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U.S. 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, 2006
 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)
 
  Securities registered pursuant to Section 12(b) of the Act:
    
    Title of Each ClassName of Each Exchange on Which Registered
    
    The NASDAQ Stock Market, LLC.Class A Common Stock ($2.00 par value)Securities registered pursuant to Section 12(g) of the Act:
    
    Title of Each ClassName of Each Exchange on Which Registered
    
    The NASDAQ Stock Market, LLCClass B Common Stock ($0.10 par value)
 o þ
 o þ
 þ o
 þ
  o þ o
 o þ
   Documents Incorporated by Reference




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TABLE OF CONTENTS  PART IITEM 1. BUSINESSITEM 1A. RISK FACTORSITEM 1B. UNRESOLVED 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 MATTER, AND ISSUER PURCHASES OF EQUITY SECURITIES.ITEM 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. 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-KSIGNATURESRoyal Bancshares of Pennsylvania, Inc. Code of EthicsSubsidiaries of RegistrantConsent of Independent Registered Public Accounting FirmRule 13a-14(a)/15-d-14(a) Certification of Chief Executive OfficerRule 13a-14(a)/15-d-14(a) Certification of Chief Financial OfficerSection 1350 Certification of Chief Executive OfficerSection 1350 Certification of Chief Financial Officer    Table of Contents  
 PART I
 
 ITEM 1. BUSINESS
 Royal Bancshares
   2




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Royal Bank America
       Service Area.
 Competition.
   3




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Employees.
 Deposits.
  Lending.
 Royal Asian Bank
   Service Area.
  Competition.
  Employees.
 Deposits.
 4




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Lending.
  Non-Bank Subsidiaries
         5




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Website Access to Company Reports
  Products and Services with Reputation Risk
  Future Acquisitions
  Concentrations, Seasonality
  Environmental Compliance
  Supervision and Regulation
    Holding Company.
 6




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Royal Bank and Royal Asian
 7




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Federal Deposit Insurance Corporation Improvement Act of 1991
 General
 8




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Real Estate Lending Guidelines.
  Loan Category
    
    LTV LimitRaw Land
    
    
    65
    %Land DevelopmentConstruction:Commercial, Multifamily (includes
condos and co-ops), and otherNonresidential
    
    
    80
    %Improved Property
    
    
    85
    %Owner occupied 1-4 Family and Home Equity
(without credit enhancements)
    
    
    90
    %
  9




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Truth in Savings Act.
 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.
  10




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USA Patriot Act of 2001.
 Sarbanes-Oxley Act of 2002.
   -
    
    New 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 with other banks regulatory requirements;-
    
    Disclosure of off-balance sheet transactions;
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-
    
    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;-
    
    Real time filing of periodic reports;-
    
    The formation of an independent public accounting oversight board;-
    
    New 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.
  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
      Other Legislation
  13




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Monetary Policy
   Effects of Inflation
  Critical Accounting Policies, Judgments and Estimates
    14




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Available Information
 www.royalbankamerica.com
 
 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 occur, 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 recent operating results may not be indicative of future operating results.
  Our business is subject to the success of the local economies and real estate markets in which we
operate.
  Our concentration of commercial 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 losses may not be adequate to cover actual losses.
  We may suffer losses in our loan portfolio despite our underwriting practices.
  Negative publicity could damage our reputation and adversely impact our business and financial
results.
  16




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Risks Related to Our Industry
 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 Royal Bancshares 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 .
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS .
  17




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ITEM 2. PROPERTIES
  Royal Bank America
 Narberth Office (1)
    
    Villanova Office
    
    King of Prussia Office (1)732 Montgomery Avenue
    
    801 East Lancaster Avenue
    
    Rt. 202 at Wilson RoadNarberth, PA 19072
    
    Villanova, PA 19085
    
    King of Prussia, PA 19406Walnut Street Office
    
    Shillington Office
    
    Bridgeport Office (1)1230 Walnut Street
    
    516 East Lancaster Avenue
    
    105 W. 4th StreetPhiladelphia, PA 19107
    
    Shillington, PA 19607
    
    Bridgeport, PA 19406Fairmont Office (1)
    
    Trooper Office (1)
    
    Henderson Road Office401 Fairmont Avenue
    
    Trooper and Egypt Roads
    
    Bielder and Henderson RoadsPhiladelphia, PA 19123
    
    Trooper, PA 19401
    
    King of Prussia, PA 19406Castor Office (1)
    
    Reading Office
    
    Phoenixville Office (1)6331 Castor Avenue
    
    501 Washington Avenue
    
    808 Valley Forge RoadPhiladelphia, PA 19149
    
    Reading, PA 19601
    
    Phoenixville, PA 1946015th Street Office
    
    Jenkintown Office (1)
    
    Turnersville Office30 South Street
    
    600 Old York Road
    
    3501 Black Horse PikePhiladelphia, PA 19102
    
    Jenkintown, PA 19046
    
    Turnersville, NJ 08012Grant Avenue Office (1)
    
    Narberth Training Center (1)(2)
    
    Storage Facility (1)1650 Grant Avenue
    
    814 Montgomery Avenue
    
    3836 Spring Garden StreetPhiladelphia, PA 19115
    
    Narberth, PA 19072
    
    Philadelphia, PA 19104Main Street Office213 Main StreetFort Lee, NJ 07024
  Royal Asian Bank
 Northeast Office
    
    Cheltenham Office
    
    Upper Darby Office6526 Castor Avenue
    
    418 Oak Lane
    
    7001 West Chester PikePhiladelphia, PA 19149
    
    Philadelphia, PA 19126
    
    Upper Darby, PA 19082Fort Lee Office
    
    Palisades Park (3)1550 Lemoine Avenue
    
    232 Broad StreetFort Lee, NJ 07024
    
    Palisades Park, NJ 07650
 
 (1)
    
    Owned(2)
    
    Used for employee training(3)
    
    Expected opening date is March 22, 2007.   18




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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 MATTER, AND
ISSUER PURCHASES OF EQUITY SECURITIES.
  Closing Prices
 2006
    
    High
    LowFirst Quarter
    
    $
    23.810
    
    
    $
    21.524Second Quarter
    
    
    23.810
    
    
    
    21.000Third Quarter
    
    
    26.190
    
    
    
    22.390Fourth Quarter
    
    
    26.457
    
    
    
    22.762
 2005
    
    High
    
    LowFirst Quarter
    
    $
    26.125
    
    
    $
    20.402Second Quarter
    
    
    22.876
    
    
    
    20.542Third Quarter
    
    
    23.193
    
    
    
    20.550Fourth Quarter
    
    
    22.876
    
    
    
    20.812
  Title of Class
    
    Number of Record HoldersClass A Common Stock
    
    
    334Class B Common Stock
    
    
    143
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Securities Authorized for Issuance Under Equity Compensation Plans
  (c)Number of securities(a)
    
    
    
    
    
    remaining available forNumber of securities to
    
    (b)
    
    future issuance underbe issued upon
    
    Weighted-average
    
    equity compensationexercise of outstanding
    
    exercise price of
    
    plans (excludingoptions, warrants and
    
    outstanding options,
    
    securities reflected inrights
    
    warrants and rights
    
    column (a))Outside Directors Stock
Option PlanEquity compensation plan approved
by stockholders
    
    
    102,552
    
    
    $
    18.41
    
    
    
    Equity compensation plan not
approved by stockholders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    102,552
    
    
    $
    18.41
    
    
    
    
 (c)Number of securities(a)
    
    
    
    
    
    remaining available forNumber of securities to
    
    (b)
    
    future issuance underbe issued upon
    
    Weighted-average
    
    equity compensationexercise of outstanding
    
    exercise price of
    
    plans (excludingoptions, warrants and
    
    outstanding options,
    
    securities reflected inrights
    
    warrants and rights
    
    column (a))Employee Stock Option PlanEquity compensation plan approved
by stockholders
    
    
    853,804
    
    
    $
    19.48
    
    
    
    Equity compensation plan not
approved by stockholders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    853,804
    
    
    $
    19.48
    
    
    
    
 Dividends
  Stock dividends.
   20




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Cash Dividends.
 Cash Dividends Per Share2006
    
    Class A
    
    Class BFirst Quarter
    
    $
    0.26190
    
    
    $
    0.30119Second Quarter
    
    $
    0.26190
    
    
    $
    0.30119Third Quarter
    
    $
    0.26190
    
    
    $
    0.30119Fourth Quarter
    
    $
    0.27381
    
    
    $
    0.31489
 Cash Dividends Per Share2005
    
    Class A
    
    Class BFirst Quarter
    
    $
    0.23810
    
    
    $
    0.27381Second Quarter
    
    $
    0.23810
    
    
    $
    0.27381Third Quarter
    
    $
    0.23810
    
    
    $
    0.27381Fourth Quarter
    
    $
    0.26190
    
    
    $
    0.30119
   21




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COMMON STOCK PERFORMANCE GRAPH
 ROYAL BANCSHARES OF PENNSYLVANIA, INC.
 The performance graph shows cumulative investment returns to shareholders based on the
assumption that an investment of $100 was made on December 31, 2001, (with all dividends
reinvested), in each of the following:
 -
    
    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 2006 Peer Group consists of nineteen 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
    
    
    12/31/01
    
    
    12/31/02
    
    
    12/31/03
    
    
    12/31/04
    
    
    12/31/05
    
    
    12/31/06Royal Bancshares of Pennsylvania, Inc.
    
    
    
    100.00
    
    
    
    
    117.93
    
    
    
    
    151.15
    
    
    
    
    173.32
    
    
    
    
    158.10
    
    
    
    
    196.75NASDAQ Composite
    
    
    
    100.00
    
    
    
    
    68.76
    
    
    
    
    103.67
    
    
    
    
    113.16
    
    
    
    
    115.57
    
    
    
    
    127.58SNL Bank and Thrift Index
    
    
    
    100.00
    
    
    
    
    93.96
    
    
    
    
    127.39
    
    
    
    
    142.66
    
    
    
    
    144.89
    
    
    
    
    169.30Royal Bancshares Peer Group*
    
    
    
    100.00
    
    
    
    
    130.64
    
    
    
    
    173.82
    
    
    
    
    181.03
    
    
    
    
    174.69
    
    
    
    
    205.85
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ITEM 6. SELECTED FINANCIAL DATA
  Years ended December 31,(in thousands, except per share data)2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Income
Statement Data (in thousands)Interest income
    
    $
    93,006
    
    
    $
    76,460
    
    
    $
    67,541
    
    
    $
    72,320
    
    
    $
    77,104Interest expense
    
    
    46,372
    
    
    
    31,796
    
    
    
    27,301
    
    
    
    29,941
    
    
    
    36,491Net interest income
    
    
    46,634
    
    
    
    44,664
    
    
    
    40,240
    
    
    
    42,379
    
    
    
    40,613Provision for loan losses
    
    
    1,803
    
    
    
    1
    
    
    
    6
    
    
    
    674
    
    
    
    250Net interest income after loan losses
    
    
    44,831
    
    
    
    44,663
    
    
    
    40,234
    
    
    
    41,705
    
    
    
    40,363Gains on sale of loans
    
    
    379
    
    
    
    508
    
    
    
    480
    
    
    
    637
    
    
    
    767Gains on sale of real estate
    
    
    2,129
    
    
    
    2,494
    
    
    
    2,102
    
    
    
    568
    
    
    
    455Gains on investment securities
    
    
    383
    
    
    
    227
    
    
    
    810
    
    
    
    719
    
    
    
    790Income related to equity investments (VIE)
    
    
    6,627
    
    
    
    19,418
    
    
    
    7,133
    
    
    
    
    
    
    
    Other income
    
    
    2,453
    
    
    
    2,179
    
    
    
    2,635
    
    
    
    1,780
    
    
    
    1,188Total other income
    
    
    11,971
    
    
    
    24,826
    
    
    
    13,160
    
    
    
    3,704
    
    
    
    3,200Income before other expenses & income taxes
    
    
    56,802
    
    
    
    69,489
    
    
    
    53,394
    
    
    
    45,409
    
    
    
    43,563Non-interest expenseSalaries and benefits
    
    
    13,451
    
    
    
    13,488
    
    
    
    10,767
    
    
    
    9,958
    
    
    
    9,440Expenses related to equity investments
(VIE)
    
    
    1,606
    
    
    
    262
    
    
    
    4,780
    
    
    
    
    
    
    
    Other
    
    
    9,595
    
    
    
    10,98
    
    
    
    9,345
    
    
    
    8,929
    
    
    
    9,481Total operating expenses
    
    
    24,652
    
    
    
    24,731
    
    
    
    24,892
    
    
    
    18,887
    
    
    
    18,921Minority interest
    
    
    567
    
    
    
    68
    
    
    
    555
    
    
    
    
    
    
    
    Income before taxes
    
    
    31,583
    
    
    
    44,690
    
    
    
    27,947
    
    
    
    26,522
    
    
    
    24,642Incomes taxes
    
    
    10,015
    
    
    
    12,637
    
    
    
    7,914
    
    
    
    7,996
    
    
    
    7,237Net income
    
    $
    21,568
    
    
    $
    32,053
    
    
    $
    20,033
    
    
    $
    18,526
    
    
    $
    17,405Basic earnings per share (1)
    
    $
    1.60
    
    
    $
    2.39
    
    
    $
    1.50
    
    
    $
    1.40
    
    
    $
    1.32Diluted earnings per share (1)
    
    $
    1.59
    
    
    $
    2.37
    
    
    $
    1.48
    
    
    $
    1.39
    
    
    $
    1.29
 
 (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, 2% stock dividend in December
2005, a 2% stock dividend in December 2004, a 2% stock dividend in January 2004, a 3% stock
dividend in 2003, and a 6% stock dividend in 2002. As of December 31,Balance Sheet Data (in thousands)
    
    2006
    
    2005
    
    2004
    
    2003
    
    2002Total assets
    
    $
    1,356,311
    
    
    $
    1,301,019
    
    
    $
    1,205,274
    
    
    $
    1,154,410
    
    
    $
    1,088,484Total average assets(2)
    
    
    1,317,688
    
    
    
    1,258,137
    
    
    
    1,194,008
    
    
    
    1,160,354
    
    
    
    1,048,875Loans, net
    
    
    591,503
    
    
    
    539,360
    
    
    
    454,775
    
    
    
    500,131
    
    
    
    564,264Total deposits
    
    
    859,457
    
    
    
    697,409
    
    
    
    742,382
    
    
    
    791,059
    
    
    
    820,840Total average deposits
    
    
    761,267
    
    
    
    699,540
    
    
    
    761,899
    
    
    
    825,204
    
    
    
    770,148Total borrowings(1)
    
    
    301,203
    
    
    
    427,130
    
    
    
    304,023
    
    
    
    212,000
    
    
    
    124,500Total average borrowings (1)
    
    
    377,139
    
    
    
    350,662
    
    
    
    281,747
    
    
    
    183,339
    
    
    
    137,460Total stockholders equity
    
    
    163,254
    
    
    
    155,508
    
    
    
    140,876
    
    
    
    134,833
    
    
    
    121,331Total average stockholders equity
    
    
    158,732
    
    
    
    145,601
    
    
    
    137,622
    
    
    
    127,728
    
    
    
    114,655Return on average assets
    
    
    1.6
    %
    
    
    2.5
    %
    
    
    1.7
    %
    
    
    1.6
    %
    
    
    1.7
    %Return on average equity
    
    
    13.6
    %
    
    
    22.0
    %
    
    
    14.6
    %
    
    
    14.5
    %
    
    
    15.2
    %Average equity to average assets
    
    
    12.1
    %
    
    
    11.6
    %
    
    
    11.5
    %
    
    
    11.0
    %
    
    
    10.9
    %Cash dividend payout ratio
    
    
    66.1
    %
    
    
    40.1
    %
    
    
    60.9
    %
    
    
    61.1
    %
    
    
    60.8
    %
 
 (1)
    
    Includes obligations through VIE equity investments and subordinated debt.(2)
    
    Includes premises and equipment of VIE.


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ITEM 7. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Financial Condition
  Cash and Cash Equivalents.
 Investment Securities Held to Maturity .
 Investment Securities Available for Sale .
 Loans .
 Allowance for loan losses.
  24




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##### Table of Contents



December 31, 2006
    
    
    December 31, 2005Percent of
    
    
    
    
    
    
    Percent ofReserve
    
    
    loans
    
    
    Reserve
    
    
    loansAmount
    
    
    in each
    
    
    Amount
    
    
    in each(in
    
    
    category to
    
    
    (in
    
    
    category tothousands)
    
    
    total loans
    
    
    thousands)
    
    
    total loansDomesticConstruction loans
    
    $
    4,526
    
    
    
    29.93
    %
    
    $
    3,397
    
    
    
    31.43
    %Single family residential
    
    $
    845
    
    
    
    6.71
    %
    
    $
    925
    
    
    
    7.74
    %Tax certificates
    
    
    
    
    
    
    5.18
    %
    
    
    
    
    
    
    6.44
    %Real estate  non-residential
    
    $
    5,165
    
    
    
    48.14
    %
    
    $
    5,132
    
    
    
    43.19
    %Real estate  multi-family
    
    $
    56
    
    
    
    0.99
    %
    
    $
    277
    
    
    
    4.51
    %Commercial and industrial
    
    $
    559
    
    
    
    6.70
    %
    
    $
    494
    
    
    
    5.45
    %Installment loans toindividual
    
    $
    11
    
    
    
    0.18
    %
    
    $
    41
    
    
    
    0.70
    %Lease financing
    
    $
    293
    
    
    
    2.17
    %
    
    $
    75
    
    
    
    0.54
    %Foreign
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    00
    %Unallocated
    
    $
    
    
    
    
    N/A
    
(
    $
    65
    )
    
    
    N/A$
    11,455
    
    
    
    100.00
    %
    
    $
    10,276
    
    
    
    100.00
    %
 Deposits .
 FHLB Borrowings.
 Other Borrowings.
 Other
Liabilities .
 25




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##### Table of Contents



Stockholders Equity .
 Results of Operations
 General .
 Net Income .
 Net Interest Income.
   Loans and Mortgages
 2006
    
    2005
    
    2004Average loan outstanding
    
    $
    618,591,000
    
    
    $
    510,349,000
    
    
    $
    471,526,000Interest and fees on loans
    
    $
    63,379,000
    
    
    $
    46,995,000
    
    
    $
    40,044,000Average Yield
    
    
    10.25
    %
    
    
    9.21
    %
    
    
    8.49
    %
    26




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##### Table of Contents



HTM Investment Securities
 2006
    
    2005
    
    2004Average HTM investment securities
    
    $
    255,448,000
    
    
    $
    237,701,000
    
    
    $
    141,799,000Interest income
    
    $
    11,830,000
    
    
    $
    10,122,000
    
    
    $
    6,365,000Average yield
    
    
    4.63
    %
    
    
    4.26
    %
    
    
    4.49
    %
    AFS Investment Securities
 2006
    
    2005
    
    2004Average AFS investment securities
    
    $
    323,172,000
    
    
    $
    355,005,000
    
    
    $
    399,361,000Interest and dividend income
    
    $
    17,377,000
    
    
    $
    19,229,000
    
    
    $
    20,621,000Average yield
    
    
    5.38
    %
    
    
    5.42
    %
    
    
    5.16
    %
    Interest Expense on NOW and Money Market Deposits
 2006
    
    2005
    
    2004Average NOW & Money Market deposits
    
    $
    286,392,000
    
    
    $
    355,387,000
    
    
    $
    461,076,000Interest expense
    
    $
    8,927,000
    
    
    $
    7,457,000
    
    
    $
    7,965,000Average cost of funds
    
    
    3.12
    %
    
    
    2.10
    %
    
    
    1.73
    %
   Interest Expense on Time Deposits
 2006
    
    2005
    
    2004Average time deposits
    
    $
    393,685,000
    
    
    $
    254,031,000
    
    
    $
    218,756,000Interest expense
    
    $
    18,503,000
    
    
    $
    9,965,000
    
    
    $
    8,577,000Average cost of funds
    
    
    4.70
    %
    
    
    3.92
    %
    
    
    3.92
    %
 27




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##### Table of Contents



Provision for Possible Loan Losses
    Non-Interest Income
    Non-Interest Expense
   28




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##### Table of Contents



Accounting for Income Taxes
  Accounting for Debt and Equity Securities
  Asset Liability Management
  Liquidity .
  29




---



##### Table of Contents



Contractual Obligations and Other Commitments.
 Less than
    
    
    
    
    
    
    
    
    
    
    More than 5(in thousands)
    
    Total
    
    
    1 year
    
    
    1-3 years
    
    
    4-5 years
    
    
    yearsFHLB Advances
    
    $
    240,500
    
    
    $
    53,000
    
    
    $
    15,000
    
    
    $
    92,500
    
    
    $
    80,000Operating leases
    
    
    2,559
    
    
    
    741
    
    
    
    1,263
    
    
    
    509
    
    
    
    46PNC Bank
    
    
    6,588
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,588Interest rate swaps
    
    
    60,588
    
    
    
    
    
    
    
    5,000
    
    
    
    50,000
    
    
    
    5,588Pension
Obligation
    
    
    22,156
    
    
    
    36
    
    
    
    542
    
    
    
    1,086
    
    
    
    20,492Commitments to extend
credit
    
    
    131,712
    
    
    
    131,712
    
    
    
    
    
    
    
    
    
    
    
    Standby letters of credit
    
    
    4,862
    
    
    
    4,528
    
    
    
    334
    
    
    
    
    
    
    
    Subordinated debt
    
    
    25,774
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,774Time deposits
    
    
    505,080
    
    
    
    244,523
    
    
    
    150,543
    
    
    
    107,060
    
    
    
    2,954Total
    
    $
    999,819
    
    
    $
    434,540
    
    
    $
    172,682
    
    
    $
    251,155
    
    
    $
    141,442
 Interest-Rate Sensitivity .
   Interest Rate Swaps
  30




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##### Table of Contents



Interest
Rate Sensitivity  (in millions)
 Days
    
    1 to 5
    
    Over 5
    
    Non-rate0 - 90
    
    91 - 365
    
    Years
    
    Years
    
    Sensitive
    
    TotalAssets(1)Interest-bearing deposits in banks
    
    $
    66.8
    
    
    $
    0.0
    
    
    $
    0.0
    
    
    $
    0.0
    
    
    $
    13.4
    
    
    $
    80.2Federal funds sold
    
    
    2.2
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    2.2Investment securities:Available for sale
    
    
    23.4
    
    
    
    66.3
    
    
    
    123.0
    
    
    
    89.1
    
    
    
    0.2
    
    
    
    302.0Held to maturity
    
    
    1.0
    
    
    
    165.0
    
    
    
    89.4
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    255.4Total investment securities
    
    
    24.4
    
    
    
    231.3
    
    
    
    212.4
    
    
    
    89.1
    
    
    
    0.2
    
    
    
    557.4Loans:(2)Fixed rate
    
    
    18.1
    
    
    
    28.9
    
    
    
    161.5
    
    
    
    35.5
    
    
    
    0.0
    
    
    
    244.0Variable rate
    
    
    290.3
    
    
    
    48.6
    
    
    
    20.1
    
    
    
    0.0
    
    
    
    (11.5
    )
    
    
    347.5Total loans
    
    
    308.4
    
    
    
    77.5
    
    
    
    181.6
    
    
    
    35.5
    
    
    
    (11.5
    )
    
    
    591.5Other assets(3)
    
    
    11.3
    
    
    
    22.9
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    90.8
    
    
    
    125.0Total Assets
    
    $
    413.1
    
    
    $
    331.7
    
    
 $
    394.0

    
    
    $
    124.6
    
    
    $
    92.9
    
    
    $
    1,356.3Liabilities & CapitalDeposits:Non interest bearing deposits
    
    $
    0.0
    
    
    $
    0.0
    
    
    $
    0.0
    
    
    $
    0.0
    
    
    $
    61.0
    
    
    $
    61.0Interest bearing deposits
    
    
    32.0
    
    
    
    261.5
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    293.5Certificate of deposits
    
    
    23.9
    
    
    
    220.6
    
    
    
    230.5
    
    
    
    30.0
    
    
    
    0.0
    
    
    
    505.0Total deposits
    
    
    55.9
    
    
    
    482.1
    
    
    
    230.5
    
    
    
    30.0
    
    
    
    61.0
    
    
    
    859.5Borrowings
    
    
    121.5
    
    
    
    0.0
    
    
    
    107.5
    
    
    
    42.9
    
    
    
    29.3
    
    
    
    301.2Other liabilities
    
    
    0.1
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    32.2
    
    
    
    32.3Capital
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    163.3
    
    
    
    163.3Total liabilities & capital
    
    $
    177.5
    
    
    $
    482.1
    
    
    $
    338.0
    
    
    $
    72.9
    
    
    $
    285.8
    
    
    $
    1,356.3Net interest rate GAP
    
    $
    235.6
    
    
    $
    (150.4
    )
    
    $
    56.0
    
    
    $
    51.7
    
    
    $
    (192.9
    )Cumulative interest rate GAP
    
    $
    235.6
    
    
    $
    85.2
    
    
    $
    141.2
    
    
    $
    192.9
    
    
    $
    0.0GAP to total assets
    
    
    17
    %
    
    
    -11
    %GAP to total equity
    
    
    144
    %
    
    
    -92
    %Cumulative GAP to total assets
    
    
    17
    %
    
    
    6
    %Cumulative GAP to total equity
    
    
    144
    %
    
    
    52
    %
 
 (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 nonperforming loans.(3)
    
    Includes FHLB stock.  31




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##### Table of Contents



Capital Adequacy
  Regulatory2006
    
    2005
    
    2004
    
    MinimumCapital LevelLeverage ratio
    
    
    14.9
    %
    
    
    14.2
    %
    
    
    13.9
    %
    
    
    3.0
    %Risk based capital ratio:Tier 1
    
    
    19.2
    %
    
    
    18.8
    %
    
    
    19.2
    %
    
    
    4.0
    %Total
    
    
    20.4
    %
    
    
    19.8
    %
    
    
    20.4
    %
    
    
    8.0
    %Capital PerformanceReturn on average assets
    
    
    1.6
    %
    
    
    2.5
    %
    
    
    1.7
    %
    
    
    Return on average equity
    
    
    13.6
    %
    
    
    22.0
    %
    
    
    14.6
    %
    
    
    
   Management Options to Purchase Securities
   32




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##### Table of Contents



Average Balances
  2006
    
    
    2005
    
    2004Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/(In thousands)
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateAssetsInterest bearing deposits
    
    $
    7,361
    
    
    $
    377
    
    
    
    5.12
    %
    
    $
    1,789
    
    
    $
    56
    
    
    
    3.13
    %
    
    $
    34,702
    
    
    $
    409
    
    
    
    1.18
    %Federal funds
    
    
    844
    
    
    
    43
    
    
    
    5.09
    %
    
    
    2,079
    
    
    
    58
    
    
    
    2.79
    %
    
    
    8,644
    
    
    
    102
    
    
    
    1.18
    %Investment securitiesHeld to maturity
    
    
    255,448
    
    
    
    11,830
    
    
    
    4.63
    %
    
    
    237,701
    
    
    
    10,122
    
    
    
    4.26
    %
    
    
    141,799
    
    
    
    6,365
    
    
    
    4.49
    %Available for sale
    
    
    323,172
    
    
    
    17,377
    
    
    
    5.38
    %
    
    
    355,005
    
    
    
    19,229
    
    
    
    5.42
    %
    
    
    399,361
    
    
    
    20,621
    
    
    
    5.16
    %Total investment securities
    
    
    578,620
    
    
    
    29,207
    
    
    
    5.05
    %
    
    
    592,706
    
    
    
    29,351
    
    
    
    4.95
    %
    
    
    541,160
    
    
    
    26,986
    
    
    
    4.99
    %LoansCommercial demand loans
    
    
    372,623
    
    
    
    33,889
    
    
    
    9.09
    %
    
    
    259,216
    
    
    
    20,605
    
    
    
    7.95
    %
    
    
    199,645
    
    
    
    14,241
    
    
    
    7.13
    %Real estate secured
    
    
    233,816
    
    
    
    28,158
    
    
    
    12.04
    %
    
    
    247,762
    
    
    
    26,181
    
    
    
    10.57
    %
    
    
    267,757
    
    
    
    25,504
    
    
    
    9.53
    %Other loans
    
    
    12,152
    
    
    
    1,332
    
    
    
    10.96
    %
    
    
    3,371
    
    
    
    209
    
    
    
    6.20
    %
    
    
    4,124
    
    
    
    299
    
    
    
    7.25
    %Total loans
    
    
    618,591
    
    
    
    63,379
    
    
    
    10.25
    %
    
    
    510,349
    
    
    
    46,995
    
    
    
    9.21
    %
    
    
    471,526
    
    
    
    40,044
    
    
    
    8.49
    %Total interest earnings assets
    
    
    1,205,416
    
    
    
    93,006
    
    
    
    7.72
    %
    
    
    1,106,923
    
    
    
    76,460
    
    
    
    6.91
    %
    
    
    1,056,032
    
    
    
    67,541
    
    
    
    6.40
    %Non interest earnings assetsCash & due from banks
    
    
    16,559
    
    
    
    
    
    
    
    
    
    
    
    12,470
    
    
    
    
    
    
    
    
    
    
    
    9,720Other assets
    
    
    109,031
    
    
    
    
    
    
    
    
    
    
    
    151,738
    
    
    
    
    
    
    
    
    
    
    
    142,455Allowance for loan loss
    
    
    (11,066
    )
    
    
    
    
    
    
    
    
    
    
    (11,165
    )
    
    
    
    
    
    
    
    
    
    
    (12,503
    )Unearned discount
    
    
    (2,252
    )
    
    
    
    
    
    
    
    
    
    
    (1,829
    )
    
    
    
    
    
    
    
    
    
    
    (1,696
    )Total non-interest earning
assets
    
    
    112,272
    
    
    
    
    
    
    
    
    
    
    
    151,214
    
    
    
    
    
    
    
    
    
    
    
    137,976Total assets
    
    $
    1,317,688
    
    
    
    
    
    
    
    
    
    
    $
    1,258,137
    
    
    
    
    
    
    
    
    
    
    $
    1,194,008Liabilities & Shareholders
EquityDeposits:Savings
    
    $
    18,549
    
    
    $
    98
    
    
    
    0.53
    %
    
    $
    21,814
    
    
    $
    127
    
    
    
    0.58
    %
    
    $
    24,278
    
    
    $
    152
    
    
    
    0.63
    %Now
    
    
    59,472
    
    
    
    1,473
    
    
    
    2.48
    %
    
    
    33,732
    
    
    
    307
    
    
    
    0.91
    %
    
    
    34,181
    
    
    
    244
    
    
    
    0.71
    %Money market
    
    
    226,920
    
    
    
    7,454
    
    
    
    3.28
    %
    
    
    321,655
    
    
    
    7,150
    
    
    
    2.22
    %
    
    
    426,895
    
    
    
    7,721
    
    
    
    1.81
    %Time deposits
    
    
    393,685
    
    
    
    18,503
    
    
    
    4.70
    %
    
    
    254,031
    
    
    
    9,965
    
    
    
    3.92
    %
    
    
    218,756
    
    
    
    8,577
    
    
    
    3.92
    %Total interest bearing deposits
    
    
    698,626
    
    
    
    27,528
    
    
    
    3.94
    %
    
    
    631,232
    
    
    
    17,549
    
    
    
    2.78
    %
    
    
    704,110
    
    
    
    16,694
    
    
    
    2.37
    %Federal funds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Borrowings
    
    
    308,236
    
    
    
    14,051
    
    
    
    4.56
    %
    
    
    312,952
    
    
    
    12,225
    
    
    
    3.91
    %
    
    
    221,741
    
    
    
    8,744
    
    
    
    3.94
    %Obligation through VIE equity
investments
    
    
    43,129
    
    
    
    3,108
    
    
    
    7.21
    %
    
    
    11,936
    
    
    
    557
    
    
    
    4.67
    %
    
    
    55,558
    
    
    
    1,639
    
    
    
    2.95
    %Subordinated debt
    
    
    25,774
    
    
    
    1,685
    
    
    
    6.54
    %
    
    
    25,774
    
    
    
    1,465
    
    
    
    5.68
    %
    
    
    4,448
    
    
    
    224
    
    
    
    5.06
    %Total interest bearing
liabilities
    
    
    1,075,765
    
    
    
    46,372
    
    
    
    4.31
    %
    
    
    981,894
    
    
    
    31,796
    
    
    
    3.24
    %
    
    
    985,857
    
    
    
    27,301
    
    
    
    2.77
    %Non interest bearing deposits
    
    
    62,641
    
    
    
    
    
    
    
    
    
    
    
    68,308
    
    
    
    
    
    
    
    
    
    
    
    57,789Other liabilities
    
    
    20,550
    
    
    
    
    
    
    
    
    
    
    
    62,334
    
    
    
    
    
    
    
    
    
    
    
    12,740Total liabilities
    
    
    1,158,956
    
    
    
    
    
    
    
    
    
    
    
    1,112,536
    
    
    
    
    
    
    
    
    
    
    
    1,056,386Stockholders equity
    
    
    158,732
    
    
    
    
    
    
    
    
    
    
    
    145,601
    
    
    
    
    
    
    
    
    
    
    
    137,622Total liabilities and
Stockholders equity
    
    $
    1,317,688
    
    
    
    
    
    
    
    
    
    
    $
    1,258,137
    
    
    
    
    
    
    
    
    
    
    $
    1,194,008Net interest income
    
    
    
    
    
    $
    46,634
    
    
    
    
    
    
    
    
    
    
    $
    44,664
    
    
    
    
    
    
    
    
    
    
    $
    40,240Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.87
    %
    
    
    
    
    
    
    
    
    
    
    4.03
    %
    
    
    
    
    
    
    
    
    
    
    3.81
    %
 
 
  33




---



##### Table of Contents



2006 Vs 2005
    
    2005 Vs 2004Changes due to:
    
    Changes due to:Volume
    
    Rate
    
    Total
    
    Volume
    
    Rate
    
    Total(In thousands)Interest incomeInterest bearing deposits in banks
    
    $
    281
    
    
    $
    40
    
    
    $
    321
    
    (
    $
    622
    )
    
    $
    269
    
     (
    $

    353
    )Federal funds sold
    
    
    (58
    )
    
    
    43
    
    
    
    (15
    )
    
    
    (115
    )
    
    
    71
    
    
    
    (44
    )Investments securitiesHeld to maturity
    
    
    829
    
    
    
    879
    
    
    
    1,708
    
    
    
    4,101
    
    
    
    (344
    )
    
    
    3,757Available for sale
    
    
    (2,069
    )
    
    
    217
    
    
    
    (1,852
    )
    
    
    (2,368
    )
    
    
    976
    
    
    
    (1,392
    )Total investment securities
    
    
    (1,240
    )
    
    
    1,096
    
    
    
    (144
    )
    
    
    1,733
    
    
    
    632
    
    
    
    2,365LoansCommercial demand loans
    
    
    9,188
    
    
    
    4,275
    
    
    
    13,463
    
    
    
    4,600
    
    
    
    1,764
    
    
    
    6,364Mortgages secured by real estate
    
    
    (1,280
    )
    
    
    1,502
    
    
    
    222
    
    
    
    (1,990
    )
    
    
    2,667
    
    
    
    677Other loans
    
    
    2,664
    
    
    
    36
    
    
    
    2,700
    
    
    
    (50
    )
    
    
    (40
    )
    
    
    (90
    )Total loans
    
    
    10,572
    
    
    
    5,813
    
    
    
    16,385
    
    
    
    2,560
    
    
    
    4,391
    
    
    
    6,951Total increase in interest income
    
    
    9,555
    
    
    
    6,992
    
    
    
    16,547
    
    
    
    3,556
    
    
    
    5,363
    
    
    
    8,919Interest expenseDepositsSavings
    
    $
    (18
    )
    
    $
    (11
    )
    
    $
    (29
    )
  (
    $

 17
    )
  (
    $

 8
    )
  (
    $

 25
    )Now and Money Market
    
    
    (1,657
    )
    
    
    3,094
    
    
    
    1,437
    
    
    
    (1,400
    )
    
    
    892
    
    
    
    (508
    )Time deposits
    
    
    6,271
    
    
    
    2,300
    
    
    
    8,571
    
    
    
    1,387
    
    
    
    1
    
    
    
    1,388Total deposits
    
    
    4,596
    
    
    
    5,383
    
    
    
    9,979
    
    
    
    (30
    )
    
    
    885
    
    
    
    855Borrowings
    
    
    853
    
    
    
    1,194
    
    
    
    2,047
    
    
    
    1,999
    
    
    
    1,084
    
    
    
    3,083Total increase in interest expense
    
    
    5,449
    
    
    
    6,577
    
    
    
    12,026
    
    
    
    1,969
    
    
    
    1,969
    
    
    
    3,938Total increase in net interest income
    
    $
    4,106
    
    
    $
    415
    
    
    $
    4,521
    
  
    $
      1,587
    
  
    $

 3,394
    
  
    $

 4,981
 Loans
  As of December 31,(in thousands)2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002LoansComml and Industrial
    
    $
    43,019
    
    
    
    7
    %
    
    $
    30,075
    
    
    
    5
    %
    
    $
    37,468
    
    
    
    8
    %
    
    $
    18,343
    
    
    
    3
    %
    
    $
    6,963
    
    
    
    1
    %Const & land development
    
    
    183,534
    
    
    
    30
    %
    
    
    177,102
    
    
    
    32
    %
    
    
    109,129
    
    
    
    23
    %
    
    
    107,463
    
    
    
    21
    %
    
    
    82,736
    
    
    
    14
    %Single family residential
    
    
    43,338
    
    
    
    7
    %
    
    
    41,900
    
    
    
    8
    %
    
    
    48,020
    
    
    
    10
    %
    
    
    60,366
    
    
    
    12
    %
    
    
    119,667
    
    
    
    21
    %Other real estate secured
    
    
    319,894
    
    
    
    53
    %
    
    
    296,051
    
    
    
    53
    %
    
    
    273,099
    
    
    
    58
    %
    
    
    326,523
    
    
    
    63
    %
    
    
    354,875
    
    
    
    61
    %Leases net of unearned
income
    
    
    13,404
    
    
    
    2
    %
    
    
    2,623
    
    
    
    1
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    1,333
    
    
    
    1
    %
    
    
    3,868
    
    
    
    1
    %
    
    
    3,322
    
    
    
    1
    %
    
    
    4,512
    
    
    
    1
    %
    
    
    14,613
    
    
    
    3
    %Total gross loans
    
    
    604,522
    
    
    
    100
    %
    
    
    551,619
    
    
    
    100
    %
    
    
    471,038
    
    
    
    100
    %
    
    
    517,207
    
    
    
    100
    %
    
    
    578,854
    
    
    
    100
    %Unearned income
    
    
    (1,564
    )
    
    
    
    
    
    
    (1,983
    )
    
    
    
    
    
    
    (1,540
    )
    
    
    
    
    
    
    (1,203
    )
    
    
    
    
    
    
    (1,082
    )Discount on loans purchased
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (290
    )
    
    
    
    
    
    
    (1,038
    )602,958
    
    
    
    
    
    
    
    549,636
    
    
    
    
    
    
    
    469,498
    
    
    
    
    
    
    
    515,714
    
    
    
    
    
    
    
    576,734Allowance for loan loss
    
    
    (11,455
    )
    
    
    
    
    
    
    (10,276
    )
    
    
    
    
    
    
    (12,519
    )
    
    
    
    
    
    
    (12,426
    )
    
    
    
    
    
    
    (12,470
    )Total net loans
    
    $
    591,503
    
    
    
    
    
    
    $
    539,360
    
    
    
    
    
    
    $
    456,979
    
    
    
    
    
    
    $
    503,288
    
    
    
    
    
    
    $
    564,264
 34




---



##### Table of Contents



Analysis of Allowance for Loan Loss
 Year ending December 31,(in thousands)2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Total Loans
    
    $
    602,958
    
    
    $
    549,636
    
    
    $
    469,498
    
    
    $
    515,714
    
    
    $
    576,734Daily average loan balance
    
    $
    618,591
    
    
    $
    510,349
    
    
    $
    471,526
    
    
    $
    562,765
    
    
    $
    617,156Allowance for loan loss:Balance at the beginning of the year
    
    $
    10,276
    
    
    $
    12,519
    
    
    $
    12,426
    
    
    $
    12,470
    
    
    $
    11,888Charge offs by loan type:Single family residential
    
    
    631
    
    
    
    142
    
    
    
    197
    
    
    
    444
    
    
    
    775Other real estate secured
    
    
    5
    
    
    
    2,162
    
    
    
    1
    
    
    
    
    
    
    
    103Tax certificates
    
    
    25
    
    
    
    1
    
    
    
    6
    
    
    
    74
    
    
    
    Commercial and industrial
    
    
    
    
    
    
    28
    
    
    
    
    
    
    
    22
    
    
    
    47Other loans
    
    
    84
    
    
    
    2
    
    
    
    
    
    
    
    271
    
    
    
    Total charge offs
    
    
    745
    
    
    
    2,335
    
    
    
    204
    
    
    
    811
    
    
    
    925Recoveries by loan type:Single family residential
    
    
    100
    
    
    
    68
    
    
    
    249
    
    
    
    49
    
    
    
    100Other real estate secured
    
    
    14
    
    
    
    7
    
    
    
    1
    
    
    
    3
    
    
    
    167Tax certificates
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial and industrial
    
    
    2
    
    
    
    12
    
    
    
    37
    
    
    
    26
    
    
    
    19Other loans
    
    
    5
    
    
    
    4
    
    
    
    4
    
    
    
    15
    
    
    
    971Total recoveries
    
    
    121
    
    
    
    91
    
    
    
    291
    
    
    
    93
    
    
    
    1,257Loan (charge offs) recoveries
    
    
    (624
    )
    
    
    (2,244
    )
    
    
    87
    
    
    
    (718
    )
    
    
    332Provision for loan loss
    
    
    1,803
    
    
    
    1
    
    
    
    6
    
    
    
    674
    
    
    
    250Balance at end of year
    
    $
    11,455
    
    
    $
    10,276
    
    
    $
    12,519
    
    
    $
    12,426
    
    
    $
    12,470Net charge offs to average loans
    
    
    (0.10
    %)
    
    
    (0.44
    %)
    
    
    0.02
    %
    
    
    (0.13
    %)
    
    
    0.05
    %Allowance to total loans at year-end
    
    
    1.90
    %
    
    
    1.87
    %
    
    
    2.67
    %
    
    
    2.41
    %
    
    
    2.16
    %
    35




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##### Table of Contents



Loans and Lease Financing Receivables
  As of December 31,(in thousands)2006
    
    
    2005
    
    
    2004Loans secured by real estateConstruction and land development
    
    $
    186,163
    
    
    $
    177,102
    
    
    $
    109,129Secured by 1-4 family residential properties:Revolving, open-end loans secured by 1-4 family residential
properties and extended under lines of credit
    
    
    4,585
    
    
    
    10,070
    
    
    
    7,369All other loans secured by 1-4 family residential properties:Secured by first liens
    
    
    33,868
    
    
    
    28,327
    
    
    
    36,136Secured by junior liens
    
    
    4,885
    
    
    
    4,306
    
    
    
    4,515Secured by multi family (5 or more) residential properties
    
    
    6,082
    
    
    
    24,804
    
    
    
    15,256Secured by non-farm nonresidential properties
    
    
    311,183
    
    
    
    270,444
    
    
    
    257,843Commercial and industrial loans to US addresses
    
    
    43,019
    
    
    
    30,075
    
    
    
    37,468Loans to individuals for household, family, and other personal
expenditures
    
    
    1,088
    
    
    
    1,061
    
    
    
    1,346Obligations of state and political subdivisions in the US
    
    
    78
    
    
    
    1,268
    
    
    
    1,769Lease financing receivables (net of unearned income)
    
    
    13,404
    
    
    
    2,623
    
    
    
    All other loans
    
    
    167
    
    
    
    1,539
    
    
    
    207Less: Any unearned income on loans listed above
    
    
    1,564
    
    
    
    1,983
    
    
    
    1,540Total loans and leases, net of unearned income
    
    $
    602,958
    
    
    $
    549,636
    
    
    $
    469,498
 Credit Quality
  As of December 31,(in thousands)2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Non-accruing loans (1)
    
    $
    6,560
    
    
    $
    4,371
    
    
    $
    4,526
    
    
    $
    11,328
    
    
    $
    11,908Other real estate
    
    
    924
    
    
    
    3,834
    
    
    
    5,424
    
    
    
    4,371
    
    
    
    1,444Total nonperforming assets
    
    $
    7,484
    
    
    $
    8,205
    
    
    $
    9,950
    
    
    $
    15,699
    
    
    $
    13,352Nonperforming assets to total assets
    
    
    0.55
    %
    
    
    0.63
    %
    
    
    0.83
    %
    
    
    1.36
    %
    
    
    1.23
    %Nonperforming loans to total loans
    
    
    1.09
    %
    
    
    0.79
    %
    
    
    0.96
    %
    
    
    2.20
    %
    
    
    2.06
    %Allowance for loan loss to nonperforming loans
    
    
    174.62
    %
    
    
    235.09
    %
    
    
    276.54
    %
    
    
    109.69
    %
    
    
    104.72
    %
 
 (1)
    
    Generally, a loan is placed on non-accruing 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. 36




---



##### Table of Contents



Investment Securities
  As of December 31, 2006(in thousands)After 1 year but
    
    
    After 5 years, butWithin 1 year
    
    
    within 5 years
    
    
    within 10 years
    
    
    After 10 years
    
    
    TotalAmount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    RateSecurities held to maturityMortgage backed
securities
    
    $
    
    
    
    
    
    %
    
    $
    11
    
    
    
    10.9
    %
    
    $
    35
    
    
    
    5.4
    %
    
    $
    83
    
    
    
    4.9
    %
    
    $
    129
    
    
    
    5.5
    %Agencies
    
    
    35,000
    
    
    
    3.2
    %
    
    
    160,000
    
    
    
    3.8
    %
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    195,000
    
    
    
    3.8
    %Other securities
    
    
    60,300
    
    
    
    7.6
    %
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    60,300
    
    
    
    7.6
    %Total
    
    $
    95,300
    
    
    
    6.0
    %
    
    $
    160,011
    
    
    
    3.9
    %
    
    $
    35
    
    
    
    5.4
    %
    
    $
    83
    
    
    
    4.9
    %
    
    $
    255,429
    
    
    
    4.7
    %Available for saleMortgage backed
securities
    
    $
    
    
    
    
    
    %
    
    $
    4
    
    
    
    7.5
    %
    
    $
    
    
    
    
    
    %
    
    $
    26,986
    
    
    
    4.8
    %
    
    $
    26,990
    
    
    
    4.8
    %CMOS
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    19,717
    
    
    
    5.1
    %
    
    
    19,717
    
    
    
    5.1
    %Agencies
    
    
    
    
    
    
    
    %
    
    
    57,634
    
    
    
    3.8
    %
    
    
    
    
    
    
    
    %
    
    
    43,938
    
    
    
    4.9
    %
    
    
    101,572
    
    
    
    4.3
    %Trust Preferred
    
    
    921
    
    
    
    8.0
    %
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    40,564
    
    
    
    9.8
    %
    
    
    41,485
    
    
    
    9.7
    %Other securities
    
    
    80,869
    
    
    
    4.43
    %
    
    
    30,062
    
    
    
    7.5
    %
    
    
    
    
    
    
    
    %
    
    
    1,341
    
    
    
    6.0
    %
    
    
    112,272
    
    
    
    5.3
    %Total
    
    $
    81,790
    
    
    
    4.5
    %
    
    $
    87,700
    
    
    
    5.1
    %
    
    $
    
    
    
    
    
    %
    
    $
    132,546
    
    
    
    6.4
    %
    
    $
    302,036
    
    
    
    5.5
    %
   37




---



##### Table of Contents



As of December 31,(in thousands)2006
    
    
    2005
    
    
    2004Amortized
    
    
    Fair
    
    
    Amortized
    
    
    Fair
    
    
    Amortized
    
    
    FairCost
    
    
    Value
    
    
    Cost
    
    
    Value
    
    
    Cost
    
    
    ValueSecurities held to maturityMortgage backed securities
    
    $
    129
    
    
    $
    129
    
    
    $
    167
    
    
    $
    167
    
    
    $
    232
    
    
    $
    232US agencies
    
    
    195,000
    
    
    
    192,180
    
    
    
    195,000
    
    
    
    190,829
    
    
    
    185,000
    
    
    
    184,267Other securities
    
    
    60,300
    
    
    
    61,940
    
    
    
    60,300
    
    
    
    62,202
    
    
    
    26,995
    
    
    
    27,366Total
    
    $
    255,429
    
    
    $
    254,249
    
    
    $
    255,467
    
    
    $
    253,198
    
    
    $
    212,227
    
    
    $
    211,865Securities available for saleMortgage backed securities
    
    $
    47,701
    
    
    $
    46,707
    
    
    $
    56,628
    
    
    $
    55,892
    
    
    $
    81,303
    
    
    $
    81,669US agencies
    
    
    104,980
    
    
    
    101,572
    
    
    
    104,979
    
    
    
    101,698
    
    
    
    94,997
    
    
    
    93,305Trust preferred securities
    
    
    38,657
    
    
    
    41,485
    
    
    
    36,174
    
    
    
    39,733
    
    
    
    37,196
    
    
    
    39,562Other securities
    
    
    110,343
    
    
    
    112,272
    
    
    
    129,854
    
    
    
    128,866
    
    
    
    141,679
    
    
    
    146,398Total
    
    $
    301,681
    
    
    $
    302,036
    
    
    $
    327,635
    
    
    $
    326,189
    
    
    $
    355,175
    
    
    $
    360,934
 Deposits
  As of December 31,(in thousands)2006
    
    
    2005
    
    
    2004Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageBalance
    
    
    Rate
    
    
    Balance
    
    
    Rate
    
    
    Balance
    
    
    RateDemand deposits:Non interest bearing
    
    $
    62,641
    
    
    
    
    %
    
    $
    68,308
    
    
    
    
    %
    
    $
    57,789
    
    
    
    
    %Interest bearing (NOW)
    
    
    59,472
    
    
    
    2.48
    %
    
    
    33,732
    
    
    
    0.91
    %
    
    
    34,181
    
    
    
    0.71
    %Money market deposits
    
    
    226,920
    
    
    
    3.28
    %
    
    
    321,655
    
    
    
    2.22
    %
    
    
    426,895
    
    
    
    1.81
    %Savings deposits
    
    
    18,549
    
    
    
    0.53
    %
    
    
    21,814
    
    
    
    0.58
    %
    
    
    24,278
    
    
    
    0.63
    %Certificate of deposit
    
    
    393,685
    
    
    
    4.70
    %
    
    
    254,031
    
    
    
    3.92
    %
    
    
    218,756
    
    
    
    3.92
    %Total deposits
    
    $
    761,267
    
    
    
    
    
    
    $
    699,540
    
    
    
    
    
    
    $
    761,899
 38




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##### Table of Contents



As of December 31,(in thousands)2006
    
    
    2005MaturityThree months or less
    
    $
    6,980
    
    
    $
    8,523Over three months through twelve months
    
    
    86,167
    
    
    
    41,534Over twelve months through five years
    
    
    191,398
    
    
    
    152,566Over five years
    
    
    940
    
    
    
    988Total
    
    $
    285,485
    
    
    $
    203,611
 Short and Long Term Borrowings
 Year ending December 31,(in thousands)2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Short term borrowings
    
    $
    53,000
    
    
    $
    104,500
    
    
    $
    17,500
    
    
    $
    
    
    
    $
    3,000Long term borrowings:Other borrowings
    
    
    5,587
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Obligations through VIE equity investments (1)
    
    
    29,342
    
    
    
    47,356
    
    
    
    56,249
    
    
    
    Subordinated debt
    
    
    25,774
    
    
    
    25,774
    
    
    
    25,774
    
    
    
    
    
    
    
    FHLB advances
    
    
    187,500
    
    
    
    249,500
    
    
    
    204,500
    
    
    
    212,000
    
    
    
    124,500Total borrowings
    
    $
    301,203
    
    
    $
    427,130
    
    
    $
    304,023
    
    
    $
    212,000
    
    
    $
    127,500
 
 (1)
    
    This obligation is consolidated from requirements under FIN (46) R of which $0 is
guaranteed by Royal Bancshares.  39




---



##### Table of Contents



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
  As of December 31, 2006 (Dollars in Thousands)
 Market Value of
    
    Percent ofChanges in Rates
    
    Portfolio Equity
    
    Change+ 200 basis points
    
    
    162,073
    
    
    
    -0.7
    %+ 100 basis points
    
    
    163,015
    
    
    
    -0.1
    %Flat rate
    
    
    163,254
    
    
    
    0
    %- 100 basis points
    
    
    153,278
    
    
    
    -6.1
    %- 200 basis points
    
    
    139,768
    
    
    
    -14.4
    %
   40




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##### Table of Contents



RECENT ACCOUNTING PRONOUNCEMENTS
       41




---



##### Table of Contents



42




---



##### 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, 2006 and 2005
 43




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
       
 
 44




---



##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
  December 31,2006
    
    
    2005(In thousands, except share data)ASSETSCash on hand
    
    $
    13,426
    
    
    $
    14,357Interest bearing deposits
    
    
    66,810
    
    
    
    2,738Federal funds sold
    
    
    2,200
    
    
    
    13,800Total cash and cash equivalents
    
    
    82,436
    
    
    
    30,895Investment securities held to maturity (fair value of $254,249 and
$253,198 in 2006 and 2005, respectively)
    
    
    255,429
    
    
    
    255,467Investment securities available for sale  at fair value
    
    
    302,036
    
    
    
    326,189Federal Home Loan Bank stock, at cost
    
    
    11,276
    
    
    
    17,073Loans held for sale
    
    
    
    
    
    
    803Loans
    
    
    602,958
    
    
    
    549,636Less allowance for loan losses
    
    
    11,455
    
    
    
    10,276Net loans
    
    
    591,503
    
    
    
    539,360Premises and equipment, net
    
    
    7,766
    
    
    
    8,373Real estate owned via equity investments
    
    
    42,514
    
    
    
    58,209Accrued interest receivable
    
    
    16,494
    
    
    
    14,843Bank owned life insurance
    
    
    22,906
    
    
    
    22,059Other assets
    
    
    23,951
    
    
    
    27,748Total assets
    
    $
    1,356,311
    
    
    $
    1,301,019LIABILITIES AND STOCKHOLDERS EQUITYLiabilitiesDepositsNon-interest bearing
    
    $
    61,002
    
    
    $
    75,754Interest bearing
    
    
    798,455
    
    
    
    621,655Total deposits
    
    
    859,457
    
    
    
    697,409Accrued interest payable
    
    
    10,654
    
    
    
    6,606Other liabilities
    
    
    18,593
    
    
    
    11,879Borrowings
    
    
    246,087
    
    
    
    354,000Obligations related to equity investments in real estate
    
    
    29,342
    
    
    
    47,356Subordinated debentures
    
    
    25,774
    
    
    
    25,774Total liabilities
    
    
    1,189,907
    
    
    
    1,143,024Minority interests
    
    
    3,150
    
    
    
    2,487Stockholders equityCommon stockClass A, par value $2.00 per share; authorized, 18,000,000 shares;
issued, 11,287,462 and 10,699,592 shares in 2006 and 2005, respectively
    
    
    22,575
    
    
    
    21,400Class B, par value $0.10 per share; authorized, 3,000,000 shares;
issued, 2,108,827 and 1,992,957 shares in 2006 and 2005, respectively
    
    
    211
    
    
    
    199Undistributed Class B shares
    
    
    
    
    
    
    2Additional paid in capital
    
    
    121,542
    
    
    
    104,285Retained earnings
    
    
    23,464
    
    
    
    32,827Accumulated other comprehensive loss
    
    
    (2,273
    )
    
    
    (940
    )165,519
    
    
    
    157,773Treasury stock  at cost, 215,388 Class A shares in 2006 and 2005
    
    
    (2,265
    )
    
    
    (2,265
    )Total stockholders equity
    
    
    163,254
    
    
    
    155,508Total liabilities and stockholders equity
    
    $
    1,356,311
    
    
    $
    1,301,019
  45




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
  Years ended December 31,2006
    
    
    2005
    
    
    2004(In thousands, except per share data)Interest incomeLoans, including fees
    
    $
    63,379
    
    
    $
    46,995
    
    
    $
    40,044Investment securities:-Taxable interest
    
    
    29,132
    
    
    
    29,276
    
    
    
    26,911-Tax exempt interest
    
    
    75
    
    
    
    75
    
    
    
    75Deposits in banks
    
    
    377
    
    
    
    56
    
    
    
    409Federal funds sold
    
    
    43
    
    
    
    58
    
    
    
    102TOTAL INTEREST INCOME
    
    
    93,006
    
    
    
    76,460
    
    
    
    67,541Interest expenseDeposits
    
    
    27,528
    
    
    
    17,549
    
    
    
    16,918Borrowings
    
    
    15,736
    
    
    
    13,690
    
    
    
    8,744Obligations related to equity investments in real estate
    
    
    3,108
    
    
    
    557
    
    
    
    1,639TOTAL INTEREST EXPENSE
    
    
    46,372
    
    
    
    31,796
    
    
    
    27,301NET INTEREST INCOME
    
    
    46,634
    
    
    
    44,664
    
    
    
    40,240Provision for loan losses
    
    
    1,803
    
    
    
    1
    
    
    
    6NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES
    
    
    44,831
    
    
    
    44,663
    
    
    
    40,234Other incomeService charges and fees
    
    
    1,404
    
    
    
    1,293
    
    
    
    1,496Gains on sale of investment securities available for sale
    
    
    383
    
    
    
    227
    
    
    
    810Income related to equity investments in real estate
    
    
    6,627
    
    
    
    19,418
    
    
    
    7,133Income from bank owned life insurance
    
    
    847
    
    
    
    845
    
    
    
    966Gains on sale of other real estate
    
    
    2,129
    
    
    
    2,494
    
    
    
    2,102Gains on sale of loans
    
    
    379
    
    
    
    508
    
    
    
    480Other income
    
    
    202
    
    
    
    41
    
    
    
    17311,971
    
    
    
    24,826
    
    
    
    13,160Other expensesSalaries and employee benefits
    
    
    13,451
    
    
    
    13,488
    
    
    
    10,767Occupancy and equipment
    
    
    1,644
    
    
    
    1,611
    
    
    
    1,509Expenses related to equity investments
    
    
    1,606
    
    
    
    262
    
    
    
    4,780Pennsylvania
state shares tax
    
    
    1,082
    
    
    
    992
    
    
    
    906Other operating expenses
    
    
    6,869
    
    
    
    8,378
    
    
    
    6,93024,652
    
    
    
    24,731
    
    
    
    24,892Minority interest
    
    
    567
    
    
    
    68
    
    
    
    555INCOME BEFORE INCOME TAXES
    
    
    31,583
    
    
    
    44,690
    
    
    
    27,947Income taxes
    
    
    10,015
    
    
    
    12,637
    
    
    
    7,914NET INCOME
    
    $
    21,568
    
    
    $
    32,053
    
    
    $
    20,033Per share dataNet income  basic
    
    $
    1.60
    
    
    $
    2.39
    
    
    $
    1.50Net income
 diluted
    
    $
    1.59
    
    
    $
    2.37
    
    
    $
    1.48
  46




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    AccumulatedUn-
    
    
    Additional
    
    
    
    
    
    
    otherClass A common stock
    
    
    Class B common stock
    
    
    Distributed
    
    
    Paid in
    
    
    Retained
    
    
    comprehensive
    
    
    Treasury
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    B-shares
    
    
    Capital
    
    
    Earnings
    
    
    income (loss)
    
    
    stock
    
    
    incomeBalance, December 31, 2003
    
    
    10,027
    
    
    $
    20,054
    
    
    
    1,909
    
    
    $
    191
    
    
    
    
    
    
    
    
    
    
    $
    85,448
    
    
    $
    24,990
    
    
    $
    6,415
    
    
    $
    (2,265
    )Net income for the year ended
December 31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,033
    
    
    
    
    
    
    
    
    
    
    $
    20,033Conversion of Class B common stock
to Class A common stock
    
    
    10
    
    
    
    20
    
    
    
    (1
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19
    )
    
    
    
    
    
    
    
    
    
    
    2% stock dividends declared
    
    
    196
    
    
    
    392
    
    
    
    31
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    5,842
    
    
    
    (6,236
    )
    
    
    
    
    
    
    
    
    
    
    Cash in lieu of fractional shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11
    )
    
    
    
    
    
    
    
    
    
    
    Stock options exercised
    
    
    44
    
    
    
    87
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    416
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Tax effect of stock options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    331
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cash dividends on common stock
(Class A $0.95, Class B $1.10)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,199
    )
    
    
    
    
    
    
    
    
    
    
    Other comprehensive loss, net of
reclassifications and taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,616
    )
    
    
    
    
    
    
    (2,616
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    17,417Balance, December 31, 2004
    
    
    10,277
    
    
    
    20,553
    
    
    
    1,939
    
    
    
    194
    
    
    
    
    
    
    
    
    
    
    
    92,037
    
    
    
    26,558
    
    
    
    3,799
    
    
    
    (2,265
    )Net income for the year ended
December 31, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,053
    
    
    
    
    
    
    
    
    
    
    $
    32,053Conversion of Class B common stock
to Class A common stock
    
    
    6
    
    
    
    11
    
    
    
    (4
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11
    )
    
    
    
    
    
    
    
    
    
    
    2% stock dividends declared (January)
    
    
    201
    
    
    
    402
    
    
    
    39
    
    
    
    3
    
    
    
    22
    
    
    
    
    
    
    
    6,481
    
    
    
    (6,887
    )
    
    
    
    
    
    
    
    
    
    
    2% stock dividends declared
(December)
    
    
    206
    
    
    
    412
    
    
    
    19
    
    
    
    3
    
    
    
    
    
    
    
    2
    
    
    
    5,599
    
    
    
    (6,015
    )Cash in lieu of fractional shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12
    )
    
    
    
    
    
    
    
    
    
    
    Stock options exercised
    
    
    10
    
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Tax effect of stock options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cash dividends on common stock
(Class A $0.98, Class B $1.12)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,859
    )
    
    
    
    
    
    
    
    
    
    
    Other comprehensive loss, net of
reclassifications and taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,739
    )
    
    
    
    
    
    
    (4,739
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    27,314Balance, December 31, 2005
    
    
    10,700
    
    
    
    21,400
    
    
    
    1,993
    
    
    
    199
    
    
    
    22
    
    
    
    2
    
    
    
    104,285
    
    
    
    32,827
    
    
    
    (940
    )
    
    
    (2,265
    )
  47




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    AccumulatedUn-
    
    
    Additional
    
    
    
    
    
    
    otherClass A common stock
    
    
    Class B common stock
    
    
    Distributed
    
    
    Paid in
    
    
    Retained
    
    
    comprehensive
    
    
    Treasury
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    B-shares
    
    
    Capital
    
    
    earnings
    
    
    income (loss)
    
    
    stock
    
    
    IncomeBalance, December 31, 2005
    
    
    10,700
    
    
    $
    21,400
    
    
    
    1,993
    
    
    $
    199
    
    
    $
    2
    
    
    
    104,285
    
    
    $
    32,827
    
    
    $
    (940
    )
    
    $
    (2,265
    )Net income for the year ended
December 31, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,568
    
    
    
    
    
    
    
    
    
    
    $
    21,568Conversion of Class B common stock
to Class A common stock
    
    
    5
    
    
    
    11
    
    
    
    (5
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    (10
    )
    
    
    
    
    
    
    
    
    
    
    5% stock dividends 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 expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    733Stock options exercised
    
    
    55
    
    
    
    110
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    556
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Tax effect of stock options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    358
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Adjustment, 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
    )
  48




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   2006
    
    
    2005
    
    
    2004(In thousands)Cash flows from operating activitiesNet income
    
    $
    21,568
    
    
    $
    32,053
    
    
    $
    20,033Adjustments to reconcile net income to net cash
provided by operating activitiesDepreciation and amortization
    
    
    1,454
    
    
    
    1,307
    
    
    
    2,633Stock compensation expense
    
    
    733
    
    
    
    
    
    
    
    Provision for loan losses
    
    
    1,803
    
    
    
    1
    
    
    
    6Amortization of premiums and discounts on loans,
mortgage-backed securities and investments
    
    
    (2,415
    )
    
    
    (1,106
    )
    
    
    7,577Income tax benefit on stock options
    
    
    
    
    
    
    53
    
    
    
    331(Benefit)provision for deferred income taxes
    
    
    (1,937
    )
    
    
    189
    
    
    
    (1,442
    )Gains on sale other real estate
    
    
    (2,129
    )
    
    
    (2,494
    )
    
    
    (2,102
    )Gains on sale of loans
    
    
    (379
    )
    
    
    (508
    )
    
    
    (480
    )Gains on sales of investment securities available
for sale
    
    
    (383
    )
    
    
    (227
    )
    
    
    (810
    )Gains on sales of premises and equipment  VIEs
    
    
    
    
    
    
    (16,779
    )
    
    
    Gain from refinance of assets  VIE
    
    
    
    
    
    
    (1,892
    )
    
    
    Distributions from equity investments
    
    
    (645
    )
    
    
    
    
    
    
    Income from bank owned life insurance
    
    
    (847
    )
    
    
    (845
    )
    
    
    (966
    )Changes in assets and liabilities:(Increase) decrease in accrued interest receivable
    
    
    (1,651
    )
    
    
    (1,400
    )
    
    
    719Decrease (increase) in other assets
    
    
    9,938
    
    
    
    9,061
    
    
    
    (8,225
    )Increase (decrease) in accrued interest payable
    
    
    4,048
    
    
    
    1,004
    
    
    
    (2,131
    )Increase in other liabilities
    
    
    3,614
    
    
    
    3,807
    
    
    
    3,335Net cash provided by operating activities
    
    
    32,772
    
    
    
    22,224
    
    
    
    18,478Cash flows from investing activitiesProceeds from calls and maturities of investment securities
held to maturity
    
    
    38
    
    
    
    46,685
    
    
    
    153,714Purchases of investment securities held to maturity
    
    
    
    
    
    
    (90,025
    )
    
    
    (255,150
    )Proceeds from calls and maturities of investment securities
available for sale
    
    
    40,408
    
    
    
    38,066
    
    
    
    60,836Proceeds from sales of investment securities available for sale
    
    
    4,613
    
    
    
    13,897
    
    
    
    27,860Purchase (redemption) of Federal Home Loan Bank stock
    
    
    5,797
    
    
    
    (5,973
    )
    
    
    307Purchases of investment securities available for sale
    
    
    (19,363
    )
    
    
    (25,137
    )
    
    
    (13,812
    )Net (increase) decrease in loans
    
    
    (51,028
    )
    
    
    (84,372
    )
    
    
    46,256Purchases of premises and equipment
    
    
    (848
    )
    
    
    (900
    )
    
    
    (596
    )Net proceeds from sale of premises and equipment  VIEs
    
    
    15,695
    
    
    
    88,171
    
    
    
    Net cash disbursed to partners  VIEs
    
    
    
    
    
    
    (22,068
    )
    
    
    Distributions from equity investments
    
    
    645
    
    
    
    
    
    
    
    Purchases of premises and equipment through VIE
    
    
    
    
    
    
    (58,691
    )
    
    
    (66,990
    )Net cash
used in investing activities
    

    
    (4,043
    )
    
    
    (100,347
    )
    
    
    (47,575
    )
  49




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   2006
    
    
    2005
    
    
    2004(In thousands)Cash flows from financing activitiesDecrease in non-interest bearing and interest bearing
demand deposits and savings accounts
    
    $
    (21,088
    )
    
    $
    (164,396
    )
    
    $
    (14,295
    )Increase (decrease) in time deposits
    
    
    183,135
    
    
    
    119,424
    
    
    
    (34,382
    )Principal payments on mortgage
    
    
    (65
    )
    
    
    (63
    )
    
    
    (60
    )Proceeds from subordinated debentures, net
    
    
    
    
    
    
    
    
    
    
    25,000Cash dividends in lieu of fractional shares
    
    
    (11
    )
    
    
    (12
    )
    
    
    (11
    )(Repayments) proceeds from short term borrowings
    
    
    (51,500
    )
    
    
    87,000
    
    
    
    17,500(Repayments) proceeds from long term borrowings
    
    
    (56,413
    )
    
    
    45,000
    
    
    
    (7,500
    )Mortgage debt incurred  VIEs
    
    
    
    
    
    
    65,097
    
    
    
    56,249Repayment of mortgage debt  VIEs
    
    
    (18,014
    )
    
    
    (57,472
    )
    
    
    Income tax benefit on stock options
    
    
    358
    
    
    
    
    
    
    
    Issuance of common stock under stock option plans
    
    
    666
    
    
    
    190
    
    
    
    834Cash dividends paid
    
    
    (14,256
    )
    
    
    (12,859
    )
    
    
    (12,199
    )Net cash provided by financing activities
    
    
    22,812
    
    
    
    81,909
    
    
    
    31,136Net increase in cash and cash equivalents
    
    
    51,541
    
    
    
    3,786
    
    
    
    2,039Cash and cash equivalents at beginning of year
    
    
    30,895
    
    
    
    27,109
    
    
    
    25,070Cash and cash equivalents at end of year
    
    $
    82,436
    
    
    $
    30,895
    
    
    $
    27,109Supplemental disclosure of cash flow informationCash paid during the year forInterest
    
    $
    42,324
    
    
    $
    30,792
    
    
    $
    29,432Income taxes
    
    $
    8,958
    
    
    $
    13,450
    
    
    $
    8,705
   50




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    Basis of Financial Statement Presentation
       51




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
     Recent Accounting Pronouncements
    52




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
       53




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
       54




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   Investment Securities
   Loans held for sale
  Transfer of Financial Assets
    55




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   Loans and Allowance for Loan Losses
       56




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   Other Real Estate
  Premises and Equipment
  Bank-Owned Life Insurance
  Income Taxes
   57




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   Per Share Information
   Stock Compensation
     58




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   Benefit Plans
   Cash and Cash Equivalents
  Financial Instruments
  Advertising Costs
   59




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   Comprehensive Income
   December 31, 2006Tax
    
    
    Net ofBefore tax
    
    
    (benefit)
    
    
    taxamount
    
    
    expense
    
    
    amountUnrealized gains on securitiesUnrealized holding gains arising during period
    
    $
    2,185
    
    
    $
    765
    
    
    $
    1,420Less reclassification adjustment for gains
realized in net income
    
    
    383
    
    
    
    134
    
    
    
    249Other comprehensive gain, net
    
    $
    1,802
    
    
    $
    631
    
    
    $
    1,171
 December 31, 2005Tax
    
    
    Net ofBefore tax
    
    
    (benefit)
    
    
    taxamount
    
    
    expense
    
    
    amountUnrealized losses on securitiesUnrealized holding losses arising during period
    
    $
    (6,978
    )
    
    $
    (2,387
    )
    
    $
    (4,591
    )Less reclassification adjustment for gains
realized in net income
    
    
    227
    
    
    
    79
    
    
    
    148Other comprehensive loss, net
    
    $
    (7,205
    )
    
    $
    (2,466
    )
    
    $
    (4,739
    )
  60




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   December 31, 2004Tax
    
    
    Net ofBefore tax
    
    
    (benefit)
    
    
    taxamount
    
    
    expense
    
    
    amountUnrealized losses on securitiesUnrealized holding losses arising during period
    
    $
    (3,150
    )
    
    $
    (1,069
    )
    
    $
    (2,081
    )Less reclassification adjustment for gains
realized in net income
    
    
    810
    
    
    
    275
    
    
    
    535Other comprehensive loss, net
    
    $
    (3,960
    )
    
    $
    (1,344
    )
    
    $
    (2,616
    )
  (in thousands)
    
    2006
    
    
    2005
    
    
    2004Unfunded benefit obligation
    
    $
    (2,504
    )
    
    $
    
    
    
    $
    Unrealized gains (losses) on AFS investments
    
    
    231
    
    
    
    (940
    )
    
    
    3,799Accumulated other comprehensive (loss) income
    
    $
    (2,273
    )
    
    $
    (940
    )
    
    $
    3,799
  Reclassifications
   61




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   Variable Interest Entities (VIE)
 Real estate owned via equity investments
     62




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
      63




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   Trust Preferred Securities
   Interest Rate Swaps
    64




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    December 31,(in thousands)
    
    2006
    
    2005Notional Amount
    
    $
    60,588
    
    
    $
    60,000Weighted average pay rate
    
    
    5.524
    %
    
    
    4.40
    %Weighted average receive rate
    
    
    4.575
    %
    
    
    3.87
    %Weighted average maturity (years)
    
    
    4.6
    
    
    
    4.5Fair value of interest rate swaps
    
    ($
    1,074
    )
    
    ($
    1,281
    )
      Federal Home Loan Bank Stock
  Significant Concentration of Credit Risk
   65




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
          66




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    Community
    
    
    Tax Lien
    
    
    Equity(in thousands)
    
    Bank
    
    
    Operation
    
    
    Investments
    
    
    ConsolidatedDecember 31, 2006Total assets
    
    $
    1,268,104
    
    
    $
    43,672
    
    
    $
    44,535
    
    
    $
    1,356,311Total deposits
    
    
    859,457
    
    
    
    
    
    
    
    
    
    
    
    859,457Interest income
    
    
    88,459
    
    
    
    4,547
    
    
    
    
    
    
    
    93,006Interest expense
    
    
    39,941
    
    
    
    3,323
    
    
    
    3,108
    
    
    
    46,372Net interest income (losses)
    
    
    48,518
    
    
    
    1,224
    
    
    
    (3,108
    )
    
    
    46,634Provision for loan losses
    
    
    1,778
    
    
    
    25
    
    
    
    
    
    
    
    1,803Total non-interest income
    
    
    3,871
    
    
    
    1,473
    
    
    
    6,627
    
    
    
    11,971Total non-interest expense
    
    
    20,882
    
    
    
    2,164
    
    
    
    1,606
    
    
    
    24,652Minority interest expense
    
    
    567
    
    
    
    
    
    
    
    
    
    
    
    567Income taxes
    
    
    9,115
    
    
    
    230
    
    
    
    670
    
    
    
    10,015Net Income
    
    $
    20,047
    
    
    $
    278
    
    
    $
    1,243
    
    
    $
    21,568December 31, 2005Total assets
    
    $
    1,187,825
    
    
    $
    52,162
    
    
    $
    61,032
    
    
    $
    1,301,019Total deposits
    
    
    697,409
    
    
    
    
    
    
    
    
    
    
    
    697,409Interest income
    
    
    71,733
    
    
    
    4,727
    
    
    
    
    
    
    
    76,460Interest expense
    
    
    28,377
    
    
    
    2,862
    
    
    
    557
    
    
    
    31,796Net interest income (losses)
    
    
    43,356
    
    
    
    1,865
    
    
    
    (557
    )
    
    
    44,664Provision for loan losses
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1Total non-interest income
    
    
    3,827
    
    
    
    1,581
    
    
    
    19,418
    
    
    
    24,826Total non-interest expense
    
    
    21,683
    
    
    
    2,786
    
    
    
    262
    
    
    
    24,731Minority interest expense
    
    
    68
    
    
    
    
    
    
    
    
    
    
    
    68Income taxes
    
    
    5,830
    
    
    
    297
    
    
    
    6,510
    
    
    
    12,637Net Income
    
    $
    19,602
    
    
    $
    362
    
    
    $
    12,089
    
    
    $
    32,053
  67




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   Community
    
    
    Tax Lien
    
    
    Equity(in thousands)
    
    Bank
    
    
    Operation
    
    
    Investments
    
    
    ConsolidatedDecember 31, 2004Total assets
    
    $
    1,088,031
    
    
    $
    50,196
    
    
    $
    67,047
    
    
    $
    1,205,274Total deposits
    
    
    742,382
    
    
    
    
    
    
    
    
    
    
    
    742,382Interest income
    
    
    62,621
    
    
    
    4,920
    
    
    
    
    
    
    
    67,541Interest expense
    
    
    23,775
    
    
    
    1,896
    
    
    
    1,630
    
    
    
    27,301Net interest income (losses)
    
    
    38,846
    
    
    
    3,024
    
    
    
    (1,630
    )
    
    
    40,240Provision for loan losses
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    6Total non-interest income
    
    
    4,800
    
    
    
    1,227
    
    
    
    7,133
    
    
    
    13,160Total non-interest expense
    
    
    16,740
    
    
    
    3,372
    
    
    
    4,780
    
    
    
    24,892Minority interest expense
    
    
    555
    
    
    
    
    
    
    
    
    
    
    
    555Income taxes
    
    
    7,272
    
    
    
    389
    
    
    
    253
    
    
    
    7,914Net Income
    
    $
    19,079
    
    
    $
    484
    
    
    $
    470
    
    
    $
    20,033
    68




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    2006Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    Faircost
    
    
    gains
    
    
    losses
    
    
    valueInvestment securities held to maturityOther securities
    
    $
    60,300
    
    
    $
    2,065
    
    
    $
    (425
    )
    
    $
    61,940U.S. government agencies
    
    
    195,000
    
    
    
    
    
    
    
    (2,820
    )
    
    
    192,180Mortgage backed securities
    
    
    129
    
    
    
    
    
    
    
    
    
    
    
    129$
    255,429
    
    
    $
    2,065
    
    
    $
    (3,245
    )
    
    $
    254,249
 2006Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    Faircost
    
    
    gains
    
    
    losses
    
    
    valueInvestment securities available for salePreferred and common stock
    
    $
    15,961
    
    
    $
    1,703
    
    
    $
    (62
    )
    
    $
    17,602Corporate bonds
    
    
    81,247
    
    
    
    174
    
    
    
    (382
    )
    
    
    81,039U.S. government agencies
    
    
    104,980
    
    
    
    
    
    
    
    (3,408
    )
    
    
    101,572Trust preferred securities
    
    
    38,657
    
    
    
    2,828
    
    
    
    
    
    
    
    41,485Mortgage backed securities
    
    
    47,701
    
    
    
    10
    
    
    
    (1,004
    )
    
    
    46,707Other securities
    
    
    13,135
    
    
    
    496
    
    
    
    
    
    
    
    13,631$
    301,681
    
    
    $
    5,211
    
    
    $
    (4,856
    )
    
    $
    302,036
   69




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   2005Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    Faircost
    
    
    gains
    
    
    losses
    
    
    valueInvestment securities held to maturityCorporate securities
    
    $
    60,300
    
    
    $
    1,902
    
    
    $
    
    
    
    $
    62,202U.S. government agencies
    
    
    195,000
    
    
    
    
    
    
    
    (4,171
    )
    
    
    190,829Mortgage backed securities
    
    
    167
    
    
    
    
    
    
    
    
    
    
    
    167$
    255,467
    
    
    $
    1,902
    
    
    $
    (4,171
    )
    
    $
    253,198
 2005Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    Faircost
    
    
    gains
    
    
    losses
    
    
    valueInvestment securities available for salePreferred and common stock
    
    $
    5,129
    
    
    $
    88
    
    
    $
    
    
    
    $
    5,217Corporate bonds
    
    
    109,564
    
    
    
    670
    
    
    
    (1,700
    )
    
    
    108,534U.S. government agencies
    
    
    104,979
    
    
    
    
    
    
    
    (3,281
    )
    
    
    101,698Trust preferred securities
    
    
    36,174
    
    
    
    3,559
    
    
    
    
    
    
    
    39,733Foreign bonds
    
    
    2,995
    
    
    
    20
    
    
    
    
    
    
    
    3,015Mortgage backed securities
    
    
    56,628
    
    
    
    126
    
    
    
    (862
    )
    
    
    55,892Other securities
    
    
    12,166
    
    
    
    81
    
    
    
    (147
    )
    
    
    12,100$
    327,635
    
    
    $
    4,544
    
    
    $
    (5,990
    )
    
    $
    326,189
   70




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    2006Held to maturity
    
    
    Available for saleAmortized
    
    
    Fair
    
    
    Amortized
    
    
    Faircost
    
    
    value
    
    
    cost
    
    
    valueWithin 1 year
    
    $
    35,000
    
    
    $
    34,493
    
    
    $
    61,176
    
    
    $
    60,977After 1 but within 5 years
    
    
    220,311
    
    
    
    219,638
    
    
    
    89,742
    
    
    
    87,700After 5 but within 10 years
    
    
    35
    
    
    
    35
    
    
    
    13,779
    
    
    
    13,749After 10 years
    
    
    83
    
    
    
    83
    
    
    
    117,927
    
    
    
    118,801No contractual maturity
    
    
    
    
    
    
    
    
    
    
    19,057
    
    
    
    20,809$
    255,429
    
    
    $
    254,249
    
    
    $
    301,681
    
    
    $
    302,036
     71




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    Less than 12 months
    
    
    12 months or longer
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedDescription of Securities

    
    value
    
    
    losses
    
    
    value
    
    
    losses
    
    
    value
    
    
    lossesHeld to maturityUS government agencies
    
    $
    
    
    
    $
    
    
    
    $
    192,180
    
    
    $
    (2,820
    )
    
    $
    192,180
    
    
    $
    (2,820
    )Other securities
    
    
    24,575
    
    
    
    (425
    )
    
    
    
    
    
    
    
    
    
    
    24,575
    
    
    
    (425
    )Total held to maturity
    
    $
    24,575
    
    
    $
    (425
    )
    
    $
    192,180
    
    
    $
    (2,820
    )
    
    $
    216,755
    
    
    $
    (3,245
    )Available for SaleUS government agencies
    
    $
    
    
    
    $
    
    
    
    $
    101,572
    
    
    $
    (3,408
    )
    
    $
    101,572
    
    
    $
    (3,408
    )Mortgage backed securities
    
    
    11,962
    
    
    
    (274
    )
    
    
    33,801
    
    
    
    (730
    )
    
    
    45,763
    
    
    
    (1,004
    )Corporate bonds
    
    
    10,538
    
    
    
    (9
    )
    
    
    37,032
    
    
    
    (373
    )
    
    
    47,570
    
    
    
    (382
    )Preferred and common stock
    
    
    830
    
    
    
    (62
    )
    
    
    
    
    
    
    
    
    
    
    830
    
    
    
    (62
    )Total available for sale
    
    $
    23,330
    
    
    $
    (345
    )
    
    $
    172,405
    
    
    $
    (4,511
    )
    
    
    195,735
    
    
    $
    (4,856
    )Total temporarily
impaired
securities
    
    $
    47,905
    
    
    $
    (770
    )
    
    $
    364,585
    
    
    $
    (7,331
    )
    
    $
    412,490
    
    
    $
    (8,101
    )
  72




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
     Less than 12 months
    
    
    12 months or longer
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedDescription of Securities
    
    value
    
    
    losses
    
    
    value
    
    
    losses
    
    
    value
    
    
    lossesHeld to MaturityUS government agencies
    
    $
    108,426
    
    
    $
    (1,574
    )
    
    $
    82,403
    
    
    $
    (2,597
    )
    
    $
    190,829
    
    
    $
    (4,171
    )Total held to maturity
    
    $
    108,426
    
    
    $
    (1,574
    )
    
    $
    82,403
    
    
    $
    (2,597
    )
    
    $
    190,829
    
    
    $
    (4,171
    )Available for SaleUS government agencies
    
    $
    9,886
    
    
    $
    (114
    )
    
    $
    91,812
    
    
    $
    (3,167
    )
    
    $
    101,698
    
    
    $
    (3,281
    )Mortgage backed securities
    
    
    22,387
    
    
    
    (381
    )
    
    
    17,992
    
    
    
    (481
    )
    
    
    40,379
    
    
    
    (862
    )Corporate bonds
    
    
    51,312
    
    
    
    (1,700
    )
    
    
    
    
    
    
    
    
    
    
    51,312
    
    
    
    (1,700
    )Other bonds
    
    
    10,121
    
    
    
    (147
    )
    
    
    
    
    
    
    
    
    
    
    10,121
    
    
    
    (147
    )Total available for sale
    
    $
    93,706
    
    
    $
    (2,342
    )
    
    $
    109,804
    
    
    $
    (3,648
    )
    
    $
    203,510
    
    
    $
    (5,990
    )Total temporarily
impaired
securities
    
    $
    202,132
    
    
    $
    (3,916
    )
    
    $
    192,207
    
    
    $
    (6,245
    )
    
    $
    394,339
    
    
    $
    (10,161
    )
  73




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    2006
    
    
    2005Commercial and industrial
    
    $
    43,019
    
    
    $
    30,075Construction and land development
    
    
    183,534
    
    
    
    177,102Single family and residential
    
    
    43,338
    
    
    
    41,900Other real estate secured
    
    
    319,894
    
    
    
    296,051Leases (net of unearned income)
    
    
    13,404
    
    
    
    2,623Other
    
    
    1,333
    
    
    
    3,868604,522
    
    
    
    551,619LessUnearned income
    
    
    (1,564
    )
    
    
    (1,983
    )Total loans
    
    $
    602,958
    
    
    $
    549,636
     74




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
      2006
    
    
    2005
    
    
    2004Balance at beginning of year
    
    $
    10,276
    
    
    $
    12,519
    
    
    $
    12,426Charge-offs
    
    
    (745
    )
    
    
    (2,335
    )
    
    
    (204
    )Recoveries
    
    
    121
    
    
    
    91
    
    
    
    291Net (charge-offs) recoveries
    
    
    (624
    )
    
    
    (2,244
    )
    
    
    87Provision for loan losses
    
    
    1,803
    
    
    
    1
    
    
    
    6Balance at end of year
    
    $
    11,455
    
    
    $
    10,276
    
    
    $
    12,519
   EstimatedUsefulLives
    
    
    2006
    
    
    2005Land
    
    
    
    
    
    $
    2,396
    
    
    $
    2,396Buildings and leasehold improvements
    
    5 - 31.5 years
    
    
    7,854
    
    
    
    7,764Furniture, fixtures and equipment
    
    3 - 7 years
    
    
    5,772
    
    
    
    5,22516,022
    
    
    
    15,385Less accumulated depreciation and amortization
    
    
    
    
    
    
    8,256
    
    
    
    7,012$
    7,766
    
    
    $
    8,373
  75




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
      2006
    
    
    2005Demand
    
    $
    61,002
    
    
    $
    75,754NOW and money market
    
    
    276,190
    
    
    
    279,602Savings
    
    
    17,185
    
    
    
    20,109Time, $100,000 and over
    
    
    285,485
    
    
    
    203,611Other time
    
    
    219,595
    
    
    
    118,333$
    859,457
    
    
    $
    697,409
  2007
    
    $
    244,5232008
    
    
    126,8722009
    
    
    23,6712010
    
    
    73,6822011
    
    
    33,378Thereafter
    
    
    2,954$
    505,080
  Advances from the Federal Home Loan Bank
    76




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    2007
    
    
    5.44
    %
    
    $
    53,0002008
    
    
    
    
    
    
    2009
    
    
    5.58
    %
    
    
    15,0002010
    
    
    5.30
    %
    
    
    92,5002011
    
    
    
    
    
    
    Thereafter
    
    
    3.27
    %
    
    
    80,000$
    240,500
 Other borrowings
     Subordinated Debentures
   77




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
      2007
    
    $
    741,0002008
    
    
    725,0002009
    
    
    538,0002010
    
    
    342,0002011
    
    
    167,000Thereafter
    
    
    46,000$
    2,559,000
     78




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
       2006
    
    
    2005
    
    
    2004Income tax expense (benefit)Current
    
    $
    11,952
    
    
    $
    12,448
    
    
    $
    9,356Deferred federal tax
    
    
    (1,937
    )
    
    
    189
    
    
    
    (1,442
    )$
    10,015
    
    
    $
    12,637
    
    
    $
    7,914
  2006
    
    
    2005
    
    
    2004Computed tax expense at statutory rate
    
    $
    11,054
    
    
    $
    15,642
    
    
    $
    9,781Tax-exempt income
    
    
    (257
    )
    
    
    (361
    )
    
    
    (466
    )Low-income housing tax credit
    
    
    (544
    )
    
    
    (545
    )
    
    
    (545
    )Nondeductible expense
    
    
    65
    
    
    
    
    
    
    
    Reduction of valuation allowance
    
    
    
    
    
    
    (1,761
    )
    
    
    Other, net
    
    
    (303
    )
    
    
    (338
    )
    
    
    (619
    )Effect of 35% rate bracket
    
    
    
    
    
    
    
    
    
    
    (237
    )Applicable income tax expense
    
    $
    10,015
    
    
    $
    12,637
    
    
    $
    7,914
   79




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    2006
    
    
    2005Deferred tax assetsAllowance for loan losses
    
    $
    4,009
    
    
    $
    3,597Asset valuation reserves
    
    
    431
    
    
    
    431Goodwill from Knoblauch State Bank
    
    
    270
    
    
    
    539Investment in partnerships
    
    
    511
    
    
    
    Accrued pension liability
    
    
    3,546
    
    
    
    1,806Accrued stock-based compensation
    
    
    256
    
    
    
    Net operating loss carryovers from Knoblauch State Bank
    
    
    1,585
    
    
    
    1,761Unrealized losses on investment securities available for
sale
    
    
    
    
    
    
    506Other
    
    
    29
    
    
    
    10,637
    
    
    
    8,640Deferred tax liabilitiesUnrealized gains on investment securities available for sale
    
    
    124
    
    
    
    Penalties on delinquent tax certificates
    
    
    156
    
    
    
    182Deferred tax related to VIEs
    
    
    
    
    
    
    662Other
    
    
    227
    
    
    
    321507
    
    
    
    1,165Net deferred tax asset, included in other assets
    
    $
    10,130
    
    
    $
    7,475
   80




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
        2006AverageIncome
    
    
    shares
    
    
    Per share(numerator)
    
    
    (denominator)
    
    
    amountBasic EPSIncome available to common shareholders
    
    $
    21,568
    
    
    
    13,460
    
    
    $
    1.60Effect of dilutive securitiesStock options
    
    
    
    
    
    
    111
    
    
    
    (.01
    )Diluted EPSIncome available to common shareholders plus
assumed exercise of options
    
    $
    21,568
    
    
    
    13,571
    
    
    $
    1.59
   81




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   2005AverageIncome
    
    
    shares
    
    
    Per share(numerator)
    
    
    (denominator)
    
    
    AmountBasic EPSIncome available to common shareholders
    
    $
    32,053
    
    
    
    13,437
    
    
    $
    2.39Effect of dilutive securitiesStock options
    
    
    
    
    
    
    100
    
    
    
    (0.02
    )Diluted EPSIncome available to common shareholders plus
assumed exercise of options
    
    $
    32,053
    
    
    
    13,537
    
    
    $
    2.37
  2004AverageIncome
    
    
    shares
    
    
    Per share(numerator)
    
    
    (denominator)
    
    
    AmountBasic EPSIncome available to common shareholders
    
    $
    20,033
    
    
    
    13,393
    
    
    $
    1.50Effect of dilutive securitiesStock options
    
    
    
    
    
    
    109
    
    
    
    (0.02
    )Diluted EPSIncome available to common shareholders plus
assumed exercise of options
    
    $
    20,033
    
    
    
    13,502
    
    
    $
    1.48
   82




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
      Years EndedDecember 31,(in thousands)
    
    2005
    
    2004Net income, as reported
    
    $
    32,053
    
    
    $
    20,033Less: Stock-based compensation costs under
fair value based method for all awards, net of tax
    
    
    (682
    )
    
    
    (490
    )Pro forma net income
    
    
    31,371
    
    
    
    19,543Earnings per share Basic           As Reported
    
    $
    2.39
    
    
    $
    1.50Pro forma
    
    
    2.33
    
    
    
    1.46Earnings per share Diluted        As Reported
    
    
    2.37
    
    
    
    1.48Pro forma
    
    
    2.32
    
    
    
    1.45
  2006
    
    2005
    
    2004Dividend yield
    
    
    4.090
    %
    
    
    4.845
    %
    
    
    4.090
    %Expected life
    
    7 years
    
    7 years
    
    7 yearsExpected volatility
    
    
    24.470
    %
    
    
    26.640
    %
    
    
    25.970
    %Risk-free interest rate
    
    
    4.710
    %
    
    
    4.690
    %
    
    
    4.216
    %
  83




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    Outside Directors Stock Option Plan
   Years Ended December 31,2006
    
    2005
    
    2004Weighted
    
    
    
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    Average(1)
    
    
    
    
    
    Average
    
    
    
    
    
    AverageExercise
    
    Intrinsic
    
    
    
    
    
    Exercise
    
    
    
    
    
    ExerciseShares
    
    Price
    
    Value
    
    Shares
    
    Price
    
    Shares
    
    PriceOutstanding at beginning
of year
    
    
    95,621
    
    
    $
    17.65
    
    
    
    
    
    
    
    84,509
    
    
    $
    16.14
    
    
    
    76,389
    
    
    $
    13.92Granted
    
    
    17,325
    
    
    
    21.78
    
    
    
    
    
    
    
    17,672
    
    
    
    21.70
    
    
    
    18,025
    
    
    
    22.38Exercised
    
    
    (10,394
    )
    
    
    17.96
    
    
    
    
    
    
    
    (6,560
    )
    
    
    9.79
    
    
    
    (9,905
    )
    
    
    10.77Outstanding at end of year
    
    
    102,552
    
    
    $
    18.41
    
    
    $
    807,084
    
    
    
    95,621
    
    
    $
    17.65
    
    
    
    84,509
    
    
    $
    16.14Options exercisable at
end of year
    
    
    85,227
    
    
    $
    17.72
    
    
    $
    729,351Weighted-average fair
value of options granted
during the year
    
    
    
    
    
    $
    4.91
    
    
    
    
    
    
    
    
    
    
    $
    4.27
    
    
    
    
    
    
    $
    4.90
 
 (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, 2006. This amount changes based on the
changes in the market value in Royal Bancshares stock. The fair value (present value of the
estimated future benefit to the option holder) of each option grant is estimated on the date
of the grant using the Black-Scholes option pricing model.  84




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    Options outstanding
    
    Options exercisableWeightedaverage
    
    Weighted
    
    
    
    
    
    Weightedremaining
    
    average
    
    
    
    
    
    averageRange of
    
    Number
    
    contractual
    
    exercise
    
    Number
    
    exerciseexercise prices
    
    Outstanding
    
    life (years)
    
    price
    
    exercisable
    
    price$9.13
    
    
    2,258
    
    
    
    0.2
    
    
    $
    9.13
    
    
    
    2,258
    
    
    $
    9.13$10.59 - $18.28
    
    
    50,529
    
    
    
    4.4
    
    
    $
    15.56
    
    
    
    50,529
    
    
    $
    15.27$21.78  $22.39
    
    
    49,765
    
    
    
    8.2
    
    
    $
    22.01
    
    
    
    32,440
    
    
    $
    22.14102,552
    
    
    
    
    
    
    
    
    
    
    
    85,227
  Number
    
    Weighted Averageof
    
    Grant Date FairShares
    
    ValueNon-vested options December 31, 2005
    
    
    17,672
    
    
    
    $21.70Granted
    
    
    17,325
    
    
    
    21.78Vested
    
    
    (17,672
    )
    
    
    21.70Non-vested options December 31, 2006
    
    
    17,325
    
    
    
    21.78
   85




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   2.
    
    Employee Stock Option and Appreciation Right PlanRoyal Bancshares adopted a Stock Option and Appreciation Right Plan (the Plan). The Plan is an
incentive program under which Company officers and other key employees may be awarded additional
compensation in the form of options to purchase up to 1,800,000 shares of Royal Bancshares Class
A common stock (but not in excess of 19% of outstanding shares). At the time a stock option is
granted, a stock appreciation right for an identical number of shares may also be granted. The
option price is equal to the fair market value at the date of the grant. The options are
exercisable at 20% per year beginning one year after the date of grant and must be exercised
within ten years of the grant.
  Years Ended December 31,2006
    
    2005
    
    2004Weighted
    
    
    
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    Average
    
    
    
    
    
    Average
    
    
    
    
    
    AverageExercise
    
    Intrinsic
    
    
    
    
    
    Exercise
    
    
    
    
    
    ExerciseShares
    
    Price
    
    Value (1)
    
    Shares
    
    Price
    
    Shares
    
    PriceOutstanding at beginning
of year
    
    
    774,029
    
    
    $
    18.68
    
    
    
    
    
    
    
    635,679
    
    
    $
    17.90
    
    
    
    458,851
    
    
    $
    14.71Granted
    
    
    157,500
    
    
    
    21.78
    
    
    
    
    
    
    
    160,650
    
    
    
    21.46
    
    
    
    273,518
    
    
    
    22.38Exercised
    
    
    (46,877
    )
    
    
    14.14
    
    
    
    
    
    
    
    (5,668
    )
    
    
    13.83
    
    
    
    (37,103
    )
    
    
    10.76Forfeited
    
    
    (30,848
    )
    
    
    22.01
    
    
    
    
    
    
    
    (16,632
    )
    
    
    21.71
    
    
    
    (59,587
    )
    
    
    19.15Outstanding at end of year
    
    
    853,804
    
    
    $
    19.48
    
    
    $
    5,805,867
    
    
    
    774,029
    
    
    $
    18.68
    
    
    
    635,679
    
    
    $
    17.90Options exercisable at
end of year
    
    
    390,819
    
    
    $
    17.04
    
    
    $
    3,610,239Weighted-average fair
value of options granted
during the year
    
    
    
    
    
    $
    4.91
    
    
    
    
    
    
    
    
    
    
    $
    4.27
    
    
    
    
    
    
    $
    4.90
 
 (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, 2006. This amount changes based on the
changes in the market value in Royal Bancsharess stock. The fair value (present value of the
estimated future benefit to the option holder) of each option grant is estimated on the date
of the grant using the Black-Scholes option pricing model.  86




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    Options outstanding
    
    Options exercisableWeightedaverage
    
    Weighted
    
    
    
    
    
    Weightedremaining
    
    average
    
    
    
    
    
    averageRange of
    
    Number
    
    contractual
    
    exercise
    
    Number
    
    exerciseexercise prices
    
    Outstanding
    
    life (years)
    
    price
    
    exercisable
    
    price$9.13
    
    
    14,015
    
    
    
    0.2
    
    
    $
    9.13
    
    
    
    14,015
    
    
    $
    9.13$10.58 - $18.27
    
    
    311,146
    
    
    
    4.8
    
    
    
    15.26
    
    
    
    255,176
    
    
    
    14.99$21.78  $22.39
    
    
    528,643
    
    
    
    8.0
    
    
    
    22.07
    
    
    
    121,628
    
    
    
    22.26853,804
    
    
    
    
    
    
    
    
    
    
    
    390,819
  Weighted AverageNumber of
    
    
    Grant Date FairShares
    
    
    ValueNon-vested options December 31, 2005
    
    
    460,956
    
    
    $
    20.42Granted
    
    
    157,500
    
    
    
    21.78Vested
    
    
    (124,623
    )
    
    
    28.30Forfeited/ expired
    
    
    (30,848
    )
    
    
    22.01Non-vested options December 31, 2006
    
    
    462,985
    
    
    $
    21.35
  87




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
     Before
    
    
    
    
    
    AfterApplication of
    
    
    
    
    
    Application ofStatement 158
    
    Adjustments
    
    Statement 158Deferred tax asset
    
    $
    8,782
    
    
    $
    1,348
    
    
    $
    10,130Total assets
    
    
    1,354,963
    
    
    
    1,348
    
    
    
    1,356,311Benefit obligation
    
    
    7,052
    
    
    
    3,851
    
    
    
    10,903Other liabilities
    
    
    1,186,055
    
    
    
    3,852
    
    
    
    1,189,907Accumulated other
comprehensive
Income, net of tax
    
    
    231
    
    
    
    (2,504
    )
    
    
    (2,273
    )Total stockholders equity
    
    
    165,758
    
    
    
    (2,504
    )
    
    
    163,254
  2006
    
    
    2005Change in benefit obligationBenefit obligation at beginning of year
    
    $
    6,244
    
    
    $
    4,303Service cost
    
    
    773
    
    
    
    1,725Interest cost
    
    
    347
    
    
    
    248Other changes
    
    
    (312
    )
    
    
    (32
    )Benefits obligation at end of year
    
    
    7,052
    
    
    
    6,244Amounts recognized in accumulated other
comprehensive income, pre tax
    
    
    3,851
    
    
    
    Total recognized benefit obligation
    
    $
    10,903
    
    
    $
    6,244
   88




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   December 312006
    
    2005Discount rate
    
    
    5.41
    %
    
    
    6.00
    %Rate of compensation increase
    
    
    4.00
    %
    
    
    4.00
    %
  2006
    
    
    2005
    
    
    2004Service cost
    
    $
    773
    
    
    $
    1,477
    
    
    $
    570Interest cost
    
    
    347
    
    
    
    248
    
    
    
    205Net periodic benefit cost
    
    $
    1,120
    
    
    $
    1,725
    
    
    $
    775
  Non Qualified(amounts in thousand)
    
    Pension Plans (1)2007
    
    $
    362008
    
    
    642009
    
    
    4782010
    
    
    5102011
    
    
    576Thereafter
    
    
    20,492$
    22,156
 
 (1)
    
    Benefits payments expected to be made from insurance policies owned by Royal Bank. The
cash surrender value for these policies was approximately $1,427,000 and $1,462,000 as of
December 31, 2006 and 2005, respectively.  89




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   Defined Contribution Plan
     90




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
     December 31.2006
    
    2005Financial instruments whose contract amounts represent credit
riskOpen-end lines of credit
    
    $
    103,169
    
    
    $
    148,226Commitments to extend credit
    
    
    28,543
    
    
    
    28,189Standby letters of credit and financial guarantees written
    
    
    4,862
    
    
    
    3,228Financial Instruments whose notional amount exceed the amount
the amount of credit riskInterest rate swap agreements
    
    $
    60,588
    
    
    $
    60,000
     91




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
       2006
    
    2005Estimated
    
    Carrying
    
    Estimated
    
    Carryingfair value
    
    amount
    
    fair value
    
    amountCash and cash equivalents
    
    $
    82,436
    
    
    $
    82,436
    
    
    $
    30,895
    
    
    $
    30,895Investment securities held to maturity
    
    
    254,249
    
    
    
    255,429
    
    
    
    253,198
    
    
    
    255,467Investment securities available for sale
    
    
    302,036
    
    
    
    302,036
    
    
    
    326,189
    
    
    
    326,189
  2006
    
    2005Estimated
    
    Carrying
    
    Estimated
    
    Carryingfair value
    
    amount
    
    fair value
    
    amountDeposits with stated maturities
    
    $
    513,335
    
    
    $
    505,080
    
    
    $
    327,879
    
    
    $
    321,944Borrowings
    
    
    245,648
    
    
    
    246,087
    
    
    
    355,547
    
    
    
    354,000Subordinated debt
    
    
    25,774
    
    
    
    25,774
    
    
    
    25,774
    
    
    
    25,774Obligations from equity investments
    
    
    29,342
    
    
    
    29,342
    
    
    
    47,356
    
    
    
    47,356
  92




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    2006
    
    2005Estimated
    
    Carrying
    
    Estimated
    
    Carryingfair value
    
    amount
    
    fair value
    
    amountCommitments to extend credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Standby letters of credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Fair value of the net loan portfolio has been estimated using present value cash flow, discounted
at the treasury rate adjusted for non-interest operating costs and giving consideration to
estimated prepayment risk and credit loss factors, as follows (in thousands):2006
    
    2005Estimated
    
    Carrying
    
    Estimated
    
    Carryingfair value
    
    amount
    
    fair value
    
    amountLoans held for sale
    
    $
    
    
    
    $
    
    
    
    $
    803
    
    
    $
    803Loans, net
    
    
    583,504
    
    
    
    591,503
    
    
    
    538,804
    
    
    
    539,360
     93




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
     Payment of Dividends
   Capital Ratios
   94




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
      2006To be wellcapitalized underFor capital
    
    prompt correctiveActual
    
    adequacy purposes
    
    action provisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioTotal capital (to risk-
weighted assets)Company
(consolidated)
    
    $
    203,190
    
    
    
    20.38
    %
    
    $
    79,757
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/ARoyal Bank
    
    
    150,274
    
    
    
    16.44
    
    
    
    73,112
    
    
    
    8.00
    
    
    $
    91,390
    
    
    
    10.00
    %Royal Asian
    
    
    15,493
    
    
    
    25.29
    
    
    
    4,901
    
    
    
    8.00
    
    
    
    6,126
    
    
    
    10.00Tier I capital (to risk-
weighted assets)Company
(consolidated)
    
    
    191,735
    
    
    
    19.23
    
    
    
    39,879
    
    
    
    4.00
    
    
    
    N/A
    
    
    
    N/ARoyal Bank
    
    
    139,599
    
    
    
    15.28
    
    
    
    36,556
    
    
    
    4.00
    
    
    
    54,834
    
    
    
    6.00Royal Asian
    
    
    14,727
    
    
    
    24.04
    
    
    
    2,450
    
    
    
    4.00
    
    
    
    3,676
    
    
    
    6.00Tier I capital(to average
assets, leverage)Company
(consolidated)
    
    
    191,735
    
    
    
    14.92
    
    
    
    38,547
    
    
    
    3.00
    
    
    
    N/A
    
    
    
    N/ARoyal Bank
    
    
    139,599
    
    
    
    11.23
    
    
    
    37,286
    
    
    
    3.00
    
    
    
    62,143
    
    
    
    5.00Royal Asian
    
    
    14,727
    
    
    
    23.03
    
    
    
    1,918
    
    
    
    3.00
    
    
    
    3,197
    
    
    
    5.00
  95




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   2005To be wellcapitalized underFor capital
    
    prompt correctiveActual
    
    adequacy purposes
    
    action provisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioTotal capital (to risk-
weighted assets)Company
(consolidated)
    
    $
    193,125
    
    
    
    19.80
    %
    
    $
    78,021
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/ARoyal Bank
    
    
    141,673
    
    
    
    14.86
    
    
    
    76,247
    
    
    
    8.00
    
    
    $
    95,309
    
    
    
    10.00
    %Tier I capital (to risk-
weighted assets)Company
(consolidated)
    
    
    182,849
    
    
    
    18.75
    
    
    
    39,010
    
    
    
    4.00
    
    
    
    N/A
    
    
    
    N/ARoyal Bank
    
    
    131,397
    
    
    
    13.79
    
    
    
    38,123
    
    
    
    4.00
    
    
    
    57,185
    
    
    
    6.00Tier I capital(to average
assets, leverage)Company
(consolidated)
    
    
    182,849
    
    
    
    14.24
    
    
    
    38,528
    
    
    
    3.00
    
    
    
    N/A
    
    
    
    N/ARoyal Bank
    
    
    131,397
    
    
    
    10.43
    
    
    
    37,790
    
    
    
    3.00
    
    
    
    62,983
    
    
    
    5.00
   CONDENSED BALANCE SHEETS
 December 31,2006
    
    
    2005Assets
Cash
    
    $
    7,932
    
    
    $
    24,119Investment in Non bank subsidiaries  at equity
    
    
    43,109
    
    
    
    19,699Investment in Royal Bank America  at equity
    
    
    113,814
    
    
    
    130,009Investment in Royal Asian  at equity
    
    
    14,804
    
    
    
    Loans, net
    
    
    5,899
    
    
    
    4,682Other assets
    
    
    3,470
    
    
    
    2,773$
    189,028
    
    
    $
    181,282Subordinated debentures
    
    $
    25,774
    
    
    $
    25,774Stockholders equity
    
    
    163,254
    
    
    
    155,508$
    189,028
    
    
    $
    181,282
  96




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   CONDENSED STATEMENTS OF INCOME
 Year ended December 31,2006
    
    
    2005
    
    
    2004IncomeEquity in undistributed net earnings of subsidiaries
    
    $
    6,845
    
    
    $
    19,160
    
    
    $
    7,888Dividends from subsidiary banks
    
    
    14,267
    
    
    
    12,859
    
    
    
    12,199Other income
    
    
    826
    
    
    
    173
    
    
    
    Total income
    
    
    21,938
    
    
    
    32,192
    
    
    
    20,087ExpensesOther expenses
    
    
    125
    
    
    
    121
    
    
    
    83Income tax expense (benefit)
    
    
    245
    
    
    
    18
    
    
    
    (29
    )Total expenses
    
    
    370
    
    
    
    139
    
    
    
    54Net income
    
    $
    21,568
    
    
    $
    32,053
    
    
    $
    20,033
   97




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   CONDENSED STATEMENTS OF CASH FLOWS
 Year ended December 31,2006
    
    
    2005
    
    
    2004Cash flows from operating activitiesNet income
    
    $
    21,568
    
    
    $
    32,053
    
    
    $
    20,033Adjustments to reconcile net income to net cash
provided by operating activitiesUndistributed earnings from subsidiaries
    
    
    (6,845
    )
    
    
    (19,160
    )
    
    
    (7,888
    )Operating expenses
    
    
    125
    
    
    
    121
    
    
    
    83Non-cash income tax (benefit) expense
    
    
    245
    
    
    
    18
    
    
    
    (29
    )Net cash provided by operating activities
    
    
    15,093
    
    
    
    13,032
    
    
    
    12,199Cash flows from investing activitiesInvestment in Royal Asian
    
    
    (15,000
    )
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    (15,000
    )
    
    
    
    
    
    
    Cash flows from financing activitiesLoan funding
    
    
    (1,217
    )
    
    
    (4,695
    )
    
    
    Cash dividends paid
    
    
    (14,267
    )
    
    
    (12,859
    )
    
    
    (12,199
    )Proceeds from subordinated debentures
    
    
    
    
    
    
    
    
    
    
    25,000Issuance of common stock under stock option plan
    
    
    666
    
    
    
    190
    
    
    
    834Income tax benefit on stock options
    
    
    358
    
    
    
    
    
    
    
    Other, net
    
    
    (1,820
    )
    
    
    (1,875
    )
    
    
    (283
    )Net cash (used in) provided by financing
activities
    
    
    (16,280
    )
    
    
    (19,239
    )
    
    
    13,352Net increase (decrease) in cash
    
    
    (16,187
    )
    
    
    (6,207
    )
    
    
    25,551Cash at beginning of year
    
    
    24,119
    
    
    
    30,326
    
    
    
    4,775Cash at end of year
    
    $
    7,932
    
    
    $
    24,119
    
    
    $
    30,326
 98




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    2006Fourth
    
    
    Third
    
    
    Second
    
    
    FirstQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterInterest income
    
    $
    23,475
    
    
    $
    25,430
    
    
    $
    22,688
    
    
    $
    21,413Net interest income
    
    
    11,196
    
    
    
    13,045
    
    
    
    11,059
    
    
    
    11,334Provision for loan losses
    
    
    202
    
    
    
    303
    
    
    
    963
    
    
    
    335Net interest income after provision
    
    
    10,994
    
    
    
    12,742
    
    
    
    10,096
    
    
    
    10,999Non interest income
    
    
    2,137
    
    
    
    3,936
    
    
    
    2,900
    
    
    
    2,998Non interest expenses
    
    
    5,564
    
    
    
    7,061
    
    
    
    6,408
    
    
    
    6,186Income before income taxes
    
    
    7,567
    
    
    
    9,617
    
    
    
    6,588
    
    
    
    7,811Net income
    
    $
    5,121
    
    
    $
    6,515
    
    
    $
    4,586
    
    
    $
    5,346Net income per shareBasic
    
    $
    0.31
    
    
    $
    0.51
    
    
    $
    0.36
    
    
    $
    0.42Diluted
    
    $
    0.31
    
    
    $
    0.50
    
    
    $
    0.36
    
    
    $
    0.42
 2005Fourth
    
    
    Third
    
    
    Second
    
    
    FirstQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterInterest income
    
    $
    20,281
    
    
    $
    19,645
    
    
    $
    19,330
    
    
    $
    17,204Net interest income
    
    
    12,297
    
    
    
    10,894
    
    
    
    11,635
    
    
    
    9,838Provision for loan losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Net interest income after provision
    
    
    12,297
    
    
    
    10,894
    
    
    
    11,635
    
    
    
    9,837Non interest income
    
    
    15,039
    
    
    
    3,294
    
    
    
    3,880
    
    
    
    2,613Non interest expense
    
    
    3,345
    
    
    
    7,526
    
    
    
    7,569
    
    
    
    6,359Income before income taxes
    
    
    23,991
    
    
    
    6,662
    
    
    
    7,946
    
    
    
    6,091Net income
    
    $
    15,587
    
    
    $
    4,903
    
    
    $
    7,242
    
    
    $
    4,321Net income per shareBasic
    
    $
    1.15
    
    
    $
    0.37
    
    
    $
    0.55
    
    
    $
    0.32Diluted
    
    $
    1.14
    
    
    $
    0.37
    
    
    $
    0.54
    
    
    $
    0.32
 99




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##### Table of Contents



ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
 Effectiveness of Disclosure Controls and Procedures
  Managements Report on Internal control Over Financial Reporting
    100




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
 Internal Control  Integrated Framework
    Internal Control  Integrated Framework Internal Control  Integrated Framework
 101




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##### Table of Contents



Beard Miller Company LLP
Reading, Pennsylvania
March 14, 2007
    

(BEARD MILLER COMPANY LLP)
 102




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##### Table of Contents



PART III.
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS OF REGISTRANT AND CORPORATE GOVERNANCE
   103




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##### Table of Contents



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
  
 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
   104




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PART IV
 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
   
    2
    
    Purchase and Assumption Agreement, dated as of March 12, 2001,
among Royal Bank of Pennsylvania, Crusader Holding Corporation, Crusader
Savings Bank, F.S.B. and Asset Investment Corporation. (Incorporated by
reference to Exhibit 2 to Registrants Report on Form 8-K, filed with the
Commission on March 15, 2001.)3(i)
    
    Articles of Incorporation. (Incorporated by reference to
Exhibit 3(i) to Registrants Registration Statement No. 0-26366 on Form S-4.)3(ii)
    
    By-laws. (Incorporated by reference to Exhibit 99 to
Registrants Current Report on Form 8-K, filed with the Commission on March 13,
2001.)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.)
 105




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##### Table of Contents



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.)4.6
    
    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,
2006 (Incorporated by reference to the Registrants Registration
Statement No.
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
    
    Employment agreement between Royal Bancshares of Pennsylvania, Inc. and Joseph
P. Campbell, President and Chief Executive Officer, entered into on April 23, 2004.
(Incorporated by reference to Exhibit 10.1 to Registrants Quarterly Report on Form
10- Q filed with the Commission on November 9, 2004.)10.5
    
    Employment agreement between Royal Bancshares of Pennsylvania, Inc. and James
J. McSwiggan, Executive Vice President, entered into on April 23, 2004.
(Incorporated by reference to Exhibit 10.3 to Registrants Quarterly Report on Form
10-Q filed with the Commission on November 9, 2004.)10.6
    
    Employment agreement between Royal Bank America and Robert R. Tabas, entered
into on April 23, 2004. (Incorporated by reference to Exhibit 10.6 to Registrants
Quarterly Report on Form 10-Q filed with the Commission on November 9, 2004.)10.7
    
    Employment agreement between Royal Bancshares of Pennsylvania, Inc. and Murray
Stempel, Senior Vice President, entered into on April 23, 2004. (Incorporated by
reference to Exhibit 10.4 to Registrants Quarterly Report on Form 10-Q filed with
the Commission on November 9, 2004.)10.8
    
    Employment agreement between Royal Bancshares of Pennsylvania, Inc. and John
Decker, Senior Vice President, entered into on April 23, 2004. (Incorporated by
reference to Exhibit 10.2 to Registrants Quarterly Report on Form 10-Q filed with
the Commission on November 9, 2004.)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.)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.
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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.
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SIGNATURES
  ROYAL BANCSHARES OF PENNSYLVANIA, INC.
 /s/ Joseph P. CampbellJoseph P. CampbellChief Executive OfficerMarch 12, 2007.
  SIGNATURESBy: /s/ Joseph P. Campbell
    
    March 12, 2007Joseph P. CampbellCEO/ President/DirectorBy: /s/ Jeffrey T. Hanuscin
    
    March 12, 2007Jeffrey T. HanuscinChief Financial OfficerPrincipal Accounting OfficerBy: /s/ James J. McSwiggan
    
    March 12, 2007James J. McSwigganChief Operating Officer/ DirectorBy: /s/ Robert R. Tabas
    
    March 12, 2007Robert R. TabasChairman of the BoardBy: /s/ Albert Ominsky
    
    March 12, 2007Albert OminskyDirector
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SIGNATURESBy: /s/ Anthony Micale
    
    March 12, 2007Anthony MicaleDirectorBy: /s/ Gregory Reardon
    
    March 12, 2007Gregory ReardonDirectorBy: /s/ Murray Stempel, III
    
    March 12, 2007Murray Stempel, IIIChief Lending Officer/ DirectorBy: /s/ John M. Decker
    
    March 12, 2007John M. DeckerExecutive Vice President/DirectorBy: /s/ Carl M. Cousins
    
    March 12, 2007Carl M. CousinsDirectorBy:
    
    March 12, 2007Jack R. LoewDirectorBy: /s/ Howard Wurzak
    
    March 12, 2007Howard WurzakDirector
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SIGNATURESBy: /s/ Evelyn R. Tabas
    
    March 12, 2007Evelyn R. TabasDirectorBy: /s/ Mitchell L. Morgan
    
    March 12, 2007Mitchell L. MorganDirectorBy: /s/ Edward B. Tepper
    
    March 12, 2007Edward B. TepperDirectorBy: /s/ Linda Tabas Stempel
    
    March 12, 2007Linda Tabas StempelDirectorBy: /s/ Patrick McCormick
    
    March 12, 2007Patrick McCormickDirector
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ROYAL BANCSHARES OF PENNSYLVANIA, INC.
ANNUAL REPORT ON FORM 10-K
EXHIBIT INDEX
 2.
    
    Purchase and Assumption Agreement, dated as of March 12, 2001, among Royal Bank
of Pennsylvania, Crusader Holding Corporation, Crusader Savings Bank, F.S.B. and Asset
Investment Corporation. (Incorporated by reference to Exhibit 2 to Registrants Report
on Form 8-K, filed with the Commission on March 15, 2001.)3(i)
    
    Articles of Incorporation. (Incorporated by reference to Exhibit 3(i) to
Registrants Registration Statement No. 0-26366 on Form S-4.)3(ii)
    
    By-laws. (Incorporated by reference to Exhibit 99 to Registrants Current
Report on Form 8-K, filed with the Commission on March 13, 2001.)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.)4.6
    
    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, 2006 (Incorporated by reference to the
Registrants Registration Statement No. 333-135226, on form S-8
filed with the Commission on June 22, 2006).10.2
    
    Stock Option and Appreciation Right Plan. (Incorporated by reference to the
Registrants Registration Statement No. 333-25855, on form S-8 filed with the
Commission on April 5, 1997).10.3
    
    Outside Directors Stock Option Plan. (Incorporated by reference to the
Registrants Registration Statement No. 333-129894, on form S-8 filed with the
Commission on April 5, 1997).10.4
    
    Employment agreement between Royal Bancshares of Pennsylvania, Inc. and Joseph
P. Campbell, President and Chief Executive Officer, entered into on April 23, 2004.
(Incorporated by reference to Exhibit 10.1 to Registrants Quarterly Report on Form
10-Q filed with the Commission on November 9, 2004.)
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10.5
    
    Employment agreement between Royal Bancshares of Pennsylvania, Inc. and James
J. McSwiggan, Executive Vice President, entered into on April 23, 2004. (Incorporated
by reference to Exhibit 10.3 to Registrants Quarterly Report on Form 10-Q filed with
the Commission on November 9, 2004.)10.6
    
    Employment agreement between Royal Bank America and Robert R. Tabas, entered
into on April 23, 2004. (Incorporated by reference to Exhibit 10.6 to Registrants
Quarterly Report on Form 10-Q filed with the Commission on November 9, 2004.)10.7
    
    Employment agreement between Royal Bancshares of Pennsylvania, Inc. and Murray
Stempel, Senior Vice President, entered into on April 23, 2004. (Incorporated by
reference to Exhibit 10.4 to Registrants Quarterly Report on Form 10-Q filed with the
Commission on November 9, 2004.)10.8
    
    Employment agreement between Royal Bancshares of Pennsylvania, Inc. and John
Decker, Senior Vice President, entered into on April 23, 2004. (Incorporated by
reference to Exhibit 10.2 to Registrants Quarterly Report on Form 10-Q filed with the
Commission on November 9, 2004.)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.)11.
    
    Statement Re: Computation of Earnings Per Share. (Included at Item 8, hereof,
Note K, Per Share Information.)12.
    
    Statements 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.
 112