 1-4 family res. Properties  mezzanine
    
    
    335
    
    
    
    3,504Secured by non-farm nonresidential properties
    
    
    234,573
    
    
    
    261,350Secured by non-farm nonresidential properties  mezzanine
    
    
    4,111
    
    
    
    8,749Tax certificates
    
    
    64,168
    
    
    
    46,090Commercial and industrial loans
    
    
    86,278
    
    
    
    77,793Loans to individuals for household, family, and other personal
expenditures
    
    
    1,031
    
    
    
    1,157Obligations of state and political subdivisions in the U.S.
    
    
    47
    
    
    
    63Lease financing receivables (net of unearned income)
    
    
    26,123
    
    
    
    19,778All other loans
    
    
    165
    
    
    
    267Less: Net deferred loan fees
    
    
    1,441
    
    
    
    1,545Total loans and leases, net of unearned income
    
    $
    700,722
    
    
    $
    644,475
     93




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
    As of December 31,(In thousands)
    
    2008
    
    
    2007Impaired loans with a valuation allowance
    
    $
    69,350
    
    
    $
    22,052Impaired loans without a valuation allowance
    
    
    16,480
    
    
    
    3,349Total impaired loans
    
    $
    85,830
    
    
    $
    25,401Valuation allowance related to impaired loans
    
    $
    12,882
    
    
    $
    4,560
 For the years ended December 31,(In thousands)
    
    2008
    
    2007
    
    2006Average investment in impaired loans
    
    $
    55,134
    
    
    $
    24,741
    
    
    $
    13,500Interest income recognized on impaired loans
    
    $
    302
    
    
    $
    763
    
    
    $
    641Interest income recognized on a cash basis on impaired loans
    
    $
    302
    
    
    $
    763
    
    
    $
    641
   For the years ended December 31,(In thousands)
    
    2008
    
    
    2007
    
    
    2006Balance at the beginning of the year
    
    $
    19,282
    
    
    $
    11,455
    
    
    $
    10,276Charge-offs
    
    
    (12,327
    )
    
    
    (5,466
    )
    
    
    (745
    )Recoveries
    
    
    112
    
    
    
    267
    
    
    
    121Net charge-offs
    
    
    (12,215
    )
    
    
    (5,199
    )
    
    
    (624
    )Provision for loan losses and leases
    
    
    21,841
    
    
    
    13,026
    
    
    
    1,803Balance at the end of year
    
    $
    28,908
    
    
    $
    19,282
    
    
    $
    11,455
  94




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
  Estimated
    
    
    As of December 31,(In thousands)
    
    Useful Lives
    
    
    2008
    
    
    2007Land
    
    
    
    
    
    $
    2,396
    
    
    $
    2,396Buildings and leasehold improvements
    
    5  39 years
    
    
    8,010
    
    
    
    8,149Furniture, fixtures and equipment
    
    3  7 years
    
    
    6,711
    
    
    
    6,19817,117
    
    
    
    16,743Less accumulated depreciation and amortization
    
    
    
    
    
    
    10,191
    
    
    
    9,302$
    6,926
    
    
    $
    7,441
    As of December 31,(In thousands)
    
    2008
    
    
    2007Demand
    
    $
    50,886
    
    
    $
    59,573NOW
    
    
    48,431
    
    
    
    52,766Money Market
    
    
    145,438
    
    
    
    197,678Savings
    
    
    15,171
    
    
    
    15,352Time, $100 and over
    
    
    325,958
    
    
    
    265,250Other time
    
    
    174,184
    
    
    
    179,533Total deposits
    
    $
    760,068
    
    
    $
    770,152
   (In thousands)
    
    As of December 31, 20082009
    
    $
    257,0042010
    
    
    158,6842011
    
    
    67,3292012
    
    
    8,2072013
    
    
    4,448Thereafter
    
    
    4,470Total certificates of deposit
    
    $
    500,142
  95




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
  Advances from the Federal Home Loan Bank
     As of December 31,(Dollars in thousands)
    
    2008
    
    
    20072008
    
    $
    
    
    
    
    
    
    
    $
    102,000
    
    
    
    4.36
    %2009
    
    
    37,000
    
    
    
    2.63
    %
    
    
    15,000
    
    
    
    5.58
    %2010
    
    
    92,500
    
    
    
    5.30
    %
    
    
    92,500
    
    
    
    5.30
    %2011
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %2012
    
    
    51,069
    
    
    
    3.96
    %
    
    
    30,000
    
    
    
    4.32
    %2013
    
    
    50,000
    
    
    
    2.64
    %
    
    
    50,000
    
    
    
    2.64
    %Total FHLB borrowings
    
    $
    230,569
    
    
    
    
    
    
    $
    289,500
 Other borrowings
    96




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
  Subordinated debentures
     (In thousands)
    
    As of December 31, 20082009
    
    $
    1,0792010
    
    
    7882011
    
    
    4842012
    
    
    3192013
    
    
    67Total lease commitments
    
    $
    2,737
      97




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
     For the years ended December 31,(In thousands)
    
    2008
    
    
    2007
    
    
    2006Income tax expense (benefit)Current
    
    $
    (7,819
    )
    
    $
    2,620
    
    
    $
    11,952Deferred
    
    
    10,462
    
    
    
    (4,188
    )
    
    
    (1,937
    )Income tax expense (benefit)
    
    $
    2,643
    
    
    $
    (1,568
    )
    
    $
    10,015
  For the years ended December 31,(In thousands)
    
    2008
    
    
    2007
    
    
    2006Computed tax (benefit) expense at statutory rate
    
    $
    (12,404
    )
    
    $
    (351
    )
    
    $
    11,054Tax-exempt income
    
    
    (170
    )
    
    
    (229
    )
    
    
    (257
    )Low-income housing tax credit
    
    
    
    
    
    
    
    
    
    
    (544
    )Nondeductible expense
    
    
    69
    
    
    
    78
    
    
    
    65Bank owned life insurance
    
    
    (432
    )
    
    
    (306
    )
    
    
    (296
    )Other non-taxable income
    
    
    (413
    )
    
    
    (391
    )
    
    
    Other, net
    
    
    496
    
    
    
    (369
    )
    
    
    (7
    )Establishment of valuation allowance
    
    
    15,497
    
    
    
    
    
    
    
    Applicable income tax expense (benefit)
    
    $
    2,643
    
    
    $
    (1,568
    )
    
    $
    10,015
  98




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
   As of December 31,(In thousands)
    
    2008
    
    
    2007Deferred tax assetsAllowance for loan losses
    
    $
    10,118
    
    
    $
    6,749Asset valuation reserves
    
    
    431
    
    
    
    431Investment in partnerships
    
    
    3,654
    
    
    
    1,957Accrued pension liability
    
    
    3,641
    
    
    
    3,239Accrued stock-based compensation
    
    
    732
    
    
    
    486Net operating loss carryovers from Knoblauch State Bank
    
    
    1,232
    
    
    
    1,409Unrealized losses on investment securities available for sale
    
    
    11,738
    
    
    
    222Deferred tax assets before valuation allowance
    
    
    31,546
    
    
    
    14,493Less valuation allowance
    
    
    (15,497
    )
    
    
    Less valuation allowance for equity securities
    
    
    (3,119
    )
    
    
    Total deferred tax assets
    
    
    12,930
    
    
    
    14,493Deferred tax liabilitiesPenalties on delinquent tax certificates
    
    
    420
    
    
    
    183Accretion on investments
    
    
    488
    
    
    
    369Prepaid Deductions
    
    
    337
    
    
    
    170Other
    
    
    (30
    )
    
    
    1Total deferred tax liabilities
    
    
    1,215
    
    
    
    723Net deferred tax assets, included in other assets
    
    $
    11,715
    
    
    $
    13,770
     99




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
        100




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
   For the year ended December 31, 2008Loss
    
    Average shares
    
    Per share(In thousands, except for per share data)
    
    (numerator)
    
    (denominator)
    
    AmountBasic and Diluted EPSLoss available to common shareholders
    
    $
    (38,082
    )
    
    
    13,294
    
    
    $
    (2.86
    )
  For the year ended December 31, 2007Income
    
    
    Average shares
    
    
    Per share(In thousands, except for per share data)
    
    (numerator)
    
    
    (denominator)
    
    
    AmountBasic EPSIncome available to common shareholders
    
    $
    564
    
    
    
    13,433
    
    
    $
    0.04Effect of dilutive securities:Stock options
    
    
    
    
    
    
    14
    
    
    
    (0.00
    )Diluted EPSIncome available to common shareholders plus
assumed exercise of options
    
    $
    564
    
    
    
    13,447
    
    
    $
    0.04
  For the year ended December 31, 2006Income
    
    
    Average shares
    
    
    Per share(In thousands, except for per share data)
    
    (numerator)
    
    
    (denominator)
    
    
    AmountBasic EPSIncome available to common shareholders
    
    $
    21,568
    
    
    
    13,460
    
    
    $
    1.60Effect of dilutive securities:Stock options
    
    
    
    
    
    
    111
    
    
    
    (0.01
    )Diluted EPSIncome available to common shareholders plus
assumed exercise of options
    
    $
    21,568
    
    
    
    13,571
    
    
    $
    1.59
  101




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
     2008 (1)
    
    2008 (2)
    
    2007 (1)
    
    2007 (2)
    
    2006Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    4.85
    %
    
    
    4.85
    %
    
    
    4.09
    %Expected life
    
    7.5 years
    
    5.5 years
    
    7.5 years
    
    5.5 years
    
    7 yearsExpected volatility
    
    
    49.90
    %
    
    
    45.18
    %
    
    
    29.68
    %
    
    
    26.35
    %
    
    
    24.47
    %Risk-free interest rate
    
    
    3.51
    %
    
    
    3.51
    %
    
    
    4.79
    %
    
    
    4.58
    %
    
    
    4.71
    %
 
 (1)
    
    Amounts represent weighted average assumption for options granted during 2008 and 2007 to
employees under the Long Term Incentive Plan.(2)
    
    Amounts represent weighted average assumption for options granted during 2008 and 2007 to
directors under the Long Term Incentive Plan.  Outside Directors Stock Option Plan
   102




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
   2008
    
    
    2007
    
    
    2006Weighted
    
    
    Weighted
    
    
    
    
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    Remaining
    
    
    Intrinsic
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseOptions
    
    
    Price
    
    
    Term (yrs)
    
    
    Value (1)
    
    
    Options
    
    
    Price
    
    
    Options
    
    
    PriceOptions outstanding at beginning of year
    
    
    100,294
    
    
    $
    18.62
    
    
    
    
    
    
    
    
    
    
    
    102,552
    
    
    $
    18.41
    
    
    
    95,621
    
    
    $
    17.65Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,325
    
    
    
    21.78Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,258
    )
    
    
    9.13
    
    
    
    (10,394
    )
    
    
    17.96Forfeited
    
    
    (4,344
    )
    
    
    13.75
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options outstanding at the end of the year
    
    
    95,950
    
    
    $
    18.82
    
    
    
    4.4
    
    
    $
    
    
    
    
    100,294
    
    
    $
    18.62
    
    
    
    102,552
    
    
    $
    18.41Options exercisable at the end of the year
    
    
    95,950
    
    
    $
    18.82
    
    
    
    4.4
    
    
    $
    
    
    
    
    100,294
    
    
    $
    18.62
    
    
    
    85,227
    
    
    $
    17.72Weighted-average fair value of options
granted during the year
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    4.91
 
 (1)
    
    The aggregate intrinsic value of a stock option in the table above represents the total
pre-tax intrinsic value (the amount by which the current market value of the underlying stock
exceeds the exercise price of the option) that would have been received by the option holders had
they exercised their options on December 31, 2008. The intrinsic value varies based on the changes
in the market value in the Companys stock.  Options outstandingWeighted
    
    
    WeightedAverage
    
    
    AverageRange of
    
    Number
    
    
    Exercise
    
    
    Remainingexercise prices
    
    Outstanding
    
    
    Price
    
    
    Term (yrs)$10.57
    
    
    4,178
    
    
    $
    10.57
    
    
    
    0.8$11.72  $13.22
    
    
    14,944
    
    
    
    11.81
    
    
    
    1.7$16.55  $20.70
    
    
    27,063
    
    
    
    18.11
    
    
    
    3.6$21.78  $22.38
    
    
    49,765
    
    
    
    22.01
    
    
    
    6.095,950
    
    
    $
    18.82
    
    
    
    4.4
  Employee Stock Option and Appreciation Right Plan
   103




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
   2008
    
    
    2007
    
    
    2006Weighted
    
    
    Weighted
    
    
    
    
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    Remaining
    
    
    Intrinsic
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseOptions
    
    
    Price
    
    
    Term (yrs)
    
    
    Value (1)
    
    
    Options
    
    
    Price
    
    
    Options
    
    
    PriceOptions outstanding at beginning of year
    
    
    799,831
    
    
    $
    19.64
    
    
    
    
    
    
    
    
    
    
    
    853,804
    
    
    $
    19.47
    
    
    
    774,029
    
    
    $
    18.68Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    157,500
    
    
    
    21.78Exercised
    
    
    (14,588
    )
    
    
    11.89
    
    
    
    
    
    
    
    
    
    
    
    (24,718
    )
    
    
    11.83
    
    
    
    (46,877
    )
    
    
    14.14Forfeited
    
    
    (99,370
    )
    
    
    20.23
    
    
    
    
    
    
    
    
    
    
    
    (29,255
    )
    
    
    21.60
    
    
    
    (30,848
    )
    
    
    22.01Options outstanding at the end of the year
    
    
    685,873
    
    
    $
    19.72
    
    
    
    3.4
    
    
    $
    
    
    
    
    799,831
    
    
    $
    19.63
    
    
    
    853,804
    
    
    $
    19.48Options exercisable at the end of the year
    
    
    525,789
    
    
    $
    19.05
    
    
    
    3.0
    
    
    $
    
    
    
    
    479,441
    
    
    $
    18.57
    
    
    
    390,819
    
    
    $
    17.04Weighted-average fair value of options
granted during the year
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    4.91
 
 (1)
    
    The aggregate intrinsic value of a stock option in the table above represents the total pre-tax
intrinsic value (the amount by which the current market value of the underlying stock exceeds the
exercise price of the option) that would have been received by the option holders had they
exercised their options on December 31, 2008. The intrinsic value varies based on the changes in
the market value in the Companys stock.  Options outstanding
    
    Options exercisableWeighted
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    Average
    
    
    
    
    
    AverageRange of
    
    Number
    
    Exercise
    
    Remaining
    
    Number
    
    Exerciseexercise prices
    
    Outstanding
    
    Price
    
    Term (yrs)
    
    Outstanding
    
    Price$10.57
    
    
    13,278
    
    
    $
    10.57
    
    
    
    0.3
    
    
    
    13,278
    
    
    $
    10.57$11.72  $13.22
    
    
    82,649
    
    
    
    11.86
    
    
    
    1.2
    
    
    
    82,649
    
    
    
    11.86$16.55  $20.70
    
    
    154,013
    
    
    
    18.09
    
    
    
    2.6
    
    
    
    154,013
    
    
    
    18.09$21.78  $22.38
    
    
    435,933
    
    
    
    22.07
    
    
    
    4.2
    
    
    
    275,849
    
    
    
    21.17685,873
    
    
    $
    19.72
    
    
    
    3.4
    
    
    
    525,789
    
    
    $
    19.05
  Number
    
    
    Weighted averageof shares
    
    
    exercise priceNon-vested options December 31, 2007
    
    
    296,644
    
    
    $
    21.20Forfeited
    
    
    (77,649
    )
    
    
    21.53Vested
    
    
    (58,911
    )
    
    
    21.55Non-vested options December 31, 2008
    
    
    160,084
    
    
    $
    20.91
  104




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
 
 Long-Term Incentive Plan
    2008
    
    
    2007Weighted
    
    
    Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    Remaining
    
    
    Intrinsic
    
    
    
    
    
    
    ExerciseOptions
    
    
    Price
    
    
    Term (yrs)
    
    
    Value (1)
    
    
    Options
    
    
    PriceOptions outstanding at beginning of year
    
    
    76,940
    
    
    $
    20.08
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    Granted
    
    
    95,450
    
    
    
    4.50
    
    
    
    
    
    
    
    
    
    
    
    76,940
    
    
    
    20.08Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (10,489
    )
    
    
    20.08
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options outstanding at the end of the year
    
    
    161,901
    
    
    $
    10.89
    
    
    
    8.4
    
    
    $
    
    
    
    
    76,940
    
    
    $
    20.08Options exercisable at the end of the year
    
    
    28,340
    
    
    $
    20.08
    
    
    
    7.0
    
    
    $
    
    
    
    
    
    
    
    $
    Weighted-average fair value of options
granted during the year
    
    
    
    
    
    $
    2.38
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    4.12
 
 (1)
    
    The aggregate intrinsic value of a stock option in the table above represents the total pre-tax
intrinsic value (the amount by which the current market value of the underlying stock exceeds the
exercise price of the option) that would have been received by the option holders had they
exercised their options on December 31, 2008. The intrinsic value varies based on the changes in
the market value in the Companys stock.  Options outstanding
    
    
    Options exercisableWeighted
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    Average
    
    
    
    
    
    
    AverageRange of
    
    Number
    
    
    Exercise
    
    
    Remaining
    
    
    Number
    
    
    Exerciseexercise prices
    
    Outstanding
    
    
    Price
    
    
    Term (yrs)
    
    
    Outstanding
    
    
    Price$4.50
    
    
    95,450
    
    
    $
    4.50
    
    
    
    9.8
    
    
    
    
    
    
    $
    $20.08
    
    
    66,451
    
    
    
    20.08
    
    
    
    6.4
    
    
    
    28,340
    
    
    
    20.08161,901
    
    
    $
    10.89
    
    
    
    8.4
    
    
    
    28,340
    
    
    $
    20.08
  105




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
   Number
    
    
    Weighted averageof shares
    
    
    exercise priceNon-vested options December 31, 2007
    
    
    76,940
    
    
    $
    20.08Granted
    
    
    95,450
    
    
    
    4.50Forfeited
    
    
    (10,489
    )
    
    
    20.08Vested
    
    
    (28,340
    )
    
    
    20.08Non-vested options December 31, 2008
    
    
    133,561
    
    
    $
    8.95
     2008
    
    
    2007Weighted
    
    
    Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    Remaining
    
    
    Intrinsic
    
    
    
    
    
    
    ExerciseOptions
    
    
    Price
    
    
    Term (yrs)
    
    
    Value
    
    
    Options
    
    
    PriceRestricted options at the beginning of year
    
    
    18,682
    
    
    $
    11.43
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,682
    
    
    
    11.43Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (8,530
    )
    
    
    11.43
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restricted options at the end of year
    
    
    10,152
    
    
    $
    11.43
    
    
    
    1.9
    
    
    $
    
    
    
    
    18,682
    
    
    $
    11.43Options exercisable at the end of the year
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
  106




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
   Options outstandingWeighted
    
    WeightedAverage
    
    AverageRange of
    
    Number
    
    Exercise
    
    Remainingexercise prices
    
    Outstanding
    
    Price
    
    Term (yrs)$11.43
    
    
    10,152
    
    
    
    $  11.43
    
    
    
    1.9
      For the years ended December 31,(In thousands)
    
    2008
    
    
    2007Change in benefit obligationBenefit obligation at beginning of year
    
    $
    9,156
    
    
    $
    8,541Service cost
    
    
    472
    
    
    
    513Interest cost
    
    
    526
    
    
    
    491Benefits paid
    
    
    (56
    )
    
    
    (56
    )Amortization of actuarial loss
    
    
    135
    
    
    
    (333
    )Benefits obligation at end of year
    
    $
    10,233
    
    
    $
    9,156Unrecognized prior service cost
    
    
    628
    
    
    
    721Unrecognized actuarial loss
    
    
    1,189
    
    
    
    1,077$
    1,817
    
    
    $
    1,798
  107




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
   As of December 31,2008
    
    
    2007Discount rate
    
    
    5.50
    %
    
    
    5.75
    %Rate of compensation increase
    
    
    4.00
    %
    
    
    4.00
    %
  For the years ended December 31,2008
    
    
    2007
    
    
    2006Service cost
    
    $
    472
    
    
    $
    513
    
    
    $
    773Interest cost
    
    
    526
    
    
    
    491
    
    
    
    347Amortization prior service cost
    
    
    94
    
    
    
    94
    
    
    
    Amortization prior service gain/loss
    
    
    23
    
    
    
    80
    
    
    
    Net periodic benefit cost
    
    $
    1,115
    
    
    $
    1,178
    
    
    $
    1,120
  As of December 31, 2008Non-Qualified(In thousands)
    
    Pension Plans2009
    
    $
    572010
    
    
    4382011
    
    
    5762012
    
    
    6142013
    
    
    648Thereafter next five years
    
    
    4,973
  Defined Contribution Plan
   108




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
     As of December 31,(In thousands)
    
    2008
    
    2007Financial instruments whose contract amounts represent credit riskOpen-end lines of credit
    
    $
    98,549
    
    
    $
    135,166Commitments to extend credit
    
    
    1,840
    
    
    
    27,006Standby letters of credit and financial guarantees written
    
    
    4,563
    
    
    
    6,886Interest rate swap agreements
    
    
    
    
    
    
    60,502
      109




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
      Level 1:
    
    Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets or liabilities.Level 2:
    
    Quoted prices in markets that are not active, or inputs that are observable
either directly or indirectly, for substantially the full term of the asset or
liability.Level 3:
    
    Prices or valuation techniques that require inputs that are both significant
to the fair value measurement and unobservable (i.e., supported with little or no market
activity).
   Significant
    
    SignificantQuoted Prices in
    
    Other
    
    OtherActive Markets for
    
    Observable
    
    UnobservableIdentical Assets
    
    Inputs
    
    Inputs
    
    Balance as of(In thousands)
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)
    
    December 31, 2008Investment securities available for sale
    
    $
    48,731
    
    
    $
    223,314
    
    
    $
    78,257
    
    
    $
    350,302
 110




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
   InvestmentSecurities(In thousands)
    
    Available for SaleAssetsBeginning Balance December 31, 2007
    
    $
    68,969Total gains/(losses)  (realized/unrealized):Included in earnings
    
    
    (5,578
    )Included in other comprehensive loss
    
    
    (19,529
    )Purchases, issuances, and settlements, net
    
    
    (7,900
    )Transfers in and/or out of Level 3
    
    
    42,295Ending balance December 31, 2008
    
    $
    78,257
   Significant
    
    SignificantQuoted Prices in
    
    Other
    
    OtherActive Markets for
    
    Observable
    
    UnobservableIdentical Assets
    
    Inputs
    
    Inputs
    
    Balance as of(In thousands)
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)
    
    December 31, 2008Impaired loans
    
    $
    
    
    
    $
    
    
    
    $
    56,468
    
    
    $
    56,468
   Cash and cash equivalents (carried at cost):
  111




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
  Securities:
  Loans receivable (carried at cost):
  Impaired loans (generally carried at fair value):
 ,
 Interest rate swaps (carried at fair value):
  Restricted investment in bank stock (carried at cost):
  Accrued interest receivable and payable (carried at cost):
  Deposit liabilities (carried at cost):
  Short-term borrowings (carried at cost):
  112




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
  Long-term debt (carried at cost):
  Subordinated debt (carried at cost):
  Off-balance sheet financial instruments (disclosed at cost):
  As of December 31,2008
    
    2007Estimated
    
    Carrying
    
    Estimated
    
    Carrying(In thousands)
    
    fair value
    
    amount
    
    fair value
    
    amountCash and cash equivalents
    
    $
    14,259
    
    
    $
    14,259
    
    
    $
    10,905
    
    
    $
    10,905Investment securities held to maturity
    
    
    
    
    
    
    
    
    
    
    143,456
    
    
    
    142,905Investment securities available for sale
    
    
    350,302
    
    
    
    350,302
    
    
    
    375,328
    
    
    
    375,328Loans, net
    
    
    672,449
    
    
    
    671,814
    
    
    
    624,290
    
    
    
    625,193Federal Home Loan Bank stock
    
    
    10,952
    
    
    
    10,952
    
    
    
    13,462
    
    
    
    13,462Non maturity deposits
    
    
    259,926
    
    
    
    259,926
    
    
    
    325,369
    
    
    
    325,369Deposits with stated maturities
    
    
    513,707
    
    
    
    500,142
    
    
    
    446,911
    
    
    
    444,783Short-term borrowings
    
    
    22,000
    
    
    
    22,000
    
    
    
    102,000
    
    
    
    102,000Long-term borrowings
    
    
    263,552
    
    
    
    253,681
    
    
    
    198,402
    
    
    
    192,911Subordinated debt
    
    
    25,774
    
    
    
    25,774
    
    
    
    25,774
    
    
    
    25,774Obligations from equity investments
    
    
    12,350
    
    
    
    12,350
    
    
    
    18,566
    
    
    
    18,566
     113




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
  Payment of Dividends
      Capital Ratios
     114




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
   As of December 31, 2008To be wellcapitalized underFor capital
    
    prompt correctiveActual
    
    adequacy purposes
    
    action provisions(Dollars in thousands)
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioTotal capital (to risk-weighted assets)Company (consolidated)
    
    $
    136,273
    
    
    
    13.04
    %
    
    $
    83,611
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/ARoyal Bank
    
    
    97,478
    
    
    
    10.26
    %
    
    
    76,007
    
    
    
    8.00
    %
    
    $
    95,008
    
    
    
    10.00
    %Royal Asian
    
    
    14,739
    
    
    
    18.65
    %
    
    
    6,322
    
    
    
    8.00
    %
    
    
    7,903
    
    
    
    10.00
    %Tier I capital (to risk-weighted assets)Company (consolidated)
    
    $
    123,013
    
    
    
    11.77
    %
    
    $
    41,806
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/ARoyal Bank
    
    
    85,406
    
    
    
    8.99
    %
    
    
    38,003
    
    
    
    4.00
    %
    
    
    57,005
    
    
    
    6.00
    %Royal Asian
    
    
    13,749
    
    
    
    17.40
    %
    
    
    3,161
    
    
    
    4.00
    %
    
    
    4,742
    
    
    
    6.00
    %Tier I Capital (to average assets, leverage)Company (consolidated)
    
    $
    123,013
    
    
    
    10.30
    %
    
    $
    35,835
    
    
    
    3.00
    %
    
    
    N/A
    
    
    
    N/ARoyal Bank
    
    
    85,406
    
    
    
    7.81
    %
    
    
    32,819
    
    
    
    3.00
    %
    
    
    54,698
    
    
    
    5.00
    %Royal Asian
    
    
    13,749
    
    
    
    13.97
    %
    
    
    2,952
    
    
    
    3.00
    %
    
    
    4,921
    
    
    
    5.00
    %
 As of December 31, 2007To be wellcapitalized underFor capital
    
    prompt correctiveActual
    
    adequacy purposes
    
    action provisions(Dollars in thousands)
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioTotal capital (to risk-weighted assets)Company (consolidated)
    
    $
    186,932
    
    
    
    18.27
    %
    
    $
    81,833
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/ARoyal Bank
    
    
    133,944
    
    
    
    14.48
    %
    
    
    74,007
    
    
    
    8.00
    %
    
    $
    92,509
    
    
    
    10.00
    %Royal Asian
    
    
    15,587
    
    
    
    21.46
    %
    
    
    5,810
    
    
    
    8.00
    %
    
    
    7,262
    
    
    
    10.00
    %Tier I capital (to risk-weighted assets)Company (consolidated)
    
    $
    174,065
    
    
    
    17.02
    %
    
    $
    40,916
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/ARoyal Bank
    
    
    122,297
    
    
    
    13.22
    %
    
    
    37,004
    
    
    
    4.00
    %
    
    
    55,505
    
    
    
    6.00
    %Royal Asian
    
    
    14,679
    
    
    
    20.21
    %
    
    
    2,905
    
    
    
    4.00
    %
    
    
    4,357
    
    
    
    6.00
    %Tier I Capital (to average assets, leverage)Company (consolidated)
    
    $
    174,065
    
    
    
    13.57
    %
    
    $
    38,493
    
    
    
    3.00
    %
    
    
    N/A
    
    
    
    N/ARoyal Bank
    
    
    122,297
    
    
    
    10.23
    %
    
    
    35,882
    
    
    
    3.00
    %
    
    
    59,803
    
    
    
    5.00
    %Royal Asian
    
    
    14,679
    
    
    
    15.68
    %
    
    
    2,809
    
    
    
    3.00
    %
    
    
    4,682
    
    
    
    5.00
    %
 115




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
   CONDENSED BALANCE SHEETS
 As of December 31,(In thousands)
    
    2008
    
    
    2007AssetsCash
    
    $
    3,028
    
    
    $
    4,221Investment in non-bank subsidiaries
    
    
    37,336
    
    
    
    48,644Investment in Royal Bank America
    
    
    45,893
    
    
    
    96,970Investment in Royal Asian
    
    
    13,798
    
    
    
    14,863Loans, net
    
    
    4,559
    
    
    
    6,489Other assets
    
    
    847
    
    
    
    954Total assets
    
    $
    105,461
    
    
    $
    172,141Subordinated debentures
    
    $
    25,774
    
    
    $
    25,774Stockholders equity
    
    
    79,687
    
    
    
    146,367Total liabilities and stockholders equity
    
    $
    105,461
    
    
    $
    172,141
 CONDENSED STATEMENTS OF INCOME
 For the years ended December 31,(In thousands)
    
    2008
    
    
    2007
    
    
    2006IncomeDividends from subsidiary banks
    
    $
    4,005
    
    
    $
    15,474
    
    
    $
    14,267Other income
    
    
    222
    
    
    
    98
    
    
    
    826Total Income
    
    
    4,227
    
    
    
    15,572
    
    
    
    15,093ExpensesOther expenses
    
    
    1,172
    
    
    
    220
    
    
    
    125Provision for loan losses
    
    
    701
    
    
    
    
    
    
    
    Interest on subordinated debentures
    
    
    1,436
    
    
    
    1,736
    
    
    
    1,685Total Expenses
    
    
    3,309
    
    
    
    1,956
    
    
    
    1,810Income before income taxes and equity in undistributed
net loss
    
    
    918
    
    
    
    13,616
    
    
    
    13,283Income tax (benefit) expense
    
    
    (578
    )
    
    
    (43
    )
    
    
    245Equity in undistributed net (losses) earnings
    
    
    (39,578
    )
    
    
    (13,095
    )
    
    
    8,530Net (loss) income
    
    $
    (38,082
    )
    
    $
    564
    
    
    $
    21,568
  116




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
  CONDENSED STATEMENTS OF CASH FLOWS
 For the years ended December 31,(In thousands)
    
    2008
    
    
    2007
    
    
    2006Cash flows from operating activitiesNet (loss) income
    
    $
    (38,082
    )
    
    $
    564
    
    
    $
    21,568Adjustments to reconcile net income to net cash
provided by operating activities:Undistributed losses (earnings) from subsidiaries
    
    
    41,014
    
    
    
    14,831
    
    
    
    (6,845
    )Provision for loan losses
    
    
    701
    
    
    
    
    
    
    
    Non-cash income tax (benefit) expense
    
    
    (578
    )
    
    
    (43
    )
    
    
    245Net cash provided by operating activities
    
    
    3,055
    
    
    
    15,352
    
    
    
    14,968Cash flows from investing activitiesInvestment in Royal Asian
    
    
    
    
    
    
    
    
    
    
    (15,000
    )Net cash used in investing activities
    
    
    
    
    
    
    
    
    
    
    (15,000
    )Cash flows from financing activities:Loan payoffs (fundings)
    
    
    1,229
    
    
    
    (590
    )
    
    
    (1,217
    )Cash dividends paid
    
    
    (4,005
    )
    
    
    (15,473
    )
    
    
    (14,256
    )Issuance of common stock under stock option plan
    
    
    174
    
    
    
    334
    
    
    
    666Purchase of treasury stock
    
    
    (946
    )
    
    
    (3,760
    )
    
    
    Income tax benefit on stock options
    
    
    
    
    
    
    114
    
    
    
    358Other, net
    
    
    (700
    )
    
    
    312
    
    
    
    (1,706
    )Net cash used in financing activities
    
    
    (4,248
    )
    
    
    (19,063
    )
    
    
    (16,155
    )Net decrease in cash and cash equivalents
    
    
    (1,193
    )
    
    
    (3,711
    )
    
    
    (16,187
    )Cash and cash equivalents at beginning of period
    
    
    4,221
    
    
    
    7,932
    
    
    
    24,119Cash and cash equivalents at end of period
    
    $
    3,028
    
    
    $
    4,221
    
    
    $
    7,932
  117




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
   For the year ended December 31, 2008Fourth
    
    
    
    
    
    
    Second
    
    
    First(In thousands, except per share data)
    
    Quarter
    
    
    Third Quarter
    
    
    Quarter
    
    
    QuarterInterest income
    
    $
    17,358
    
    
    $
    17,632
    
    
    $
    17,702
    
    
    $
    20,072Net interest income
    
    
    7,391
    
    
    
    8,115
    
    
    
    9,250
    
    
    
    9,899Provision for loan losses
    
    
    8,754
    
    
    
    5,275
    
    
    
    4,531
    
    
    
    3,281Net interest (loss) income after provision
    
    
    (1,363
    )
    
    
    2,840
    
    
    
    4,719
    
    
    
    6,618Non interest (loss) income
    
    
    (5,510
    )
    
    
    (14,022
    )
    
    
    2,452
    
    
    
    1,292Non interest expenses
    
    
    10,847
    
    
    
    7,663
    
    
    
    7,204
    
    
    
    6,751(Loss) income before income tax (benefit) expense
    
    
    (17,720
    )
    
    
    (18,845
    )
    
    
    (33
    )
    
    
    1,159Net (loss) income
    
    $
    (27,265
    )
    
    $
    (12,012
    )
    
    $
    152
    
    
    $
    1,043Net (loss) income per shareBasic
    
    $
    (2.05
    )
    
    $
    (0.90
    )
    
    $
    0.01
    
    
    $
    0.08Diluted
    
    $
    (2.05
    )
    
    $
    (0.90
    )
    
    $
    0.01
    
    
    $
    0.08
   118




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
  For the year ended December 31, 2007Fourth
    
    
    Third
    
    
    Second
    
    
    First(In thousands, except per share data)
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterInterest income
    
    $
    22,327
    
    
    $
    22,348
    
    
    $
    22,601
    
    
    $
    19,460Net interest income
    
    
    10,244
    
    
    
    10,098
    
    
    
    10,019
    
    
    
    7,502Provision for loan losses
    
    
    5,759
    
    
    
    6,896
    
    
    
    159
    
    
    
    212Net interest income after provision
    
    
    4,485
    
    
    
    3,202
    
    
    
    9,860
    
    
    
    7,290Non interest income
    
    
    5,774
    
    
    
    1,847
    
    
    
    2,714
    
    
    
    2,553Non interest expenses
    
    
    6,468
    
    
    
    18,857
    
    
    
    6,829
    
    
    
    6,575Income (loss) before income tax expense (benefit)
    
    
    3,791
    
    
    
    (13,808
    )
    
    
    5,745
    
    
    
    3,268Net income (loss)
    
    $
    3,459
    
    
    $
    (9,180
    )
    
    $
    3,958
    
    
    $
    2,327Net income (loss) per shareBasic
    
    $
    0.27
    
    
    $
    (0.69
    )
    
    $
    0.29
    
    
    $
    0.17Diluted
    
    $
    0.27
    
    
    $
    (0.69
    )
    
    $
    0.29
    
    
    $
    0.17
      119




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
     
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A(T). CONTROLS AND PROCEDURES
   Managements Report on Internal Control Over Financial Reporting
   120




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##### Table of Contents



By: /s/ Robert R. Tabas
    
    
    
    By:
    
    /s/ Robert A. KuehlRobert R. Tabas
    
    
    
    Robert A. KuehlChief Executive Officer
    
    
    
    Chief Financial Officer
  
 PART III.
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS OF REGISTRANT AND CORPORATE GOVERNANCE
  
 ITEM 11. EXECUTIVE COMPENSATION
   
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDERS MATTERS
  
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
  121




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##### Table of Contents



ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
  
 PART IV
 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 (a.)
    
    
    1.
    
    
    Financial StatementsThe following financial statements are included by reference in Part II, Item 8 hereof.Report of Independent Registered Public Accounting FirmConsolidated 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 SchedulesFinancial 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.(b.)
    
    The following Exhibits are filed herewith or incorporated by reference as a part of this Annual Report.3(i)

    
    Articles of Incorporation.3(ii)
    
    By-laws.4.1
    
    
    Junior Subordinated Debt Security Due 2034 issued by Royal Bancshares of
Pennsylvania, Inc. to JPMorgan Chase Bank, as Institutional Trustee, dated October 27,
2004. (Incorporated by reference to Exhibit 4.1 to Registrants Current Report on Form
8-K (included as Exhibit A to Exhibit 10.1) filed with the Commission on November 1,
2004.))4.2
    
    
    Junior Subordinated Debt Security Due 2034 issued by Royal Bancshares of
Pennsylvania, Inc. to JPMorgan Chase Bank, as Institutional Trustee, dated October 27,
2004. (Incorporated by reference to Exhibit 4.2 to Registrants Current Report on Form
8-K (included as Exhibit A to Exhibit 10.2) filed with the Commission on November 1,
2004.))4.3
    
    
    Indenture by and between Royal Bancshares of Pennsylvania, Inc. and JPMorgan
Chase Bank, as Trustee, dated October 27, 2004. (Incorporated by reference to Exhibit
10.1 to Registrants Current Report on Form 8-K filed with the Commission on November
1, 2004.)4.4
    
    
    Indenture by and between Royal Bancshares of Pennsylvania, Inc. and JPMorgan
Chase Bank, as Trustee, dated October 27, 2004. (Incorporated by reference to Exhibit
10.2 to Registrants Current Report on Form 8-K filed with the Commission on November
1, 2004.)4.5
    
    
    Guarantee Agreement by and between Royal Bancshares of Pennsylvania, Inc. and
JPMorgan Chase Bank, as Guarantee Trustee, dated October 27, 2004. (Incorporated by
reference to Exhibit
10.3 to Registrants Current Report on Form 8-K filed with the Commission on
November 1, 2004.)
 122




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##### Table of Contents



4.6
    
    
    Guarantee Agreement by and between Royal Bancshares of Pennsylvania, Inc. and
JPMorgan Chase Bank, as Guarantee Trustee, October 27, 2004. (Incorporated by
reference to Exhibit 10.4 to Registrants Current Report on Form 8-K filed with the
Commission on November 1, 2004.)10.1
    
    
    Stock Option and Appreciation Right Plan. As amended on March 15, 2005
(Incorporated by reference to the Registrants Registration Statement N0. 333-135226,
on form S-8 filed with the Commission on June 22, 2006).*10.2
    
    
    Stock Option and Appreciation Right Plan. As amended on May 16, 2005
(Incorporated by reference to the Registrants Registration Statement N0. 333-129894,
on form S-8 filed with the Commission on November 22, 2005).*10.3
    
    
    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).*10.4
    
    
    Transition Agreement dated October 10, 2008 between Royal Bancshares of
Pennsylvania, Inc. (Corporation), and Joseph P. Campbell. (Incorporated by reference
to Exhibit 10.1 to Registrants current Report on Form 8-K as filed with the Commission
on October 16, 2008.)10.5
    
    
    Employment Agreement dated September 22, 2006 by and among Royal Bancshares of
Pennsylvania, Inc. (Corporation), Royal Bank America (Bank), and James J.
McSwiggan, Jr., Chief Operating Officer of the Corporation and the Bank.
(Incorporated by reference to Exhibit 10.2 to Registrants Quarterly Report on Form
10-Q dated March 31, 2007, as filed with the Commission on May 15, 2007.)*10.6
    
    
    Employment Agreement dated February 22, 2007 by and among Royal Bancshares of
Pennsylvania, Inc. (Corporation), Royal Bank America (Bank), and Murray Stempel, III,
Executive Vice President and Chief Lending Officer of the Corporation and the Bank.
(Incorporated by reference to Exhibit 10.3 to Registrants Quarterly Report on Form
10-Q dated March 31, 2007, as filed with the Commission on May 15, 2007.)*10.7
    
    
    Employment Agreement dated February 23, 2007 by and among Royal Bancshares of
Pennsylvania, Inc. (Corporation), Royal Bank America (Bank), and John Decker,
Executive Vice President Mezzanine/Equity Lending of the Corporation and the Bank.
(Incorporated by reference to Exhibit 10.4 to Registrants Quarterly Report on Form
10-Q dated March 31, 2007, as filed with the Commission on May 15, 2007.)*10.8
    
    
    Employment Agreement dated February 23, 2007 by and among Royal Bancshares of
Pennsylvania, Inc. (Corporation), Royal Bank America (Bank), and Robert R. Tabas,
Executive Vice President of the Corporation and the Bank. (Incorporated by reference
to Exhibit 10.5 to Registrants Quarterly Report on Form 10-Q dated March 31, 2007, as
filed with the Commission on May 15, 2007.)*10.9
    
    
    Employment agreement between Royal Bank America and Edward Shin entered into on
April 23, 2004. (Incorporated by reference to Exhibit 10.5 to Registrants Quarterly
Report on Form 10-Q filed with the Commission on November 9, 2004.)*10.10
    
    
    Royal Bancshares of Pennsylvania, Inc. 2007 Long-Term Incentive Plan.
(Incorporated by reference to Exhibit A to the Companys definitive Proxy Statement
dated April 6, 2007).*10.11
    
    
    Amendment to Employment Agreement, dated February 18, 2009, between Royal
Bancshares of Pennsylvania, Inc., Royal Bank America, and James J. McSwiggan, Jr.
(Incorporated by reference to exhibit 10.2 to Registrants Current Report on Form 8-K
filed with the Commission on February 24, 2009.)*
 123




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##### Table of Contents



10.12
    
    
    Letter Agreement, including Securities Purchase Agreement  Standard Terms,
dated December 19, 2008, between Royal Bancshares of Pennsylvania, Inc. and the United
States Department of the Treasury. (Incorporated by reference to exhibit 10.1 to
Registrants Current Report on Form 8-K filed with the Commission on February 26,
2009.)10.13
    
    
    Side Letter Agreement, dated February 20, 2009, between Royal Bancshares of
Pennsylvania, Inc. and the United States Department of the Treasury. (Incorporated by
reference to exhibit 10.2 to Registrants Current Report on Form 8-K filed with the
Commission on February 26, 2009.)10.14
    
    
    Form of Letter Agreement, dated December 19, 2008, between Royal Bancshares of
Pennsylvania, Inc. and certain of its executive officers relating to executive
compensation limitations under the United States Treasury Departments Capital Purchase
Program.*11.
    
    
    Statement re: Computation of Earnings Per Share. Included at Item 8, hereof,
Note K, Per Share Information.12.
    
    
    Statement re: Computation of Ratios. (Included at Item 8 here of, Note P,
Regulatory Matters.)14.
    
    
    Royal Bancshares of Pennsylvania, Inc. Code of Ethics.21.
    
    
    Subsidiaries of Registrant.23.
    
    
    Consent of Independent Registered Public Accounting Firm.31.1
    
    
    Rule 13a-14(a)/15-d-14(a) Certification of Chief Executive Officer31.2
    
    
    Rule 13a-14(a)/15-d-14(a) Certification of Chief Financial Officer32.1
    
    
    Section 1350 Certification of Chief Executive Officer.32.2
    
    
    Section 1350 Certification of Chief Financial Officer.
 
 *
    
    Denotes compensation plan or arrangement.  124




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##### Table of Contents



SIGNATURES
  ROYAL BANCSHARES OF PENNSYLVANIA, INC.
 By: /s/ Robert R. Tabas

Robert R. Tabas
    
    
    
    By: /s/ Robert A. Kuehl

Robert A. KuehlChief Executive Officer
    
    
    
    Chief Financial Officer(Principal Executive Officer)
    
    
    
    (Principal Accounting Officer)March 27, 2009
    
    
    
    March 27, 2009
  SIGNATURES
 By: /s/ Robert R. Tabas

Robert R. Tabas
    
    
    
    By: /s/ James J. McSwiggan

James J. McSwigganChief Executive Officer/ Chairman of the Board
    
    
    
    President/Chief Operating Officer/DirectorMarch 27, 2009
    
    
    
    March 27, 2009By: /s/ Joseph P. Campbell

Joseph P. Campbell
    
    
    
    By: /s/ Albert Ominsky

Albert OminskyDirector
    
    
    
    DirectorMarch 27, 2009
    
    
    
    March 27, 2009By: /s/ Anthony Micale

Anthony Micale
    
    
    
    By: /s/ Gregory Reardon

Gregory ReardonDirector
    
    
    
    DirectorMarch 27, 2009
    
    
    
    March 27, 2009By: /s/ Murray Stempel, III

Murray Stempel, III
    
    
    
    By: /s/ Carl M. Cousins

Carl CousinsVice Chairman of the Board
    
    
    
    DirectorMarch 27, 2009
    
    
    
    March 27, 2009By: /s/ Howard Wurzak

Howard Wurzak
    
    
    
    By: /s/ Evelyn R. Tabas

Evelyn R. TabasDirector
    
    
    
    DirectorMarch 27, 2009
    
    
    
    March 27, 2009By: /s/ Edward F. Bradley

Edward F. Bradley
    
    
    
    By: /s/ Edward B. Tepper

Edward B. TepperDirector
    
    
    
    DirectorMarch 27, 2009
    
    
    
    March 27, 2009By: /s/ Linda Tabas Stempel

Linda Tabas Stempel
    
    
    
    By: /s/ Samuel Goldstein

Samuel GoldsteinDirector
    
    
    
    DirectorMarch 27, 2009
    
    
    
    March 27, 2009By: /s/ Robert A. Richards, Jr.

Robert A. Richards, Jr.DirectorMarch 27, 2009
 125




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##### Table of Contents



OYAL BANCSHARES OF PENNSYLVANIA, INC.
ANNUAL REPORT ON FORM 10-K
EXHIBIT INDEX
 3(i)
    
    
    Articles of Incorporation.3(ii)
    
    
    By-laws.4.1
    
    
    Junior Subordinated Debt Security Due 2034 issued by Royal Bancshares of
Pennsylvania, Inc. to JPMorgan Chase Bank, as Institutional Trustee, dated October 27,
2004. (Incorporated by reference to Exhibit 4.1 to Registrants Current Report on Form
8-K (included as Exhibit A to Exhibit 10.1) filed with the Commission on November 1,
2004.))4.2
    
    
    Junior Subordinated Debt Security Due 2034 issued by Royal Bancshares of
Pennsylvania, Inc. to JPMorgan Chase Bank, as Institutional Trustee, dated October 27,
2004. (Incorporated by reference to Exhibit 4.2 to Registrants Current Report on Form
8-K (included as Exhibit A to Exhibit 10.2) filed with the Commission on November 1,
2004.))4.3
    
    
    Indenture by and between Royal Bancshares of Pennsylvania, Inc. and JPMorgan
Chase Bank, as Trustee, dated October 27, 2004. (Incorporated by reference to Exhibit
10.1 to Registrants Current Report on Form 8-K filed with the Commission on November
1, 2004.)4.4
    
    
    Indenture by and between Royal Bancshares of Pennsylvania, Inc. and JPMorgan
Chase Bank, as Trustee, dated October 27, 2004. (Incorporated by reference to Exhibit
10.2 to Registrants Current Report on Form 8-K filed with the Commission on November
1, 2004.)4.5
    
    
    Guarantee Agreement by and between Royal Bancshares of Pennsylvania, Inc. and
JPMorgan Chase Bank, as Guarantee Trustee, dated October 27, 2004. (Incorporated by
reference to Exhibit 10.3 to Registrants Current Report on Form 8-K filed with the
Commission on November 1, 2004.)4.7
    
    
    Guarantee Agreement by and between Royal Bancshares of Pennsylvania, Inc. and
JPMorgan Chase Bank, as Guarantee Trustee, October 27, 2004. (Incorporated by
reference to Exhibit 10.4 to Registrants Current Report on Form 8-K filed with the
Commission on November 1, 2004.)10.1
    
    
    Stock Option and Appreciation Right Plan. As amended on March 15, 2005
(Incorporated by reference to the Registrants Registration Statement N0. 333-135226,
on form S-8 filed with the Commission on June 22, 2006).*10.2
    
    
    Stock Option and Appreciation Right Plan. As amended on May 16, 2005
(Incorporated by reference to the Registrants Registration Statement N0. 333-129894,
on form S-8 filed with the Commission on November 22, 2005).*10.3
    
    
    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).*10.4
    
    
    Transition Agreement dated October 10, 2008 between Royal Bancshares of
Pennsylvania, Inc. (Corporation), and Joseph P. Campbell. (Incorporated by reference
to Exhibit 10.1 to Registrants current Report on Form 8-K as filed with the Commission
on October 16, 2008.)10.5
    
    
    Employment Agreement dated September 22, 2006 by and among Royal Bancshares of
Pennsylvania, Inc. (Corporation), Royal Bank America (Bank), and James J.
McSwiggan, Jr., Chief Operating Officer of the Corporation and the Bank.
(Incorporated by reference to Exhibit 10.2 to Registrants Quarterly Report on Form
10-Q dated March 31, 2007, as filed with the Commission on May 15, 2007.)*
 126




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##### Table of Contents



10.6
    
    
    Employment Agreement dated February 22, 2007 by and among Royal Bancshares of
Pennsylvania, Inc. (Corporation), Royal Bank America (Bank), and Murray Stempel, III,
Executive Vice President and Chief Lending Officer of the Corporation and the Bank.
(Incorporated by reference to Exhibit 10.3 to Registrants Quarterly Report on Form
10-Q dated March 31, 2007, as filed with the Commission on May 15, 2007.)*10.7
    
    
    Employment Agreement dated February 23, 2007 by and among Royal Bancshares of
Pennsylvania, Inc. (Corporation), Royal Bank America (Bank), and John Decker,
Executive Vice President Mezzanine/Equity Lending of the Corporation and the Bank.
(Incorporated by reference to Exhibit 10.4 to Registrants Quarterly Report on Form
10-Q dated March 31, 2007, as filed with the Commission on May 15, 2007.)*10.8
    
    
    Employment Agreement dated February 23, 2007 by and among Royal Bancshares of
Pennsylvania, Inc. (Corporation), Royal Bank America (Bank), and Robert R. Tabas,
Executive Vice President of the Corporation and the Bank. (Incorporated by reference
to Exhibit 10.5 to Registrants Quarterly Report on Form 10-Q dated March 31, 2007, as
filed with the Commission on May 15, 2007.)*10.9
    
    
    Employment agreement between Royal Bank America and Edward Shin entered into on
April 23, 2004. (Incorporated by reference to Exhibit 10.5 to Registrants Quarterly
Report on Form 10-Q filed with the Commission on November 9, 2004.)*10.10
    
    
    Royal Bancshares of Pennsylvania, Inc. 2007 Long-Term Incentive Plan.
(Incorporated by reference to Exhibit A to the Companys definitive Proxy Statement
dated April 6, 2007).*10.11
    
    
    Amendment to Employment Agreement, dated February 18, 2009, between Royal
Bancshares of Pennsylvania, Inc., Royal Bank America, and James J. McSwiggan, Jr.
(Incorporated by reference to exhibit 10.2 to Registrants Current Report on Form 8-K
filed with the Commission on February 24, 2009.)*10.12
    
    
    Letter Agreement, including Securities Purchase Agreement  Standard Terms,
dated December 19, 2008, between Royal Bancshares of Pennsylvania, Inc. and the United
States Department of the Treasury. (Incorporated by reference to exhibit 10.1 to
Registrants Current Report on Form 8-K filed with the Commission on February 26,
2009.)10.13
    
    
    Side Letter Agreement, dated February 20, 2009, between Royal Bancshares of
Pennsylvania, Inc. and the United States Department of the Treasury. (Incorporated by
reference to exhibit 10.2 to Registrants Current Report on Form 8-K filed with the
Commission on February 26, 2009.)10.14
    
    
    Form of Letter Agreement, dated December 19, 2008, between Royal Bancshares of
Pennsylvania, Inc. and certain of its executive officers relating to executive
compensation limitations under the United States Treasury Departments Capital Purchase
Program.*11.
    
    
    Statement re: Computation of Earnings Per Share. Included at Item 8, hereof,
Note K, Per Share Information.12.
    
    
    Statement re: Computation of Ratios. (Included at Item 8 here of, Note P,
Regulatory Matters.)14.
    
    
    Royal Bancshares of Pennsylvania, Inc. Code of Ethics.21.
    
    
    Subsidiaries of Registrant.23.
    
    
    Consent of Independent Registered Public Accounting Firm.31.1
    
    
    Rule 13a-14(a)/15-d-14(a) Certification of Chief Executive Officer
 127




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##### Table of Contents



31.2
    
    
    Rule 13a-14(a)/15-d-14(a) Certification of Chief Financial Officer32.1
    
    
    Section 1350 Certification of Chief Executive Officer.32.3
    
    
    Section 1350 Certification of Chief Financial Officer.
 
 *
    
    Denotes compensation plan or arrangement.  128