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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 endedDecember 31, 2007
 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)
 (Former name, former address and former year, if changed since last report)
  Name of Each Exchange on Which Registered
    
    Title of Each ClassThe NASDAQ Global Market
    
    Class A Common Stock ($2.00 par value)
  Name of Each Exchange on Which Registered
    
    Title of Each ClassNone
    
    Class B Common Stock ($0.10 par value)
 o þ
 o þ
 þ o
 þ
  o þ o o
 o þ




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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 MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIESITEM 6. SELECTED FINANCIAL DATAITEM 7. MANAGEMENTS DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTINGITEM 9A. CONTROLS AND PROCEDURESPART III.ITEM 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-KSIGNATURESSubsidiaries 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  Documents Incorporated by Reference
  Forward-Looking Statements
  
 PART I
 
 ITEM 1. BUSINESS
 Royal Bancshares
  1




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Royal Bank America
      2




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Service Area.
 Competition.
   Employees.
 Deposits.
  Lending.
 Royal Asian Bank
  3




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Service Area.
  Competition.
  Employees.
 Deposits.
 Lending.
 Business results
  Non-Bank Subsidiaries
  4




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5




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Website Access to Company Reports
 www.royalbankamerica.com,
 Products and Services with Reputation Risk
  6




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Future Acquisitions
  Concentrations, Seasonality
  Environmental Compliance
  Supervision and Regulation
    Holding Company.
   7




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Royal Bank and Royal Asian
   8




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Federal Deposit Insurance Corporation Improvement Act of 1991
 General
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Real Estate Lending Guidelines.
  Loan Category
    
    LTV LimitRaw Land
    
    
    65
    %Land DevelopmentConstruction:Commercial, Multifamily (includes
condos and co-ops), and other
Nonresidential
    
    
    80
    %Improved Property
    
    
    85
    %Owner occupied 1-4 Family and Home Equity
(without credit enhancements)
    
    
    90
    %
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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
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
    
    Addresses a variety of other legal and regulatory issues affecting both day-to-day
operations and long-term activities of financial institutions.
     USA Patriot Act of 2001.
 Sarbanes-Oxley Act of 2002.
  12




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
    
    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;
    
    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.
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
    
    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
    
    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
    14




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Other Legislation
   Monetary Policy
   Effects of Inflation
  15




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Critical Accounting Policies, Judgments and Estimates
      Available Information
  16




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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 occurs, our business, financial condition and results of
operations could be harmed. In such a case, the trading price of our common stock could decline,
and investors may lose all or part of their investment.
 Risks Related to Our Business
 Our 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.
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In the third and fourth quarters of 2007, we identified and reported certain material weaknesses in
internal control over financial reporting and cannot assure you that additional material weaknesses
will not be identified in the future. If our internal control over financial reporting or
disclosure controls and procedures are not effective, there may be errors in our financial
statements that could require a restatement of such financial statements or our filings with the
Securities and Exchange Commission may not be timely. Such events could negatively affect our
stock price.
   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 accounting standards could impact earnings.
 .
 Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
   Changes in consumer use of banks and changes in consumer spending and saving habits could adversely
affect the Royal Bancshares financial results.
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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 .
   
 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 19406
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Fairmont 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 19104
  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
    
    Flushing Branch1550 Lemoine Avenue
    
    232 Broad Street
    
    136-52 37th AvenueFort Lee, NJ 07024
    
    Palisades Park, NJ 07650
    
    Flushing, NY 11354
 
 (1)
    
    Owned(2)
    
    Used for employee training  
 ITEM 3. LEGAL PROCEEDINGS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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PART II
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, AND RELATED SECURITY HOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES.
  Closing Prices
 2007
    
    High
    
    LowFirst Quarter
    
    $
    26.790
    
    
    $
    22.920Second Quarter
    
    
    23.930
    
    
    
    19.100Third Quarter
    
    
    24.440
    
    
    
    18.020Fourth Quarter
    
    
    23.610
    
    
    
    10.380
 2006
    
    High
    
    LowFirst Quarter
    
    $
    23.810
    
    
    $
    21.524Second Quarter
    
    
    23.810
    
    
    
    21.000Third Quarter
    
    
    26.190
    
    
    
    22.390Fourth Quarter
    
    
    26.457
    
    
    
    22.762
  Title of Class
    
    Number of Record HoldersClass A Common Stock
    
    
    313Class B Common Stock
    
    
    145
 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
    
    
    100,294
    
    
    $
    18.62
    
    
    
    Equity compensation plan not
approved by stockholders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    100,294
    
    
    $
    18.62
    
    
    
    
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(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
    
    
    799,831
    
    
    $
    19.63
    
    
    
    Equity compensation plan not
approved by stockholders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    799,831
    
    
    $
    19.63
    
    
    
    
 (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))2007 Long Term Incentive PlanEquity compensation plan approved
by stockholders
    
    
    95,622
    
    
    $
    18.39
    
    
    
    904,378Equity compensation plan not
approved by stockholders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    95,622
    
    
    $
    18.39
    
    
    
    904,378
 Dividends
    23




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Cash Dividends.
 Cash Dividends Per Share2007
    
    Class A
    
    Class BFirst Quarter
    
    $
    0.28750
    
    
    $
    0.330625Second Quarter
    
    $
    0.28750
    
    
    $
    0.330625Third Quarter
    
    $
    0.28750
    
    
    $
    0.330625Fourth Quarter
    
    $
    0.28750
    
    
    $
    0.330625
 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
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COMMON STOCK PERFORMANCE GRAPH
 ROYAL BANCSHARES OF PENNSYLVANIA, INC.
  
    
    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 2007 Peer Group consists of twenty banks headquartered in the
Mid-Atlantic region, trade on a major exchange and have total assets between $750
million and $1.5 billion.
    
    SNL Bank and Thrift Index
 Total Return Performance
 
 Period EndingIndex
    
    
    12/31/02
    
    
    12/31/03
    
    
    12/31/04
    
    
    12/31/05
    
    
    12/31/06
    
    
    12/31/07Royal Bancshares of Pennsylvania, Inc.
    
    
    $
    100.00
    
    
    
    $
    128.17
    
    
    
    $
    146.96
    
    
    
    $
    134.06
    
    
    
    $
    166.83
    
    
    
    $
    73.75NASDAQ Composite
    
    
    
    100.00
    
    
    
    
    150.01
    
    
    
    
    162.89
    
    
    
    
    165.13
    
    
    
    
    180.85
    
    
    
    
    198.60SNL Bank and Thrift Index
    
    
    
    100.00
    
    
    
    
    135.57
    
    
    
    
    151.82
    
    
    
    
    154.20
    
    
    
    
    180.17
    
    
    
    
    137.40Royal Bancshares Peer Group*
    
    
    
    100.00
    
    
    
    
    134.49
    
    
    
    
    138.46
    
    
    
    
    134.75
    
    
    
    
    151.23
    
    
    
    
    127.44
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ITEM 6. SELECTED FINANCIAL DATA
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Year ended December 31,(In thousands, except share data)2007
    
    2006
    
    2005
    
    2004
    
    2003Income Statement DataInterest income
    
    $
    86,736
    
    
    $
    93,006
    
    
    $
    76,460
    
    
    $
    67,541
    
    
    $
    72,320Interest expense
    
    
    48,873
    
    
    
    46,372
    
    
    
    31,796
    
    
    
    27,301
    
    
    
    29,941Net interest income
    
    
    37,863
    
    
    
    46,634
    
    
    
    44,664
    
    
    
    40,240
    
    
    
    42,379Provision for loan losses
    
    
    13,026
    
    
    
    1,803
    
    
    
    1
    
    
    
    6
    
    
    
    674Net interest income after loan losses
    
    
    24,837
    
    
    
    44,831
    
    
    
    44,663
    
    
    
    40,234
    
    
    
    41,705Gains on sale of loans
    
    
    404
    
    
    
    379
    
    
    
    508
    
    
    
    480
    
    
    
    637Gains on sale of real estate
    
    
    1,111
    
    
    
    2,129
    
    
    
    2,494
    
    
    
    2,102
    
    
    
    568Gains on investment securities
    
    
    5,358
    
    
    
    383
    
    
    
    227
    
    
    
    810
    
    
    
    719Gain on sale of premises & equipment related to
real estate owned via equity investments
    
    
    1,860
    
    
    
    3,036
    
    
    
    16,779
    
    
    
    
    
    
    
    Income related to real estate owned via equity
investments
    
    
    1,384
    
    
    
    3,591
    
    
    
    747
    
    
    
    7,133
    
    
    
    Gain from refinance of assets related to real
estate owned via equity investments
    
    
    
    
    
    
    
    
    
    
    1,892
    
    
    
    
    
    
    
    Other income
    
    
    2,771
    
    
    
    2,453
    
    
    
    2,179
    
    
    
    2,635
    
    
    
    1,780Total other income
    
    
    12,888
    
    
    
    11,971
    
    
    
    24,826
    
    
    
    13,160
    
    
    
    3,704Income before other expenses & income taxes
    
    
    37,725
    
    
    
    56,802
    
    
    
    69,489
    
    
    
    53,394
    
    
    
    45,409Non-interest expenseSalaries and benefits
    
    
    12,215
    
    
    
    13,451
    
    
    
    13,488
    
    
    
    10,767
    
    
    
    9,958Expenses related to RE owned via equity
investments
    
    
    1,590
    
    
    
    1,606
    
    
    
    262
    
    
    
    4,780
    
    
    
    Impairment related to real estate joint venture
    
    
    5,927
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Impairment related to real estate owned via
equity investments
    
    
    8,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    11,800
    
    
    
    9,595
    
    
    
    10,981
    
    
    
    9,345
    
    
    
    8,929Total operating expenses
    
    
    40,032
    
    
    
    24,652
    
    
    
    24,731
    
    
    
    24,892
    
    
    
    18,887Minority interest
    
    
    (1,303
    )
    
    
    567
    
    
    
    68
    
    
    
    555
    
    
    
    Income (loss) before taxes
    
    
    (1,004
    )
    
    
    31,583
    
    
    
    44,690
    
    
    
    27,947
    
    
    
    26,522Income taxes
    
    
    (1,568
    )
    
    
    10,015
    
    
    
    12,637
    
    
    
    7,914
    
    
    
    7,996Net income
    
    $
    564
    
    
    $
    21,568
    
    
    $
    32,053
    
    
    $
    20,033
    
    
    $
    18,526Basic earnings per share (1)
    
    $
    0.04
    
    
    $
    1.60
    
    
    $
    2.39
    
    
    $
    1.50
    
    
    $
    1.40Diluted earnings per share (1)
    
    $
    0.04
    
    
    $
    1.59
    
    
    $
    2.37
    
    
    $
    1.48
    
    
    $
    1.39
 
 (1)
    
    The weighted average number of shares used in the calculation of earnings per share has been
adjusted to reflect a 5% stock dividend in December 2006, a 2% stock dividend in December 2005, a
2% stock dividend in December 2004, a 2% stock dividend in January 2004, and a 3% stock dividend in
2003. Year ended December 31,(in thousands)2007
    
    2006
    
    2005
    
    2004
    
    2003Balance Sheet DataTotal Assets
    
    
    1,278,475
    
    
    
    1,356,311
    
    
    
    1,301,019
    
    
    
    1,205,274
    
    
    
    1,154,410Total average assets (2)
    
    
    1,314,361
    
    
    
    1,317,688
    
    
    
    1,258,137
    
    
    
    1,194,008
    
    
    
    1,160,354Loans, net
    
    
    625,193
    
    
    
    580,759
    
    
    
    539,360
    
    
    
    454,775
    
    
    
    500,131Total deposits
    
    
    770,152
    
    
    
    859,457
    
    
    
    697,409
    
    
    
    742,382
    
    
    
    791,059Total average deposits
    
    
    869,884
    
    
    
    761,267
    
    
    
    699,540
    
    
    
    761,899
    
    
    
    825,204Total borrowings (1)
    
    
    339,251
    
    
    
    301,203
    
    
    
    427,130
    
    
    
    304,023
    
    
    
    212,000Total average borrowings (1)
    
    
    254,757
    
    
    
    377,139
    
    
    
    350,662
    
    
    
    281,747
    
    
    
    183,339Total stockholders equity
    
    
    146,367
    
    
    
    163,254
    
    
    
    155,508
    
    
    
    140,876
    
    
    
    134,833Total average stockholders equity
    
    
    158,695
    
    
    
    158,372
    
    
    
    145,601
    
    
    
    137,622
    
    
    
    127,728Return on average assets
    
    
    0.04
    %
    
    
    1.6
    %
    
    
    2.5
    %
    
    
    1.7
    %
    
    
    1.6
    %Return on average equity
    
    
    0.4
    %
    
    
    13.6
    %
    
    
    22.0
    %
    
    
    14.6
    %
    
    
    14.5
    %Average equity to average assets
    
    
    12.1
    %
    
    
    12.1
    %
    
    
    11.6
    %
    
    
    11.5
    %
    
    
    11.0
    %
 
 (1)
    
    Includes obligations through VIE equity investments and subordinated debt.(2)
    
    Includes premises and equipment of VIE. 27




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##### Table of Contents



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 .
 28




---



##### Table of Contents



Loans .
   Allowance for loan losses.
    29




---



##### Table of Contents



30




---



##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIESAnalysis of Allowance for Loan Loss
 Year ending December 31,(in thousands)2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003Total Loans
    
    $
    644,475
    
    
    $
    592,214
    
    
    $
    549,636
    
    
    $
    469,498
    
    
    $
    515,714Daily average loan balance
    
    $
    636,612
    
    
    $
    618,591
    
    
    $
    510,349
    
    
    $
    471,526
    
    
    $
    562,765Allowance for loan loss:Balance at the beginning of the year
    
    $
    11,455
    
    
    $
    10,276
    
    
    $
    12,519
    
    
    $
    12,426
    
    
    $
    12,470Charge offs by loan type:Single family residential
    
    
    195
    
    
    
    631
    
    
    
    142
    
    
    
    197
    
    
    
    444Construction and land development
    
    
    2,408
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Construction and land develop-mezzanine
    
    
    1,579
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Real Estate  non-residential
    
    
    294
    
    
    
    5
    
    
    
    2,162
    
    
    
    1
    
    
    
    Leases
    
    
    286
    
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    Commercial and industrial
    
    
    704
    
    
    
    
    
    
    
    28
    
    
    
    
    
    
    
    22Tax certificates
    
    
    
    
    
    
    25
    
    
    
    1
    
    
    
    6
    
    
    
    74Other
    
    
    
    
    
    
    73
    
    
    
    2
    
    
    
    
    
    
    
    271Total charge offs
    
    
    5,466
    
    
    
    745
    
    
    
    2,335
    
    
    
    204
    
    
    
    811Recoveries by loan type:Construction and land development
    
    
    34
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Single family residential
    
    
    28
    
    
    
    100
    
    
    
    68
    
    
    
    249
    
    
    
    49Real Estate  non-residential
    
    
    4
    
    
    
    14
    
    
    
    7
    
    
    
    1
    
    
    
    3Commercial and industrial
    
    
    201
    
    
    
    2
    
    
    
    12
    
    
    
    37
    
    
    
    26Other
    
    
    
    
    
    
    5
    
    
    
    4
    
    
    
    4
    
    
    
    15Total recoveries
    
    
    267
    
    
    
    121
    
    
    
    91
    
    
    
    291
    
    
    
    93Loan (charge offs) recoveries
    
    
    (5,199
    )
    
    
    (624
    )
    
    
    (2,244
    )
    
    
    87
    
    
    
    (718
    )Provision for Loan Loss
    
    
    13,026
    
    
    
    1,803
    
    
    
    1
    
    
    
    6
    
    
    
    674Balance at end of year
    
    $
    19,282
    
    
    $
    11,455
    
    
    $
    10,276
    
    
    $
    12,519
    
    
    $
    12,426Net charge offs to average loans
    
    
    -0.82
    %
    
    
    -0.10
    %
    
    
    -0.44
    %
    
    
    0.02
    %
    
    
    -0.13
    %Allowance to total loans at year-end
    
    
    2.99
    %
    
    
    1.93
    %
    
    
    1.87
    %
    
    
    2.67
    %
    
    
    2.41
    %
 31




---



##### Table of Contents



As of December 31,(in thousands)2007
    
    2006
    
    2005
    
    2004% of
    
    
    
    
    
    % of
    
    
    
    
    
    % of
    
    
    
    
    
    % ofloans in
    
    
    
    
    
    loans in
    
    
    
    
    
    loans in
    
    
    
    
    
    loans ineach
    
    
    
    
    
    each
    
    
    
    
    
    each
    
    
    
    
    
    eachReserve
    
    category to
    
    Reserve
    
    category to
    
    Reserve
    
    category to
    
    Reserve
    
    category to(in thousands)
    
    Amount
    
    total loans
    
    Amount
    
    total loans
    
    Amount
    
    total loans
    
    Amount
    
    total loansCommercial and industrial
    
    $
    2,124
    
    
    
    12
    %
    
    $
    559
    
    
    
    7
    %
    
    $
    494
    
    
    
    5
    %
    
    $
    964
    
    
    
    8
    %Construction and land development
    
    
    7,674
    
    
    
    40
    %
    
    
    4,117
    
    
    
    29
    %
    
    
    3,230
    
    
    
    31
    %
    
    
    1,699
    
    
    
    23
    %Constr. and land develop. -
mezzanine
    
    
    2,493
    
    
    
    13
    %
    
    
    409
    
    
    
    1
    %
    
    
    167
    
    
    
    1
    %
    
    
    19
    
    
    
    0
    %Single family residential
    
    
    1,014
    
    
    
    5
    %
    
    
    845
    
    
    
    7
    %
    
    
    925
    
    
    
    8
    %
    
    
    1,163
    
    
    
    10
    %Real Estate  non-residential
    
    
    4,746
    
    
    
    25
    %
    
    
    4,941
    
    
    
    46
    %
    
    
    4,758
    
    
    
    41
    %
    
    
    6,761
    
    
    
    46
    %Real Estate
 non-res. - mezzanine
    
    
    204
    
    
    
    1
    %
    
    
    224
    
    
    
    1
    %
    
    
    374
    
    
    
    1
    %
    
    
    351
    
    
    
    2
    %Real Estate  multi-family
    
    
    59
    
    
    
    0
    %
    
    
    36
    
    
    
    1
    %
    
    
    145
    
    
    
    4
    %
    
    
    99
    
    
    
    3
    %Real Estate  multi-family
-mezzanine
    
    
    6
    
    
    
    0
    %
    
    
    20
    
    
    
    1
    %
    
    
    132
    
    
    
    1
    %
    
    
    
    
    
    
    0
    %Tax certificates
    
    
    185
    
    
    
    0
    %
    
    
    
    
    
    
    5
    %
    
    
    
    
    
    
    6
    %
    
    
    
    
    
    
    7
    %Lease financing
    
    
    763
    
    
    
    4
    %
    
    
    293
    
    
    
    2
    %
    
    
    75
    
    
    
    1
    %
    
    
    
    
    
    
    0
    %Other
    
    
    14
    
    
    
    0
    %
    
    
    11
    
    
    
    0
    %
    
    
    41
    
    
    
    1
    %
    
    
    63
    
    
    
    1
    %Unallocated
    
    
    
    
    
    
    0
    %
    
    
    
    
    
    
    0
    %
    
    
    (65
    )
    
    
    0
    %
    
    
    1,400
    
    
    
    0
    %Total
    
    $
    19,282
    
    
    
    100
    %
    
    $
    11,455
    
    
    
    100
    %
    
    $
    10,276
    
    
    
    100
    %
    
    $
    12,519
    
    
    
    100
    %
      32




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##### Table of Contents



Deposits .
 33




---



##### Table of Contents



FHLB Borrowings.
 Other Borrowings.
 Other Liabilities.
 Stockholders Equity .
 Results of Operations
 General .
 Net Income .
 Net Interest Income.
  34




---



##### Table of Contents



Accounting
errors
 Business Segments For the Community Bank segment: For the Tax Lien segment: For the
Equity Investment segment:
 Impairments
of Investments in Real Estate Joint Ventures
 35




---



##### Table of Contents



Loans and Mortgages
 2007
    
    2006
    
    2005Average loan outstanding
    
    $
    636,612,000
    
    
    $
    618,591,000
    
    
    $
    510,349,000Interest and fees on loans
    
    $
    56,518,000
    
    
    $
    63,379,000
    
    
    $
    46,995,000Average Yield
    
    
    8.88
    %
    
    
    10.25
    %
    
    
    9.21
    %
   HTM Investment Securities
 2007
    
    2006
    
    2005Average HTM investment securities
    
    $
    205,686,000
    
    
    $
    255,448,000
    
    
    $
    237,701,000Interest income
    
    $
    10,032,000
    
    
    $
    11,830,000
    
    
    $
    10,122,000Average yield
    
    
    4.88
    %
    
    
    4.63
    %
    
    
    4.26
    %
    AFS Investment Securities
 2007
    
    2006
    
    2005Average AFS investment securities
    
    $
    338,620,000
    
    
    $
    323,172,000
    
    
    $
    355,005,000Interest and dividend income
    
    $
    18,143,000
    
    
    $
    17,377,000
    
    
    $
    19,229,000Average yield
    
    
    5.36
    %
    
    
    5.38
    %
    
    
    5.42
    %
 36




---



##### Table of Contents



Interest Expense on NOW and Money Market Deposits
 2007
    
    2006
    
    2005Average NOW & Money Market deposits
    
    $
    252,896,000
    
    
    $
    286,392,000
    
    
    $
    355,387,000Interest expense
    
    $
    9,671,000
    
    
    $
    8,927,000
    
    
    $
    7,457,000Average cost of funds
    
    
    3.82
    %
    
    
    3.12
    %
    
    
    2.10
    %
   Interest Expense on Time Deposits
 2007
    
    2006
    
    2005Average time deposits
    
    $
    531,965,000
    
    
    $
    393,685,000
    
    
    $
    254,031,000Interest expense
    
    $
    27,384,000
    
    
    $
    18,503,000
    
    
    $
    9,965,000Average cost of funds
    
    
    5.15
    %
    
    
    4.70
    %
    
    
    3.92
    %
    Provision for Possible Loan Losses
  37




---



##### Table of Contents



Non-Interest Income
    Non-Interest Expense
   38




---



##### Table of Contents



Accounting for Income Taxes
    Accounting for Debt and Equity Securities
  Asset Liability Management
  Liquidity .
 39




---



##### 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
    
    $
    289,500
    
    
    $
    102,000
    
    
    $
    107,500
    
    
    $
    30,000
    
    
    $
    50,000Operating leases
    
    
    2,523
    
    
    
    990
    
    
    
    1,288
    
    
    
    245
    
    
    
    PNC Bank  note payable
    
    
    5,411
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,411Benefit Obligations
    
    
    5,802
    
    
    
    56
    
    
    
    678
    
    
    
    891
    
    
    
    4,177Commitments to extend credit
    
    
    27,006
    
    
    
    27,006
    
    
    
    
    
    
    
    
    
    
    
    Standby letters of credit
    
    
    6,886
    
    
    
    6,886
    
    
    
    
    
    
    
    
    
    
    
    Subordinated debt
    
    
    25,774
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,774Time deposits
    
    
    444,783
    
    
    
    298,582
    
    
    
    107,949
    
    
    
    35,215
    
    
    
    3,037Total
    
    $
    807,685
    
    
    $
    435,520
    
    
    $
    217,415
    
    
    $
    66,351
    
    
    $
    88,399
 Interest-Rate Sensitivity .
   Interest Rate Swaps
 40




---



##### Table of Contents



41




---



##### Table of Contents



Interest Rate Sensitivity
 Days
    
    1 to 5
    
    Over 5
    
    Non-rate(in millions)
    
    090
    
    91365
    
    Years
    
    Years
    
    Sensitive
    
    TotalAssets (1)Interest-bearing deposits in banks
    
    $
    1.1
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    8.8
    
    
    $
    9.9Federal funds sold
    
    
    1.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.0Investment securities:Available for sale
    
    
    67.3
    
    
    
    41.0
    
    
    
    170.5
    
    
    
    97.1
    
    
    
    (0.6
    )
    
    
    375.3Held to maturity
    
    
    70.0
    
    
    
    50.4
    
    
    
    22.5
    
    
    
    
    
    
    
    
    
    
    
    142.9Total investment securities
    
    
    137.3
    
    
    
    91.4
    
    
    
    193.0
    
    
    
    97.1
    
    
    
    (0.6
    )
    
    
    518.2Loans: (2)Fixed rate
    
    
    28.5
    
    
    
    56.2
    
    
    
    147.8
    
    
    
    38.5
    
    
    
    
    
    
    
    271.0Variable rate
    
    
    287.0
    
    
    
    40.4
    
    
    
    46.7
    
    
    
    
    
    
    
    (19.9
    )
    
    
    354.2Total loans
    
    
    315.5
    
    
    
    96.6
    
    
    
    194.5
    
    
    
    38.5
    
    
    
    (19.9
    )
    
    
    625.2Other assets (3)
    
    
    13.5
    
    
    
    23.8
    
    
    
    
    
    
    
    
    
    
    
    86.9
    
    
    
    124.2Total Assets
    
    $
    468.4
    
    
    $
    211.8
    
    
    $
    387.5
    
    
    $
    135.6
    
    
    $
    75.2
    
    
    $
    1,278.5Liabilities & CapitalDeposits:Non interest bearing deposits
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    59.6
    
    
    $
    59.6Interest bearing deposits
    
    
    31.2
    
    
    
    93.3
    
    
    
    160.1
    
    
    
    
    
    
    
    
    
    
    
    284.6Certificate of deposits
    
    
    126.8
    
    
    
    158.8
    
    
    
    137.4
    
    
    
    3.0
    
    
    
    
    
    
    
    426.0Total deposits
    
    
    158.0
    
    
    
    252.1
    
    
    
    297.5
    
    
    
    3.0
    
    
    
    59.6
    
    
    
    770.2Borrowings (1)
    
    
    141.3
    
    
    
    50.0
    
    
    
    129.4
    
    
    
    
    
    
    
    18.6
    
    
    
    339.3Other liabilities
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22.5
    
    
    
    22.6Capital
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    146.4
    
    
    
    146.4Total liabilities & capital
    
    $
    299.4
    
    
    $
    302.1
    
    
    $
    426.9
    
    
    $
    3.0
    
    
    $
    247.1
    
    
    $
    1,278.5Net interest rate GAP
    
    $
    169.0
    
    
    $
    (90.3
    )
    
    $
    (39.4
    )
    
    $
    132.6
    
    
    $
    (171.9
    )Cumulative interest rate GAP
    
    $
    169.0
    
    
    $
    78.7
    
    
    $
    39.3
    
    
    $
    171.9GAP to total assets
    
    
    13
    %
    
    
    -7
    %GAP to total equity
    
    
    115
    %
    
    
    -62
    %Cumulative GAP to total assets
    
    
    13
    %
    
    
    6
    %Cumulative GAP to total equity
    
    
    115
    %
    
    
    54
    %
 
 (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.  Capital Adequacy
  42




---



##### Table of Contents



Regulatory2007
    
    2006
    
    2005
    
    MinimumCapital LevelLeverage ratio
    
    
    13.6
    %
    
    
    14.9
    %
    
    
    14.2
    %
    
    
    3.0
    %Risk based capital ratio:Tier 1
    
    
    17.0
    %
    
    
    19.2
    %
    
    
    18.8
    %
    
    
    4.0
    %Total
    
    
    18.3
    %
    
    
    20.4
    %
    
    
    19.8
    %
    
    
    8.0
    %Capital PerformanceReturn on average assets
    
    
    0.04
    %
    
    
    1.6
    %
    
    
    2.5
    %Return on average equity
    
    
    0.36
    %
    
    
    13.6
    %
    
    
    22.0
    %
   Management Options to Purchase Securities
    43




---



##### Table of Contents



44




---



##### Table of Contents



Average Balances
  45




---



##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
 Average Balances and Margin Earned
 2007
    
    
    2006
    
    
    2005Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/Assets (in thousands)
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateInterest bearing deposits
    
    $
    35,158
    
    
    $
    1,896
    
    
    
    5.39
    %
    
    $
    7,361
    
    
    $
    377
    
    
    
    5.12
    %
    
    $
    1,789
    
    
    $
    56
    
    
    
    3.13
    %Federal funds
    
    
    2,900
    
    
    
    147
    
    
    
    5.07
    %
    
    
    844
    
    
    
    43
    
    
    
    5.09
    %
    
    
    2,079
    
    
    
    58
    
    
    
    2.79
    %Investment securitiesHeld to maturity
    
    
    205,686
    
    
    
    10,032
    
    
    
    4.88
    %
    
    
    255,448
    
    
    
    11,830
    
    
    
    4.63
    %
    
    
    237,701
    
    
    
    10,122
    
    
    
    4.26
    %Available for sale
    
    
    338,620
    
    
    
    18,143
    
    
    
    5.36
    %
    
    
    323,172
    
    
    
    17,377
    
    
    
    5.38
    %
    
    
    355,005
    
    
    
    19,229
    
    
    
    5.42
    %Total investment securities
    
    
    544,306
    
    
    
    28,175
    
    
    
    5.18
    %
    
    
    578,620
    
    
    
    29,207
    
    
    
    5.05
    %
    
    
    592,706
    
    
    
    29,351
    
    
    
    4.95
    %LoansCommercial demand loans
    
    
    376,002
    
    
    
    31,874
    
    
    
    8.48
    %
    
    
    372,623
    
    
    
    33,889
    
    
    
    9.09
    %
    
    
    259,216
    
    
    
    20,605
    
    
    
    7.95
    %Real estate secured
    
    
    238,929
    
    
    
    22,187
    
    
    
    9.29
    %
    
    
    233,816
    
    
    
    28,158
    
    
    
    12.04
    %
    
    
    247,762
    
    
    
    26,181
    
    
    
    10.57
    %Other loans
    
    
    21,681
    
    
    
    2,457
    
    
    
    11.33
    %
    
    
    12,152
    
    
    
    1,332
    
    
    
    10.96
    %
    
    
    3,371
    
    
    
    209
    
    
    
    6.20
    %Total loans
    
    $
    636,612
    
    
    $
    56,518
    
    
    
    8.88
    %
    
    $
    618,591
    
    
    $
    63,379
    
    
    
    10.25
    %
    
    $
    510,349
    
    
    $
    46,995
    
    
    
    9.21
    %Total interest earnings assets
    
    
    1,218,976
    
    
    
    86,736
    
    
    
    7.12
    %
    
    
    1,205,416
    
    
    
    93,006
    
    
    
    7.72
    %
    
    
    1,106,923
    
    
    
    76,460
    
    
    
    6.91
    %Non interest earnings assetsCash & due from banks
    
    
    12,369
    
    
    
    
    
    
    
    
    
    
    
    16,559
    
    
    
    
    
    
    
    
    
    
    
    12,470Other assets
    
    
    97,649
    
    
    
    
    
    
    
    
    
    
    
    109,031
    
    
    
    
    
    
    
    
    
    
    
    151,738Allowance for loan loss
    
    
    (12,405
    )
    
    
    
    
    
    
    
    
    
    
    (11,066
    )
    
    
    
    
    
    
    
    
    
    
    (11,165
    )Unearned discount
    
    
    (2,228
    )
    
    
    
    
    
    
    
    
    
    
    (2,252
    )
    
    
    
    
    
    
    
    
    
    
    (1,829
    )Total non-interest earning assets
    
    
    95,385
    
    
    
    
    
    
    
    
    
    
    
    112,272
    
    
    
    
    
    
    
    
    
    
    
    151,214Total assets
    
    $
    1,314,361
    
    
    
    
    
    
    
    
    
    
    $
    1,317,688
    
    
    
    
    
    
    
    
    
    
    $
    1,258,137Liabilities & Shareholders EquityDepositsSavings
    
    $
    16,461
    
    
    $
    85
    
    
    
    0.52
    %
    
    $
    18,549
    
    
    $
    98
    
    
    
    0.53
    %
    
    $
    21,814
    
    
    $
    127
    
    
    
    0.58
    %Now
    
    
    52,975
    
    
    
    1,185
    
    
    
    2.24
    %
    
    
    59,472
    
    
    
    1,473
    
    
    
    2.48
    %
    
    
    33,732
    
    
    
    307
    
    
    
    0.91
    %Money market
    
    
    199,921
    
    
    
    8,486
    
    
    
    4.24
    %
    
    
    226,920
    
    
    
    7,454
    
    
    
    3.28
    %
    
    
    321,655
    
    
    
    7,150
    
    
    
    2.22
    %Time deposits
    
    
    531,965
    
    
    
    27,384
    
    
    
    5.15
    %
    
    
    393,685
    
    
    
    18,503
    
    
    
    4.70
    %
    
    
    254,031
    
    
    
    9,965
    
    
    
    3.92
    %Total interest bearing deposits
    
    
    801,322
    
    
    
    37,140
    
    
    
    4.63
    %
    
    
    698,626
    
    
    
    27,528
    
    
    
    3.94
    %
    
    
    631,232
    
    
    
    17,549
    
    
    
    2.78
    %Federal funds
    
    
    
    
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Borrowings
    
    
    205,823
    
    
    
    9,374
    
    
    
    4.55
    %
    
    
    308,236
    
    
    
    14,051
    
    
    
    4.56
    %
    
    
    312,952
    
    
    
    12,225
    
    
    
    3.91
    %Obligation through VIE equity
investments
    
    
    23,160
    
    
    
    623
    
    
    
    2.69
    %
    
    
    43,129
    
    
    
    3,108
    
    
    
    7.21
    %
    
    
    11,936
    
    
    
    557
    
    
    
    4.67
    %Subordinated debt
    
    
    25,774
    
    
    
    1,736
    
    
    
    6.74
    %
    
    
    25,774
    
    
    
    1,685
    
    
    
    6.54
    %
    
    
    25,774
    
    
    
    1,465
    
    
    
    5.68
    %Total interest bearing liabilities
    
    
    1,056,079
    
    
    
    48,873
    
    
    
    4.63
    %
    
    
    1,075,765
    
    
    
    46,372
    
    
    
    4.31
    %
    
    
    981,894
    
    
    
    31,796
    
    
    
    3.24
    %Non interest bearing deposits
    
    
    68,562
    
    
    
    
    
    
    
    
    
    
    
    62,641
    
    
    
    
    
    
    
    
    
    
    
    68,308Other liabilities
    
    
    31,025
    
    
    
    
    
    
    
    
    
    
    
    20,550
    
    
    
    
    
    
    
    
    
    
    
    62,334Total liabilities
    
    
    1,155,666
    
    
    
    
    
    
    
    
    
    
    
    1,158,956
    
    
    
    
    
    
    
    
    
    
    
    1,112,536Stockholders equity
    
    
    158,695
    
    
    
    
    
    
    
    
    
    
    
    158,732
    
    
    
    
    
    
    
    
    
    
    
    145,601Total liabilities and
Stockholders equity
    
    $
    1,314,361
    
    
    
    
    
    
    
    
    
    
    $
    1,317,688
    
    
    
    
    
    
    
    
    
    
    $
    1,258,137Net interest income
    
    
    
    
    
    $
    37,863
    
    
    
    
    
    
    
    
    
    
    $
    46,634
    
    
    
    
    
    
    
    
    
    
    $
    44,664Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.11
    %
    
    
    
    
    
    
    
    
    
    
    3.87
    %
    
    
    
    
    
    
    
    
    
    
    4.03
    %
 
 (1)
    
    Nonaccruing loans have been included in the appropriate average loan balance category,
but interest on these loans has not been included.(2)
    
    Portions of interest related to obligations through VIE are capitalized on the VIEs
books 46




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##### Table of Contents



2007 versus 2006
    
    2006 versus 2005Changes due to:
    
    Changes due to:in thousands
    
    Volume
    
    Rate
    
    Total
    
    Volume
    
    Rate
    
    TotalInterest incomeShort term earning assetsInterest bearing deposits in banks
    
    $
    1,504
    
    
    $
    15
    
    
    $
    1,519
    
    
    $
    281
    
    
    $
    40
    
    
    $
    321Federal funds sold
    
    
    104
    
    
    
    
    
    
    
    104
    
    
    
    (58
    )
    
    
    43
    
    
    
    (15
    )Total short term earning assets
    
    
    1,608
    
    
    
    15
    
    
    
    1,623
    
    
    
    223
    
    
    
    83
    
    
    
    306Investments securitiesHeld to maturity
    
    
    (2,256
    )
    
    
    458
    
    
    
    (1,798
    )
    
    
    829
    
    
    
    879
    
    
    
    1,708Available for sale
    
    
    814
    
    
    
    (48
    )
    
    
    766
    
    
    
    (2,069
    )
    
    
    217
    
    
    
    (1,852
    )Total Investments securities
    
    
    (1,442
    )
    
    
    410
    
    
    
    (1,032
    )
    
    
    (1,240
    )
    
    
    1,096
    
    
    
    (144
    )LoansCommercial demand loans
    
    
    380
    
    
    
    (6,962
    )
    
    
    (6,582
    )
    
    
    9,188
    
    
    
    4,275
    
    
    
    13,463Commercial mortgages
    
    
    278
    
    
    
    (33
    )
    
    
    245
    
    
    
    
    
    
    
    
    
    
    
    Residential and home equity loans
    
    
    (340
    )
    
    
    (17
    )
    
    
    (357
    )
    
    
    (1,280
    )
    
    
    1,502
    
    
    
    222Leases receivables
    
    
    892
    
    
    
    256
    
    
    
    1,148
    
    
    
    
    
    
    
    
    
    
    
    Real estate tax liens
    
    
    649
    
    
    
    557
    
    
    
    1,206
    
    
    
    
    
    
    
    
    
    
    
    Other loans
    
    
    (18
    )
    
    
    (4
    )
    
    
    (22
    )
    
    
    2,664
    
    
    
    36
    
    
    
    2,700Loan fees
    
    
    (2,499
    )
    
    
    
    
    
    
    (2,499
    )
    
    
    
    
    
    
    
    
    
    
    Total loans
    
    
    (658
    )
    
    
    (6,203
    )
    
    
    (6,861
    )
    
    
    10,572
    
    
    
    5,813
    
    
    
    16,385Total increase (decrease) in interest income
    
    $
    (492
    )
    
    $
    (5,778
    )
    
    $
    (6,270
    )
    
    $
    9,555
    
    
    $
    6,992
    
    
    $
    16,547Interest expenseDeposits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    NOW and money market
    
    $
    (842
    )
    
    $
    1,578
    
    
    $
    736
    
    
    $
    (1,657
    )
    
    $
    3,094
    
    
    $
    1,437Savings
    
    
    (8
    )
    
    
    (5
    )
    
    
    (13
    )
    
    
    (18
    )
    
    
    (11
    )
    
    
    (29
    )Time deposits
    
    
    5,227
    
    
    
    3,662
    
    
    
    8,889
    
    
    
    6,271
    
    
    
    2,300
    
    
    
    8,571Total deposits
    
    
    4,377
    
    
    
    5,235
    
    
    
    9,612
    
    
    
    4,596
    
    
    
    5,383
    
    
    
    9,979BorrowingsBorrowings
    
    
    (4,307
    )
    
    
    (367
    )
    
    
    (4,674
    )
    
    
    853
    
    
    
    1,194
    
    
    
    2,047Trust preferred
    
    
    
    
    
    
    48
    
    
    
    48
    
    
    
    
    
    
    
    
    
    
    
    Total Borrowings
    
    
    (4,307
    )
    
    
    (319
    )
    
    
    (4,626
    )
    
    
    853
    
    
    
    1,194
    
    
    
    2,047Total increase (decrease) in interest expense
    
    
    70
    
    
    
    4,916
    
    
    
    4,986
    
    
    
    5,449
    
    
    
    6,577
    
    
    
    12,026Total increase (decrease) in net interest
income
    
    $
    (562
    )
    
    $
    (10,694
    )
    
    $
    (11,256
    )
    
    $
    4,106
    
    
    $
    415
    
    
    $
    4,521
 47




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##### Table of Contents



Loans
  As of December 31,(in thousands)2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003LoansCommercial and industrial
    
    $
    77,856
    
    
    
    12
    %
    
    $
    43,019
    
    
    
    7
    %
    
    $
    30,075
    
    
    
    5
    %
    
    $
    37,468
    
    
    
    8
    %
    
    $
    18,343
    
    
    
    4
    %Construction and land
development
    
    
    171,653
    
    
    
    27
    %
    
    
    172,745
    
    
    
    29
    %
    
    
    173,757
    
    
    
    31
    %
    
    
    108,749
    
    
    
    23
    %
    
    
    107,463
    
    
    
    21
    %Constr. and land develop. -
mezzanine
    
    
    6,443
    
    
    
    1
    %
    
    
    5,177
    
    
    
    1
    %
    
    
    3,345
    
    
    
    1
    %
    
    
    380
    
    
    
    0
    %
    
    
    
    
    
    
    0
    %Single family residential
    
    
    42,286
    
    
    
    7
    %
    
    
    43,338
    
    
    
    7
    %
    
    
    41,900
    
    
    
    8
    %
    
    
    48,020
    
    
    
    10
    %
    
    
    60,366
    
    
    
    12
    %Real Estate  non-residential
    
    
    261,350
    
    
    
    40
    %
    
    
    268,162
    
    
    
    46
    %
    
    
    228,222
    
    
    
    41
    %
    
    
    216,396
    
    
    
    46
    %
    
    
    266,782
    
    
    
    51
    %Real Estate  non-res. -
mezzanine
    
    
    11,978
    
    
    
    2
    %
    
    
    8,283
    
    
    
    1
    %
    
    
    7,477
    
    
    
    1
    %
    
    
    7,028
    
    
    
    2
    %
    
    
    
    
    
    
    0
    %Real Estate  multi-family
    
    
    6,887
    
    
    
    1
    %
    
    
    3,953
    
    
    
    1
    %
    
    
    22,158
    
    
    
    4
    %
    
    
    15,256
    
    
    
    3
    %
    
    
    21,728
    
    
    
    4
    %Real Estate  multi-family
-mezzanine
    
    
    275
    
    
    
    0
    %
    
    
    2,129
    
    
    
    1
    %
    
    
    2,646
    
    
    
    1
    %
    
    
    
    
    
    
    0
    %
    
    
    
    
    
    
    0
    %Tax certificates
    
    
    46,090
    
    
    
    7
    %
    
    
    32,235
    
    
    
    5
    %
    
    
    35,548
    
    
    
    6
    %
    
    
    34,419
    
    
    
    7
    %
    
    
    38,013
    
    
    
    7
    %Lease financing
    
    
    19,778
    
    
    
    3
    %
    
    
    13,404
    
    
    
    2
    %
    
    
    2,623
    
    
    
    1
    %
    
    
    
    
    
    
    0
    %
    
    
    
    
    
    
    0
    %Other
    
    
    1,424
    
    
    
    0
    %
    
    
    1,333
    
    
    
    0
    %
    
    
    3,868
    
    
    
    1
    %
    
    
    3,322
    
    
    
    1
    %
    
    
    4,512
    
    
    
    1
    %Total gross loans
    
    $
    646,020
    
    
    
    100
    %
    
    $
    593,778
    
    
    
    100
    %
    
    $
    551,619
    
    
    
    100
    %
    
    $
    471,038
    
    
    
    100
    %
    
    $
    517,207
    
    
    
    100
    %Unearned income
    
    
    (1,545
    )
    
    
    
    
    
    
    (1,564
    )
    
    
    
    
    
    
    (1,983
    )
    
    
    
    
    
    
    (1,540
    )
    
    
    
    
    
    
    (1,203
    )Discount on loans purchased
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (290
    )$
    644,475
    
    
    
    
    
    
    $
    592,214
    
    
    
    
    
    
    $
    549,636
    
    
    
    
    
    
    $
    469,498
    
    
    
    
    
    
    $
    515,714Allowance for loan loss
    
    
    (19,282
    )
    
    
    
    
    
    
    (11,455
    )
    
    
    
    
    
    
    (10,276
    )
    
    
    
    
    
    
    (12,519
    )
    
    
    
    
    
    
    (12,426
    )Total net loans
    
    $
    625,193
    
    
    
    
    
    
    $
    580,759
    
    
    
    
    
    
    $
    539,360
    
    
    
    
    
    
    $
    456,979
    
    
    
    
    
    
    $
    503,288
 Credit Quality
  48




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##### Table of Contents



Year ending December 31,(in thousands)2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003Non-accruing loans (1)
    
    $
    25,401
    
    
    $
    6,748
    
    
    $
    4,371
    
    
    $
    4,526
    
    
    $
    11,328Other real estate owned
    
    
    1,048
    
    
    
    924
    
    
    
    3,834
    
    
    
    5,424
    
    
    
    4,371Total nonperforming assets
    
    $
    26,449
    
    
    $
    7,672
    
    
    $
    8,205
    
    
    $
    9,950
    
    
    $
    15,699Nonperforming assets to total assets
    
    
    2.07
    %
    
    
    0.57
    %
    
    
    0.63
    %
    
    
    0.83
    %
    
    
    1.36
    %Nonperforming loans to total loans
    
    
    3.94
    %
    
    
    1.14
    %
    
    
    0.79
    %
    
    
    0.96
    %
    
    
    2.20
    %Allowance for loan loss to
non-accruing loans
    
    
    75.91
    %
    
    
    169.75
    %
    
    
    235.09
    %
    
    
    276.54
    %
    
    
    109.69
    %
 
 (1)
    
    Generally, a loan is placed in 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.  First Quarter 2007 new non-accruing loans:
 
    
    Two loans (one construction and one construction mezzanine loan) representing $8.2
million were related to one customer for a condominium building. These loans became 90
days past due during the first quarter of 2007 and were classified as impaired during the
first quarter of 2007. An appraisal received during the first quarter of 2007 provided a
gross retail sellout value of this property which supported its value. The Company received
a payment of approximately $490,000 in the third quarter on the sale of one of the
condominiums. The company received a new appraisal during the third quarter. This new
appraisal resulted in the charge-off of the $1.3 million construction mezzanine loan and a
$1.8 million partial charge-off of the construction loan during
the third quarter of 2007. The Company added a specific
allowance of $1.3 million in the fourth quarter, based
in part by the decision to proceed with the foreclosure process and
corresponding collateral value based on an updated appraisal.
    
    Two loans (one construction and one construction mezzanine loan) in the amount of $6.9
million were added to non-accruing status during the first quarter of 2007. These loans
are secured by a 36 unit condominium building. These loans became 90 days past due during
the first quarter of 2007 and were classified as impaired during the first quarter of 2007.
The customer was waiting for a Certificate of Occupancy and had seven agreements of sale on
the condominiums as of March 31, 2007. As of the end of the third quarter the borrower
had not obtained the Certificate of Occupancy and the Company received and reviewed a new
appraisal for these loans. Based on this appraisal, a specific allowance of $2.0 million
was added for these loans. The Company charged-off $304,000 of this loan during the fourth
quarter.
 Second Quarter 2007 new non-accruing loans:
 
    
    A commercial loan in the amount of $3.1 million was added to non-accruing status in June
2007. As of September 30, 2007 the loan has been paid down to $1.3 million and a specific
allowance of $961,000 was added for this loan. This loan was classified as an impaired
loan during the second
 49




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##### Table of Contents



quarter of 2007. We are continuing to collect payments on this loan.
The Company charged-off $739,000 of this loan during the fourth quarter of 2007. The
Company has a specific reserve to cover the $593,000 outstanding balance of this loan at
December 31, 2007.
    
    A $4.8 million construction loan for a 9 unit condominium building was added to
non-accruing loans during the second quarter of 2007. The principal of this loan was paid
in full during the third quarter of 2007.
 Third Quarter 2007 new non-accruing loans:
 
    
    A $770,000 construction loan to build a four unit condominium building was declared in
default in September 2007 and added to non-accrual loans. This loan was classified as
impaired during the third quarter of 2007. The Company charged-off $448,000 of this loan
during the fourth quarter of 2007.
    
    A construction loan for land in the amount of $630,000 was added to non-accruing loans
in September 2007. This loan was classified as impaired during the third quarter of 2007.
The Company added a specific allowance of $180,000 based on the results of an appraisal.
    
    Two non-residential real estate loans in the amount of $1.4 million and one $757,000
construction loan to the same borrower were added to non-accruing status in September as a
result of the loan being in default during the third quarter. These loans were classified
as impaired during the third quarter of 2007. The Company added a specific allowance of
$485,000 to the non-residential loans based on the results of an appraisal. The Company
charged-off $294,000 of this loan during the fourth quarter of 2007.
 Fourth Quarter 2007 new non-accruing loans:
 
    
    A construction loan for land in the amount of $4.3 million was added to non-accruing
loans and classified as impaired in December. The Company added a specific allowance of
$50,000 based on the results of an appraisal.
    
    A $408,000 construction loan to convert an apartment building into condominiums was
added to non-accruing loans and classified as impaired in December. The Company added a
specific allowance of $33,000 based on the results of an appraisal.
    
    Two non-residential real estate loans to one customer in the amount of $564,000 were
added to non-accrual and classified as impaired during December 2007. A specific allowance
was not required for these loans.
    
    A $196,000 non-residential real estate loan was added to non-accrual and classified as
impaired during December 2007. A specific allowance was not required for this loan.
   50




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##### Table of Contents



Non-Accruing Loans:
 12/31/06
    
    1st Qtr 2007
    
    2nd Qtr 2007
    
    3rd Qtr 2007
    
    4th Qtr 2007
    
    Year to date 12/31/07
    
    12/31/07(in thousands)
    
    Balance
    
    Additions
    
    Additions
    
    Additions
    
    Additions
    
    Payments
    
    Charge-offs
    
    BalanceConstruction & Land
Develop.
    
    $
    5,241
    
    
    $
    11,647
    
    
    $
    4,754
    
    
    $
    2,156
    
    
    $
    408
    
    
    $
    (6,720
    )
    
    $
    (2,286
    )
    
    $
    15,200Constr.&
Develop.-mezzanine
    
    
    
    
    
    
    3,859
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,579
    )
    
    
    2,280Real
Estate-Non-Residential
    
    
    448
    
    
    
    
    
    
    
    100
    
    
    
    1,384
    
    
    
    5,159
    
    
    
    (409
    )
    
    
    (340
    )
    
    
    6,342Commercial & Industrial
    
    
    188
    
    
    
    26
    
    
    
    2,922
    
    
    
    263
    
    
    
    24
    
    
    
    (1,980
    )
    
    
    (826
    )
    
    
    617Single Family Residential
    
    
    871
    
    
    
    48
    
    
    
    59
    
    
    
    91
    
    
    
    24
    
    
    
    (488
    )
    
    
    (73
    )
    
    
    532Leasing
    
    
    
    
    
    
    
    
    
    
    498
    
    
    
    
    
    
    
    103
    
    
    
    (80
    )
    
    
    (91
    )
    
    
    430Total
    
    $
    6,748
    
    
    $
    15,580
    
    
    $
    8,333
    
    
    $
    3,894
    
    
    $
    5,718
    
    
    $
    (9,677
    )
    
    $
    (5,195
    )
    
    $
    25,401
       51




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##### Table of Contents



Loans and Lease Financing Receivables
  52




---



##### Table of Contents



As of December 31,(in thousands)2007
    
    
    2006
    
    
    2005Loans secured by real estate:Construction and land development
    
    $
    173,192
    
    
    $
    172,745
    
    
    $
    164,557Construction and land development  mezzanine
    
    
    4,904
    
    
    
    5,177
    
    
    
    12,545Secured by 1-4 family residential properties:Revolving, open-end loans secured by 1-4 family residential
properties and extended under lines of credit
    
    
    2,094
    
    
    
    4,585
    
    
    
    10,070All other loans secured by 1-4 family residential properties:Secured by first liens
    
    
    32,485
    
    
    
    33,868
    
    
    
    28,327Secured by junior liens
    
    
    7,707
    
    
    
    4,885
    
    
    
    4,306Secured by multi family (5 or more) residential properties
    
    
    6,887
    
    
    
    3,953
    
    
    
    22,158Secured by multi family (5 or more) res. Properties  mezzanine
    
    
    275
    
    
    
    2,129
    
    
    
    2,646Secured by non-farm nonresidential properties
    
    
    262,550
    
    
    
    268,162
    
    
    
    227,419Secured by non-farm nonresidential properties  mezzanine
    
    
    10,778
    
    
    
    8,283
    
    
    
    7,477Tax certificates
    
    
    46,090
    
    
    
    32,235
    
    
    
    35,548Commercial and industrial loans
    
    
    77,793
    
    
    
    43,019
    
    
    
    30,075Loans to individuals for household, family, and other personal
expenditures
    
    
    1,157
    
    
    
    1,088
    
    
    
    1,061Obligations of state and political subdivisions in the U.S.
    
    
    63
    
    
    
    78
    
    
    
    1,268Lease financing receivables (net of unearned income)
    
    
    19,778
    
    
    
    13,404
    
    
    
    2,623All other loans
    
    
    267
    
    
    
    167
    
    
    
    1,539Less: net deferred loan fees
    
    
    1,545
    
    
    
    1,564
    
    
    
    1,983Total loans and leases, net of unearned income
    
    $
    644,475
    
    
    $
    592,214
    
    
    $
    549,636
 Credit Classification Process
   
   53




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##### Table of Contents



Investment Securities
  As of December 31, 2007(in thousands)After 1 year, but
    
    
    After 1 year, butWithin 1 year
    
    
    within 5 years
    
    
    within 5 years
    
    
    After 10 Years
    
    
    TotalAmount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    RateSecurities held to
maturityMortgage backed securities
    
    $
    
    
    
    
    0.0
    %
    
    $
    8
    
    
    
    11.0
    %
    
    $
    38
    
    
    
    6.3
    %
    
    $
    59
    
    
    
    6.0
    %
    
    $
    105
    
    
    
    6.5
    %Agencies
    
    
    50,000
    
    
    
    3.5
    %
    
    
    30,000
    
    
    
    4.2
    %
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    80,000
    
    
    
    3.8
    %Other debt securities
    
    
    275
    
    
    
    4.0
    %
    
    
    62,525
    
    
    
    7.7
    %
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    62,800
    
    
    
    7.7
    %Total held to maturity
    
    $
    50,275
    
    
    
    3.5
    %
    
    $
    92,533
    
    
    
    6.6
    %
    
    $
    38
    
    
    
    6.3
    %
    
    $
    59
    
    
    
    6.0
    %
    
    $
    142,905
    
    
    
    5.5
    %Available for saleMortgage backed securities
    
    $
    
    
    
    
    0.0
    %
    
    $
    1
    
    
    
    7.5
    %
    
    $
    21
    
    
    
    6.0
    %
    
    $
    33,263
    
    
    
    4.9
    %
    
    $
    33,285
    
    
    
    4.9
    %Agencies
    
    
    
    
    
    
    0.0
    %
    
    
    59,847
    
    
    
    3.8
    %
    
    
    10,009
    
    
    
    5.0
    %
    
    
    35,024
    
    
    
    4.9
    %
    
    
    104,880
    
    
    
    4.3
    %CMOs
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    83,126
    
    
    
    5.4
    %
    
    
    83,126
    
    
    
    5.4
    %Trust Preferred
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    3,096
    
    
    
    7.9
    %
    
    
    41,004
    
    
    
    9.4
    %
    
    
    44,100
    
    
    
    9.3
    %Other securities
    
    
    48,980
    
    
    
    2.9
    %
    
    
    53,577
    
    
    
    5.6
    %
    
    
    7,380
    
    
    
    6.4
    %
    
    
    
    
    
    
    0.0
    %
    
    
    109,937
    
    
    
    4.5
    %Total Available for Sale
    
    $
    48,980
    
    
    
    2.9
    %
    
    $
    113,425
    
    
    
    4.6
    %
    
    $
    20,506
    
    
    
    5.9
    %
    
    $
    192,417
    
    
    
    6.1
    %
    
    $
    375,328
    
    
    
    5.2
    %
  54




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##### Table of Contents



2007Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    Fair
    
    
    Carryingcost
    
    
    gains
    
    
    losses
    
    
    value
    
    
    valueInvestment securities held to maturityMortgage backed securities
    
    $
    105
    
    
    $
    
    
    
    $
    
    
    
    $
    105
    
    
    $
    105U.S. government Agencies
    
    
    80,000
    
    
    
    13
    
    
    
    (234
    )
    
    
    79,779
    
    
    
    80,000Other debt securities
    
    
    62,800
    
    
    
    1,512
    
    
    
    (740
    )
    
    
    63,572
    
    
    
    62,800Total held to maturity
    
    $
    142,905
    
    
    $
    1,525
    
    
    $
    (974
    )
    
    $
    143,456
    
    
    $
    142,905Investment securities available for saleMortgage backed securities
    
    $
    33,090
    
    
    $
    383
    
    
    $
    (187
    )
    
    
    33,285
    
    
    $
    33,285U.S. government agencies
    
    
    104,982
    
    
    
    51
    
    
    
    (153
    )
    
    
    104,880
    
    
    
    104,880Preferred and common stock
    
    
    20,696
    
    
    
    17
    
    
    
    (821
    )
    
    
    19,892
    
    
    
    19,892CMOs
    
    
    82,316
    
    
    
    965
    
    
    
    (155
    )
    
    
    83,126
    
    
    
    83,126Corporate bonds
    
    
    86,205
    
    
    
    464
    
    
    
    (1,241
    )
    
    
    85,428
    
    
    
    85,428Trust preferred securities
    
    
    44,118
    
    
    
    2,151
    
    
    
    (2,169
    )
    
    
    44,100
    
    
    
    44,100Other securities
    
    
    4,557
    
    
    
    60
    
    
    
    
    
    
    
    4,617
    
    
    
    4,617Total Available for Sale
    
    $
    375,964
    
    
    $
    4,091
    
    
    $
    (4,726
    )
    
    $
    375,328
    
    
    $
    375,328
 2006Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    Fair
    
    
    Carryingcost
    
    
    gains
    
    
    losses
    
    
    value
    
    
    valueInvestment securities held to maturityMortgage backed securities
    
    $
    129
    
    
    $
    
    
    
    $
    
    
    
    $
    129
    
    
    $
    129U.S. government Agencies
    
    
    195,000
    
    
    
    
    
    
    
    (2,820
    )
    
    
    192,180
    
    
    
    195,000Other debt securities
    
    
    60,300
    
    
    
    2,065
    
    
    
    (425
    )
    
    
    61,940
    
    
    
    60,300$
    255,429
    
    
    $
    2,065
    
    
    $
    (3,245
    )
    
    $
    254,249
    
    
    $
    255,429Investment securities available for saleMortgage backed securities
    
    $
    27,630
    
    
    $
    
    
    
    $
    (709
    )
    
    $
    26,921
    
    
    $
    26,921U.S. government agencies
    
    
    104,980
    
    
    
    
    
    
    
    (3,408
    )
    
    
    101,572
    
    
    
    101,572Preferred and common stock
    
    
    15,961
    
    
    
    1,703
    
    
    
    (62
    )
    
    
    17,602
    
    
    
    17,602CMOs
    
    
    20,071
    
    
    
    10
    
    
    
    (295
    )
    
    
    19,786
    
    
    
    19,786Corporate bonds
    
    
    81,247
    
    
    
    174
    
    
    
    (382
    )
    
    
    81,039
    
    
    
    81,039Trust preferred securities
    
    
    38,657
    
    
    
    2,828
    
    
    
    
    
    
    
    41,485
    
    
    
    41,485Other securities
    
    
    13,135
    
    
    
    496
    
    
    
    
    
    
    
    13,631
    
    
    
    13,631Total Available for Sale
    
    $
    301,681
    
    
    $
    5,211
    
    
    $
    (4,856
    )
    
    $
    302,036
    
    
    $
    302,036
 55




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##### Table of Contents



2005Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    Fair
    
    
    Carryingcost
    
    
    gains
    
    
    losses
    
    
    value
    
    
    valueInvestment securities held to maturityMortgage backed securities
    
    $
    167
    
    
    $
    
    
    
    $
    
    
    
    $
    167
    
    
    $
    167U.S. government Agencies
    
    
    195,000
    
    
    
    
    
    
    
    (4,171
    )
    
    
    190,829
    
    
    
    195,000Other debt securities
    
    
    60,300
    
    
    
    1,902
    
    
    
    
    
    
    
    62,202
    
    
    
    60,300$
    255,467
    
    
    $
    1,902
    
    
    $
    (4,171
    )
    
    $
    253,198
    
    
    $
    255,467Investment securities available for saleMortgage backed securities
    
    $
    56,628
    
    
    $
    126
    
    
    $
    (862
    )
    
    $
    55,892
    
    
    $
    U.S. government agencies
    
    
    104,979
    
    
    
    
    
    
    
    (3,281
    )
    
    
    101,698
    
    
    
    Preferred and common stock
    
    
    5,129
    
    
    
    88
    
    
    
    
    
    
    
    5,217
    
    
    
    Corporate bonds
    
    
    109,564
    
    
    
    670
    
    
    
    (1,700
    )
    
    
    108,534
    
    
    
    Trust preferred securities
    
    
    36,174
    
    
    
    3,559
    
    
    
    
    
    
    
    39,733
    
    
    
    Foreign Bonds
    
    
    2,995
    
    
    
    20
    
    
    
    
    
    
    
    3,015
    
    
    
    Other securities
    
    
    12,166
    
    
    
    81
    
    
    
    (147
    )
    
    
    12,100
    
    
    
    Total Available for Sale
    
    $
    327,635
    
    
    $
    4,544
    
    
    $
    (5,990
    )
    
    $
    326,189
    
    
    $
    
 Deposits
  As of December 31,(in thousands)2007
    
    
    2006
    
    
    2005Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageBalance
    
    
    Rate
    
    
    Balance
    
    
    Rate
    
    
    Balance
    
    
    RateDemand depositsNon interest bearing
    
    $
    68,562
    
    
    
    
    
    
    $
    62,641
    
    
    
    
    
    
    $
    68,308
    
    
    
    Interest bearing (NOW)
    
    
    52,975
    
    
    
    2.24
    %
    
    
    59,472
    
    
    
    2.48
    %
    
    
    33,732
    
    
    
    0.91
    %Money market deposits
    
    
    199,921
    
    
    
    4.24
    %
    
    
    226,920
    
    
    
    3.28
    %
    
    
    321,655
    
    
    
    2.22
    %Savings deposits
    
    
    16,461
    
    
    
    0.52
    %
    
    
    18,549
    
    
    
    0.53
    %
    
    
    21,814
    
    
    
    0.58
    %Certificate of deposit
    
    
    531,965
    
    
    
    5.15
    %
    
    
    393,685
    
    
    
    4.70
    %
    
    
    254,031
    
    
    
    3.92
    %Total deposits
    
    $
    869,884
    
    
    
    
    
    
    $
    761,267
    
    
    
    
    
    
    $
    699,540
  56




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##### Table of Contents



As of December 31,(in thousands)2007
    
    
    2006Three months or less
    
    $
    48,139
    
    
    $
    6,980Over three months through twelve months
    
    
    98,630
    
    
    
    86,167Over twelve months through five years
    
    
    117,787
    
    
    
    191,397Over five years
    
    
    694
    
    
    
    940Total
    
    $
    265,250
    
    
    $
    285,484
 Short and Long Term Borrowings
 Year ending December 31,(in thousands)2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003Short term borrowings
    
    $
    102,000
    
    
    $
    53,000
    
    
    $
    104,500
    
    
    $
    17,500
    
    
    $
    Long term borrowingsOther borrowings
    
    
    5,411
    
    
    
    5,587
    
    
    
    
    
    
    
    
    
    
    
    Obligations through RE owned via equity invest(1)
    
    
    18,566
    
    
    
    29,342
    
    
    
    47,356
    
    
    
    56,249
    
    
    
    Subordinated debt
    
    
    25,774
    
    
    
    25,774
    
    
    
    25,774
    
    
    
    25,774
    
    
    
    FHLB advances
    
    
    187,500
    
    
    
    187,500
    
    
    
    249,500
    
    
    
    204,500
    
    
    
    212,000Total borrowings
    
    $
    339,251
    
    
    $
    01,203
    
    
    $
    427,130
    
    
    $
    304,023
    
    
    $
    212,000
 
 (1)
    
    This obligation is consolidated from requirements under FIN (46) R of which $0 is
guaranteed by Royal Bancshares. 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
  57




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As of December 31, 2007 (dollars in Thousands)Market Value of
    
    
    Percent ofChanges in Rates
    
    Portfolio Equity
    
    
    Change+ 200 basis points
    
    
    138,756
    
    
    
    -5.2
    %+ 100 basis points
    
    
    144,504
    
    
    
    -1.3
    %Flat rate
    
    
    146,367
    
    
    
    - 100 basis points
    
    
    141,993
    
    
    
    -3.0
    %- 200 basis points
    
    
    131,724
    
    
    
    -10.0
    %
  RECENT ACCOUNTING PRONOUNCEMENTS
   58




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##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
 December 31, 2007 and 2006
 59




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Report of Independent Registered Public Accounting Firm
 
      Internal ControlIntegrated
Framework
 
 
 60




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##### Table of Contents



Internal ControlIntegrated Framework
      Internal ControlIntegrated Framework
 61




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##### Table of Contents



(BEARD MILLER COMPANY LLP)
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ROYAL
BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
 Consolidated Balance Sheets
 December 31,2007
    
    
    2006(Dollars in thousands, except share data)ASSETSCash on hand
    
    $
    8,785
    
    
    $
    13,426Interest bearing deposits
    
    
    1,120
    
    
    
    66,810Federal funds sold
    
    
    1,000
    
    
    
    2,200Total cash and cash equivalents
    
    
    10,905
    
    
    
    82,436Investment securities held to maturity (fair value of $143,456 and
$254,249 in 2007 and 2006, respectively)
    
    
    142,905
    
    
    
    255,429Investment securities available for sale at fair value
    
    
    375,328
    
    
    
    302,036Federal Home Loan Bank stock, at cost
    
    
    13,462
    
    
    
    11,276Total investment securities and FHLB stock
    
    
    531,695
    
    
    
    568,741Loans and leases
    
    
    644,475
    
    
    
    592,214Less allowance for loan and lease losses
    
    
    19,282
    
    
    
    11,455Net loans and leases
    
    
    625,193
    
    
    
    580,759Premises and equipment, net
    
    
    7,441
    
    
    
    7,766Accrued interest receivable
    
    
    15,256
    
    
    
    16,494Real estate owned via equity investment
    
    
    23,967
    
    
    
    42,514Investment in real estate joint ventures
    
    
    7,739
    
    
    
    10,744Bank owned life insurance
    
    
    23,781
    
    
    
    22,906Other assets
    
    
    32,498
    
    
    
    23,951Total Assets
    
    $
    1,278,475
    
    
    $
    1,356,311LIABILITIES AND STOCKHOLDERS EQUITYLiabilitiesDepositsNon-interest bearing
    
    $
    59,573
    
    
    $
    61,002Interest bearing
    
    
    710,579
    
    
    
    798,455Total deposits
    
    
    770,152
    
    
    
    859,457Accrued interest payable
    
    
    8,600
    
    
    
    10,654Borrowings
    
    
    294,911
    
    
    
    246,087Obligations related to real estate owned via equity investment
    
    
    18,566
    
    
    
    29,342Subordinated debentures
    
    
    25,774
    
    
    
    25,774Other liabilities
    
    
    12,238
    
    
    
    18,593Total liabilities
    
    
    1,130,241
    
    
    
    1,189,907Minority interests
    
    
    1,867
    
    
    
    3,150Stockholders equityCommon stockClass A, par value $2 per share, authorized 18,000,000
shares;
issued, 11,329,431 and 11,287,462 shares in 2007 and
2006, respectively
    
    
    22,659
    
    
    
    22,575Class B, par value $0.10 per share; authorized, 3,000,0000
shares; issued, 2,096,646 and 2,108,827 in 2007 and
2006, respectively
    
    
    210
    
    
    
    211Additional paid in capital
    
    
    122,578
    
    
    
    121,542Retained earnings
    
    
    8,527
    
    
    
    23,464Accumulated
other comprehensive loss
    
    
    (1,582
    )
    
    
    (2,273
    )152,392
    
    
    
    165,519Treasury stock - 398,488 and 215,388 Class A shares,
at cost, in 2007 and 2006
    
    
    (6,025
    )
    
    
    (2,265
    )Total stockholders equity
    
    
    146,367
    
    
    
    163,254Total liabilities and stockholders equity
    
    $
    1,278,475
    
    
    $
    1,356,311
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ROYAL
BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
 Consolidated Statements of Income
 Year ended December 31,2007
    
    
    2006
    
    
    2005(In thousands, except per share data)Interest incomeLoans and leases, including fees
    
    $
    56,518
    
    
    $
    63,379
    
    
    $
    46,995Investment securities held to maturity
    
    
    10,032
    
    
    
    11,830
    
    
    
    10,122Investment securities available for sale:Taxable interest
    
    
    18,068
    
    
    
    17,302
    
    
    
    19,154Tax exempt interest
    
    
    75
    
    
    
    75
    
    
    
    75Deposits in banks
    
    
    1,896
    
    
    
    377
    
    
    
    56Federal funds sold
    
    
    147
    
    
    
    43
    
    
    
    58TOTAL INTEREST INCOME
    
    
    86,736
    
    
    
    93,006
    
    
    
    76,460Interest expenseDeposits
    
    
    37,140
    
    
    
    27,528
    
    
    
    17,549Borrowings
    
    
    11,110
    
    
    
    15,736
    
    
    
    13,690Obligations related to real estate owned via equity
investments
    
    
    623
    
    
    
    3,108
    
    
    
    557TOTAL INTEREST EXPENSE
    
    
    48,873
    
    
    
    46,372
    
    
    
    31,796NET INTEREST INCOME
    
    
    37,863
    
    
    
    46,634
    
    
    
    44,664Provision for loan losses
    
    
    13,026
    
    
    
    1,803
    
    
    
    1NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES
    
    
    24,837
    
    
    
    44,831
    
    
    
    44,663Other incomeService charges and fees
    
    
    1,348
    
    
    
    1,404
    
    
    
    1,293Net gains on investment securities available for sale
    
    
    5,358
    
    
    
    383
    
    
    
    227Gain on sale of premises and equipment related to real
estate
owned via equity investments
    
    
    1,860
    
    
    
    3,036
    
    
    
    16,779Gains on sales related to real estate joint ventures
    
    
    350
    
    
    
    
    
    
    
    Income related to real estate owned via equity investments
    
    
    1,384
    
    
    
    3,591
    
    
    
    747Gain from refinance of assets related to real estate
owned via equity investments
    
    
    
    
    
    
    
    
    
    
    1,892Gains on sales of other real estate
    
    
    1,111
    
    
    
    2,129
    
    
    
    2,494Gains on sales of loans and leases
    
    
    404
    
    
    
    379
    
    
    
    508Income from bank owned life insurance
    
    
    875
    
    
    
    847
    
    
    
    845Other income
    
    
    198
    
    
    
    202
    
    
    
    41TOTAL OTHER INCOME
    
    
    12,888
    
    
    
    11,971
    
    
    
    24,826Other expensesSalaries and wages
    
    
    9,220
    
    
    
    9,931
    
    
    
    10,094Employee benefits
    
    
    2,995
    
    
    
    2,787
    
    
    
    3,394Stock option expense
    
    
    657
    
    
    
    733
    
    
    
    Occupancy and equipment
    
    
    1,873
    
    
    
    1,644
    
    
    
    1,611Expenses related to real estate owned via equity investments
    
    
    1,590
    
    
    
    1,606
    
    
    
    262Impairment of real estate joint venture
    
    
    5,927
    
    
    
    
    
    
    
    Impairment of real estate owned via equity investments
    
    
    8,500
    
    
    
    
    
    
    
    Pennsylvania shares tax
    
    
    1,158
    
    
    
    1,082
    
    
    
    992Other operating expenses
    
    
    8,112
    
    
    
    6,869
    
    
    
    8,378TOTAL OTHER EXPENSE
    
    
    40,032
    
    
    
    24,652
    
    
    
    24,731Minority interests
    
    
    (1,303
    )
    
    
    567
    
    
    
    68(LOSS) INCOME BEFORE INCOME TAXES
    
    
    (1,004
    )
    
    
    31,583
    
    
    
    44,690(Benefit) income taxes
    
    
    (1,568
    )
    
    
    10,015
    
    
    
    12,637NET INCOME
    
    $
    564
    
    
    $
    21,568
    
    
    $
    32,053Per share dataNet income  basic
    
    $
    0.04
    
    
    $
    1.60
    
    
    $
    2.39Net income  diluted
    
    $
    0.04
    
    
    $
    1.59
    
    
    $
    2.37Cash
dividends  Class A shares
    
    $
    1.15
    
    
    $
    1.11
    
    
    $
    0.98Cash
dividends  Class B shares
    
    $
    1.32
    
    
    $
    1.28
    
    
    $
    1.12
  64




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders Equity
Years ended December 31, 2007, 2006, 2005
 AccumulatedAdditional
    
    
    
    
    
    
    otherClass A common stock
    
    
    Class B common stock
    
    
    Paid in
    
    
    Retained
    
    
    comprehensive
    
    
    Treasury
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    earnings
    
    
    income (loss)
    
    
    stock
    
    
    IncomeBalance, January 1, 2007
    
    
    11,287
    
    
    $
    22,575
    
    
    
    2,108
    
    
    $
    211
    
    
    $
    121,542
    
    
    $
    23,464
    
    
    $
    (2,273
    )
    
    $
    (2,265
    )Net Income for the year ended
December 31, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    564
    
    
    
    
    
    
    
    
    
    
    $
    564Adjustment related to adoption of FASB
No. 158, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,006Conversion of Class B common stock
to Class A common stock
    
    
    14
    
    
    
    28
    
    
    
    (12
    )
    
    
    (1
    )
    
    
    
    
    
    
    (27
    )Cash in lieu of fractional shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14
    )Stock dividend adjustment
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    (13
    )
    
    
    13Stock options exercised
    
    
    28
    
    
    
    56
    
    
    
    
    
    
    
    
    
    
    
    278Stock option expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    657Tax benefit stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    114Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,760
    )Cash dividends on common stock
(Class A $1.15, Class B $1.3225)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,473
    )Other comprehensive loss, net of
reclassifications and taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (315
    )
    
    
    
    
    
    
    (315
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    249Balance, December 31, 2007
    
    
    11,329
    
    
    $
    22,659
    
    
    
    2,097
    
    
    $
    210
    
    
    $
    122,578
    
    
    $
    8,527
    
    
    $
    (1,582
    )
    
    $
    (6,025
    )
 65




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders Equity
Years ended December 31, 2007, 2006, 2005
 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, January 1, 2006
    
    
    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
    )Stock Dividend, 5%, declared
(December)
    
    
    527
    
    
    
    1,054
    
    
    
    100
    
    
    
    11
    
    
    
    
    
    
    
    15,588
    
    
    
    (16,653
    )Undistributed shares registered (20 shares)
    
    
    
    
    
    
    
    
    
    
    20
    
    
    
    2
    
    
    
    (2
    )
    
    
    22Cash in lieu of fractional shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12
    )Stock option exercised
    
    
    55
    
    
    
    110
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    556Stock options expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    733Tax benefit stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    358Adjustment, to initially apply FASB
No. 158, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,504
    )Cash dividends on common stock
(Class A $1.11, Class B $1.28)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,256
    )Other comprehensive income, net of
reclassifications and taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,171
    
    
    
    
    
    
    
    1,171Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    22,739Balance, December 31, 2006
    
    
    11,287
    
    
    $
    22,575
    
    
    
    2,108
    
    
    $
    211
    
    
    $
    
    
    
    $
    121,542
    
    
    $
    23,464
    
    
    $
    (2,273
    )
    
    $
    (2,265
    )
 66




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders Equity
Years ended December 31, 2007, 2006, 2005
 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, January 1, 2005
    
    
    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
    )Stock Dividend, 2%, declared
(January)
    
    
    201
    
    
    
    402
    
    
    
    39
    
    
    
    3
    
    
    
    
    
    
    
    6,481
    
    
    
    (6,887
    )Stock Dividend, 2%, declared
(December)
    
    
    206
    
    
    
    412
    
    
    
    19
    
    
    
    3
    
    
    
    2
    
    
    
    5,599
    
    
    
    (6,015
    )Cash in lieu of fractional shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12
    )Stock options exercised
    
    
    10
    
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115Tax benefit stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53Cash dividends on common stock
(Class A $0.98 Class B $1.12)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,859
    )Other comprehensive income, net of
reclassifications and taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,739
    )
    
    
    
    
    
    
    (4,739
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    27,314Balance, December 31, 2005
    
    
    10,700
    
    
    $
    21,400
    
    
    
    1,993
    
    
    $
    199
    
    
    $
    2
    
    
    $
    104,285
    
    
    $
    32,827
    
    
    $
    (940
    )
    
    $
    (2,265
    )
  67




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
 Consolidated Statements of Cash Flows
 Year ended December 31,2007
    
    
    2006
    
    
    2005(In thousands)Cash flows from operating activitiesNet income
    
    $
    564
    
    
    $
    21,568
    
    
    $
    32,053Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    1,306
    
    
    
    1,454
    
    
    
    1,307Stock compensation expense
    
    
    657
    
    
    
    733
    
    
    
    Provision for loan losses
    
    
    13,026
    
    
    
    1,803
    
    
    
    1Amortization of premiums and discounts on loans,
mortgage-backed securities and investments
    
    
    (2,793
    )
    
    
    (2,415
    )
    
    
    (1,106
    )Income tax benefit on stock options
    
    
    
    
    
    
    
    
    
    
    53(Benefit) provision for deferred income taxes
    
    
    (4,118
    )
    
    
    (1,937
    )
    
    
    189Gains on sales of other real estate
    
    
    (1,111
    )
    
    
    (2,129
    )
    
    
    (2,494
    )Gains from sales related to real estate owned via equity investment
    
    
    (264
    )
    
    
    
    
    
    
    Gain on sales of real estate joint ventures
    
    
    (350
    )
    
    
    
    
    
    
    Gains on sales of loans
    
    
    (404
    )
    
    
    (379
    )
    
    
    (508
    )Net gains on sales of investment securities
    
    
    (5,358
    )
    
    
    (383
    )
    
    
    (227
    )Distributions from investments in real estate
    
    
    (167
    )
    
    
    (645
    )
    
    
    Gain from sale of premises of real estate owned via equity investment
    
    
    (1,860
    )
    
    
    (3,036
    )
    
    
    (16,779
    )Impairment of real estate owned via equity investments
    
    
    8,500
    
    
    
    
    
    
    
    Gain from refinance of assets  Variable Interest Entity
    
    
    
    
    
    
    
    
    
    
    (1,892
    )Income from bank owned life insurance
    
    
    (875
    )
    
    
    (847
    )
    
    
    (845
    )Impairment of real estate joint venture
    
    
    5,927
    
    
    
    
    
    
    
    Changes in assets and liabilities:Decrease (increase) in accrued interest receivable
    
    
    1,238
    
    
    
    (1,651
    )
    
    
    (1,400
    )(Increase) decrease in other assets
    
    
    (2,502
    )
    
    
    9,938
    
    
    
    9,061(Decrease) increase in accrued interest payable
    
    
    (2,054
    )
    
    
    4,048
    
    
    
    1,004Minority Interest
    
    
    (1,283
    )
    
    
    
    
    
    
    (Decrease) increase in other liabilities
    
    
    (4,235
    )
    
    
    3,614
    
    
    
    3,807Net cash provided by operating activities
    
    
    3,844
    
    
    
    29,736
    
    
    
    22,224Cash flows from investing activitiesProceeds from calls and maturities of investment securities
held to maturity
    
    
    115,024
    
    
    
    38
    
    
    
    46,685Purchases of investment securities held to maturity
    
    
    (2,500
    )
    
    
    
    
    
    
    (90,025
    )Proceeds from calls/maturities of investment securities
available for sale
    
    
    105,041
    
    
    
    40,408
    
    
    
    38,066Proceeds from sales of investment securities available for sale
    
    
    20,773
    
    
    
    4,613
    
    
    
    13,897Purchase of investment securities available for sale
    
    
    (194,839
    )
    
    
    (19,363
    )
    
    
    (25,137
    )(Purchase) redemption of Federal Home Loan Bank stock
    
    
    (2,186
    )
    
    
    5,797
    
    
    
    (5,973
    )Net increase in loans
    
    
    (57,524
    )
    
    
    (57,404
    )
    
    
    (93,509
    )Proceeds from sale of OREO
    
    
    2,174
    
    
    
    6,376
    
    
    
    9,137Purchase of premises and equipment
    
    
    (728
    )
    
    
    (848
    )
    
    
    (900
    )Net proceeds from sale of premises of real estate owned via equity
investments
    
    
    19,368
    
    
    
    26,303
    
    
    
    88,171Net cash disbursed to partners in real estate owned via equity investments
    
    
    
    
    
    
    
    
    
    
    (22,068
    )Distributions from real estate owned via equity investments
    
    
    167
    
    
    
    645
    
    
    
    Net increase in real estate joint ventures
    
    
    (2,572
    )
    
    
    
    
    
    
    Net increase in real estate owned via equity investments
    
    
    (7,451
    )
    
    
    (7,572
    )
    
    
    (58,691
    )Net cash (used) in investing activities
    
    
    (5,253
    )
    
    
    (1,007
    )
    
    
    (100,347
    )
 68




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
 Consolidated Statements of Cash Flows
 Year ended December 31,2007
    
    
    2006
    
    
    2005(In thousands, except share data)Cash flows from financing activities:Decrease in non-interest bearing and interest bearing
demand deposits and savings accounts
    
    $
    (29,009
    )
    
    $
    (21,088
    )
    
    $
    (164,396
    )Increase (decrease) in certificates of deposit
    
    
    (60,296
    )
    
    
    183,135
    
    
    
    119,424Principal payments on mortgage
    
    
    (67
    )
    
    
    (65
    )
    
    
    (63
    )Repayments from short term borrowings
    
    
    49,000
    
    
    
    (51,500
    )
    
    
    87,000Repayments from long term borrowings
    
    
    (175
    )
    
    
    (56,413
    )
    
    
    45,000Mortgage debt incurred for real estate owned via equity investments
    
    
    
    
    
    
    
    
    
    
    65,097Repayment of mortgage debt of real estate owned via equity
investments
    
    
    (10,776
    )
    
    
    (18,014
    )
    
    
    (57,472
    )Income tax benefit on stock options
    
    
    114
    
    
    
    358
    
    
    
    Cash dividends paid
    
    
    (15,473
    )
    
    
    (14,256
    )
    
    
    (12,859
    )Cash in lieu of fractional shares
    
    
    (14
    )
    
    
    (11
    )
    
    
    (12
    )Purchase of treasury stock
    
    
    (3,760
    )
    
    
    
    
    
    
    Issuance of common stock under stock option plans
    
    
    334
    
    
    
    666
    
    
    
    190Net cash provided by (used in) financing activities
    
    $
    (70,122
    )
    
    $
    22,812
    
    
    $
    81,909Net increase (decrease) in cash and cash equivalents
    
    
    (71,531
    )
    
    
    51,541
    
    
    
    3,786Cash and cash equivalents at beginning of period
    
    
    82,436
    
    
    
    30,895
    
    
    
    27,109Cash and cash equivalents at end of period
    
    $
    10,905
    
    
    $
    82,436
    
    
    $
    30,895Supplemental DisclosureCash paid during the year for
Interest
    
    $
    50,927
    
    
    $
    42,324
    
    
    $
    30,792Income taxes
    
    $
    6,814
    
    
    $
    8,958
    
    
    $
    13,450Transfer of loans to foreclosed assets
    
    $
    1,188
    
    
    $
    1,285
    
    
    $
    5,053
   69




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    Basis of Financial Statement Presentation
    
 
 70




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
     Recent Accounting Pronouncements
     71




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
         72




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
         73




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
       Investment Securities
   74




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    Transfer of Financial Assets
    75




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   Loans and Allowance for Loan Losses
       76




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
     Other Real Estate
  Premises and Equipment
  Investments in Real Estate Joint Ventures
   77




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    Bank-Owned Life Insurance
  Income Taxes
  Per Share Information
   Stock Compensation
   78




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
     Benefit Plans
   14. Cash and Cash Equivalents
  15. Financial Instruments
   79




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   Advertising Costs
  Comprehensive Income
  Year ended December 31, 2007Tax
    
    
    Net ofBefore tax
    
    
    (benefit)
    
    
    taxamount
    
    
    expense
    
    
    amountUnrealized losses on securities:Unrealized holding gains arising during period
    
    $
    4,369
    
    
    $
    1,529
    
    
    $
    2,840Less reclassification adjustment for gains
realized in net income
    
    
    5,358
    
    
    
    1,875
    
    
    
    3,483Unrealized losses on investment securities
    
    
    (989
    )
    
    
    (346
    )
    
    
    (643
    )Unrecognized benefit obligation expense:Actuarial
gains
    
    
    333
    
    
    
    117
    
    
    
    216Less reclassification adjustment for amortization
    
    
    172
    
    
    
    60
    
    
    
    112505
    
    
    
    177
    
    
    
    328Other comprehensive loss, net
    
    $
    (484
    )
    
    $
    (169
    )
    
    $
    (315
    )
 Year ended December 31, 2006Tax
    
    
    Net ofBefore tax
    
    
    (benefit)
    
    
    taxamount
    
    
    expense
    
    
    amountUnrealized gains on securities:Unrealized holding gains arising during period
    
    $
    2,185
    
    
    $
    765
    
    
    $
    1,420Less reclassification adjustment for gains
realized in net income
    
    
    383
    
    
    
    134
    
    
    
    249Other comprehensive income, net
    
    $
    1,802
    
    
    $
    631
    
    
    $
    1,171
   80




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   Year ended December 31, 2005Tax
    
    
    Net ofBefore tax
    
    
    (benefit)
    
    
    taxamount
    
    
    expense
    
    
    amountUnrealized losses on securities:Unrealized 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
    )
  2007
    
    
    2006
    
    
    2005Unrecognized benefit obligation
    
    $
    (1,267
    )
    
    $
    (2,504
    )
    
    $
    Unrealized
(losses) gains on AFS investments
    
    
    (643
    )
    
    
    231
    
    
    
    (940
    )Adjustment to net periodic pension cost
    
    
    328
    
    
    
    
    
    
    
    Accumulated other comprehensive loss
    
    $
    (1,582
    )
    
    $
    (2,273
    )
    
    $
    (940
    )
 Reclassifications
   81




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
     Variable Interest Entities (VIE)
 Real estate owned via equity investments
     82




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
        83




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
       Trust Preferred Securities
  
 84




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    Interest Rate Swaps
     December 31,(in thousands)
    
    2007
    
    2006Notional amounts
    
    $
    60,502
    
    
    $
    60,588Weighted average pay rate
    
    
    5.53
    %
    
    
    5.52
    %Weighted average receive rate
    
    
    4.75
    %
    
    
    4.58
    %Weighted average maturity (years)
    
    
    3.6
    
    
    
    4.6Fair value relating to interest
rate swaps
    
    $
    336
    
    
    $
    (1,074
    )
  85




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
      Restrictions on Cash and Amounts Due From Banks
  Federal Home Loan Bank Stock
  Significant Concentration of Credit Risk
   86




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
         87




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    Community
    
    
    Tax Lien
    
    
    Equity(in thousands)
    
    Banking
    
    
    Operation
    
    
    Investment
    
    
    ConsolidatedDecember 31, 2007Total assets
    
    $
    1,192,553
    
    
    $
    63,211
    
    
    $
    22,711
    
    
    $
    1,278,475Total deposits
    
    
    770,152
    
    
    
    
    
    
    
    
    
    
    
    770,152Interest income
    
    $
    81,034
    
    
    $
    5,702
    
    
    $
    
    
    
    $
    86,736Interest expense
    
    
    44,961
    
    
    
    3,289
    
    
    
    623
    
    
    
    48,873Net interest income (loss)
    
    
    36,073
    
    
    
    2,413
    
    
    
    (623
    )
    
    
    37,863Provision for loan losses
    
    
    12,876
    
    
    
    150
    
    
    
    
    
    
    
    13,026Total non-interest income
    
    
    9,005
    
    
    
    1,069
    
    
    
    2,814
    
    
    
    12,888Total non-interest expense
    
    
    22,371
    
    
    
    1,644
    
    
    
    1,590
    
    
    
    25,605Impairment-real estate joint venture
    
    
    5,927
    
    
    
    
    
    
    
    
    
    
    
    5,927Impairment-real estate owned via equity investment
    
    
    
    
    
    
    
    
    
    
    8,500
    
    
    
    8,500Minority interest
    
    
    34
    
    
    
    173
    
    
    
    (1,510
    )
    
    
    (1,303
    )Income tax expense (benefit)
    
    
    132
    
    
    
    536
    
    
    
    (2,236
    )
    
    
    (1,568
    )Net income (loss)
    
    $
    3,738
    
    
    $
    979
    
    
    $
    (4,153
    )
    
    $
    564December 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 (loss)
    
    
    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
    
    
    (178
    )
    
    
    111
    
    
    
    634
    
    
    
    567Income tax expense
    
    
    9,337
    
    
    
    230
    
    
    
    448
    
    
    
    10,015Net income
    
    $
    20,570
    
    
    $
    167
    
    
    $
    831
    
    
    $
    21,568
  88




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   Community
    
    
    Tax Lien
    
    
    Equity(in thousands)
    
    Banking
    
    
    Operation
    
    
    Investment
    
    
    ConsolidatedDecember 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 (loss)
    
    
    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
    
    
    (41
    )
    
    
    145
    
    
    
    (36
    )
    
    
    68Income tax expense
    
    
    5,818
    
    
    
    297
    
    
    
    6,522
    
    
    
    12,637Net income
    
    $
    19,723
    
    
    $
    217
    
    
    $
    12,113
    
    
    $
    32,053
    89




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    2007Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    Fair
    
    
    Carryingcost
    
    
    gains
    
    
    losses
    
    
    value
    
    
    valueInvestment securities held to maturityMortgage backed securities
    
    $
    105
    
    
    $
    
    
    
    $
    
    
    
    $
    105
    
    
    $
    105U.S.
government agencies
    
    
    80,000
    
    
    
    13
    
    
    
    (234
    )
    
    
    79,779
    
    
    
    80,000Other debt securities
    
    
    62,800
    
    
    
    1,512
    
    
    
    (740
    )
    
    
    63,572
    
    
    
    62,800Total held to maturity
    
    $
    142,905
    
    
    $
    1,525
    
    
    $
    (974
    )
    
    $
    143,456
    
    
    $
    142,905Investment securities available for saleMortgage backed securities
    
    $
    33,090
    
    
    $
    383
    
    
    $
    (188
    )
    
    
    33,285
    
    
    $
    33,285U.S. government agencies
    
    
    104,982
    
    
    
    51
    
    
    
    (153
    )
    
    
    104,880
    
    
    
    104,880Preferred and common stock
    
    
    20,696
    
    
    
    17
    
    
    
    (821
    )
    
    
    19,892
    
    
    
    19,892CMOs
    
    
    82,316
    
    
    
    965
    
    
    
    (155
    )
    
    
    83,126
    
    
    
    83,126Corporate bonds
    
    
    86,205
    
    
    
    464
    
    
    
    (1,241
    )
    
    
    85,428
    
    
    
    85,428Trust preferred securities
    
    
    44,118
    
    
    
    2,151
    
    
    
    (2,168
    )
    
    
    44,100
    
    
    
    44,100Other securities
    
    
    4,557
    
    
    
    60
    
    
    
    
    
    
    
    4,617
    
    
    
    4,617Total available for Sale
    
    $
    375,964
    
    
    $
    4,091
    
    
    $
    (4,726
    )
    
    $
    375,328
    
    
    $
    375,328
   90




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   2006Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    Fair
    
    
    Carryingcost
    
    
    gains
    
    
    losses
    
    
    value
    
    
    valueInvestment securities held to maturityMortgage backed securities
    
    $
    129
    
    
    $
    
    
    
    $
    
    
    
    $
    129
    
    
    $
    129U.S.
government agencies
    
    
    195,000
    
    
    
    
    
    
    
    (2,820
    )
    
    
    192,180
    
    
    
    195,000Other debt securities
    
    
    60,300
    
    
    
    2,065
    
    
    
    (425
    )
    
    
    61,940
    
    
    
    60,300$
    255,429
    
    
    $
    2,065
    
    
    $
    (3,245
    )
    
    $
    254,249
    
    
    $
    255,429Investment securities available for saleMortgage backed securities
    
    $
    27,630
    
    
    $
    
    
    
    $
    (709
    )
    
    $
    26,921
    
    
    $
    26,921U.S. government agencies
    
    
    104,980
    
    
    
    
    
    
    
    (3,408
    )
    
    
    101,572
    
    
    
    101,572Preferred and common stock
    
    
    15,961
    
    
    
    1,703
    
    
    
    (62
    )
    
    
    17,602
    
    
    
    17,602CMOs
    
    
    20,071
    
    
    
    10
    
    
    
    (295
    )
    
    
    19,786
    
    
    
    19,786Corporate bonds
    
    
    81,247
    
    
    
    174
    
    
    
    (382
    )
    
    
    81,039
    
    
    
    81,039Trust preferred securities
    
    
    38,657
    
    
    
    2,828
    
    
    
    
    
    
    
    41,485
    
    
    
    41,485Other securities
    
    
    13,135
    
    
    
    496
    
    
    
    
    
    
    
    13,631
    
    
    
    13,631Total available for Sale
    
    $
    301,681
    
    
    $
    5,211
    
    
    $
    (4,856
    )
    
    $
    302,036
    
    
    $
    302,036
   91




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    2007Held to maturity
    
    
    Available for SaleAmortized
    
    
    Fair
    
    
    Amortized
    
    
    Faircost
    
    
    value
    
    
    cost
    
    
    valueWithin 1 year
    
    $
    50,275
    
    
    $
    50,051
    
    
    $
    24,918
    
    
    $
    24,465After 1 but within 5 years
    
    
    92,532
    
    
    
    93,307
    
    
    
    113,972
    
    
    
    113,422After 5 but within 10 years
    
    
    38
    
    
    
    38
    
    
    
    22,519
    
    
    
    20,507After 10 years
    
    
    60
    
    
    
    60
    
    
    
    189,234
    
    
    
    192,418No contractual maturity
    
    
    
    
    
    
    
    
    
    
    25,321
    
    
    
    24,516$
    142,905
    
    
    $
    143,456
    
    
    $
    375,964
    
    
    $
    375,328
     92




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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
    
    
    lossesInvestment securities held to maturityU.S. government Agencies
    
    $
    
    
    
    $
    
    
    
    $
    69,767
    
    
    $
    (234
    )
    
    $
    69,767
    
    
    $
    (234
    )Other debt securities
    
    
    9,260
    
    
    
    (740
    )
    
    
    
    
    
    
    
    
    
    
    9,260
    
    
    
    (740
    )Total held to maturity
    
    $
    9,260
    
    
    $
    (740
    )
    
    $
    69,767
    
    
    $
    (234
    )
    
    $
    79,027
    
    
    $
    (974
    )Investment securities available for saleU.S. government agencies
    
    
    
    
    
    
    
    
    
    
    59,847
    
    
    
    (153
    )
    
    
    59,847
    
    
    
    (153
    )Mortgage backed securities
    
    $
    
    
    
    $
    
    
    
    $
    22,987
    
    
    $
    (188
    )
    
    $
    22,987
    
    
    $
    (188
    )Preferred and common stock
    
    
    19,048
    
    
    
    (699
    )
    
    
    786
    
    
    
    (122
    )
    
    
    19,834
    
    
    
    (821
    )CMOs
    
    
    3,187
    
    
    
    (1
    )
    
    
    16,218
    
    
    
    (154
    )
    
    
    19,405
    
    
    
    (155
    )Corporate bonds
    
    
    33,226
    
    
    
    (1,135
    )
    
    
    7,406
    
    
    
    (106
    )
    
    
    40,632
    
    
    
    (1,241
    )Trust Preferreds
    
    
    5,096
    
    
    
    (2,168
    )
    
    
    
    
    
    
    
    
    
    
    5,096
    
    
    
    (2,168
    )Other
    
    
    1,316
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,316
    
    
    
    Total Available for Sale
    
    $
    61,873
    
    
    $
    (4,003
    )
    
    $
    107,244
    
    
    $
    (723
    )
    
    $
    169,117
    
    
    $
    (4,726
    )Total temporarily impaired securities
    
    $
    71,133
    
    
    $
    (4,743
    )
    
    $
    177,011
    
    
    $
    (957
    )
    
    $
    248,144
    
    
    $
    (5,700
    )
   93




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    Less than 12 months
    
    
    12 months or longer
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized2006
    
    value
    
    
    losses
    
    
    value
    
    
    losses
    
    
    value
    
    
    lossesInvestment securities held to maturityU.S. government Agencies
    
    $
    
    
    
    $
    
    
    
    $
    192,180
    
    
    $
    (2,820
    )
    
    $
    192,180
    
    
    $
    (2,820
    )Other debt securities
    
    
    24,575
    
    
    
    (425
    )
    
    
    
    
    
    
    
    
    
    
    24,575
    
    
    
    (425
    )Total held to maturity
    
    $
    24,575
    
    
    $
    (425
    )
    
    $
    192,180
    
    
    $
    (2,820
    )
    
    $
    216,755
    
    
    $
    (3,245
    )Investment securities available for saleU.S. government agencies
    
    $
    
    
    
    $
    
    
    
    $
    101,572
    
    
    
    (3,408
    )
    
    $
    101,572
    
    
    $
    (3,408
    )Mortgage backed securities
    
    
    11,962
    
    
    
    (274
    )
    
    
    14,901
    
    
    
    (435
    )
    
    
    26,863
    
    
    
    (709
    )Preferred and common stock
    
    
    830
    
    
    
    (62
    )
    
    
    
    
    
    
    
    
    
    
    830
    
    
    
    (62
    )CMOs
    
    
    
    
    
    
    
    
    
    
    18,900
    
    
    
    (295
    )
    
    
    18,900
    
    
    
    (295
    )Corporate bonds
    
    
    10,538
    
    
    
    (9
    )
    
    
    37,032
    
    
    
    (373
    )
    
    
    47,570
    
    
    
    (382
    )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
    )
   94




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    Loans and Lease Financing Receivables
 As of December 31,(in thousands)2007
    
    
    2006Loans secured by real estate:Construction and land development
    
    $
    173,192
    
    
    $
    172,745Construction and land development  mezzanine
    
    
    4,904
    
    
    
    5,177Secured by 1-4 family residential properties:Revolving, open-end loans secured by 1-4 family residential
properties and extended under lines of credit
    
    
    2,094
    
    
    
    4,585All other loans secured by 1-4 family residential properties:Secured by first liens
    
    
    32,485
    
    
    
    33,868Secured by junior liens
    
    
    7,707
    
    
    
    4,885Secured by multi family (5 or more) residential properties
    
    
    6,887
    
    
    
    3,953Secured by multi family (5 or more) res. Properties  mezzanine
    
    
    275
    
    
    
    2,129Secured by non-farm nonresidential properties
    
    
    262,550
    
    
    
    268,162Secured by non-farm nonresidential properties  mezzanine
    
    
    10,778
    
    
    
    8,283Tax certificates
    
    
    46,090
    
    
    
    32,235Commercial and industrial loans
    
    
    77,793
    
    
    
    43,019Loans to individuals for household, family, and other personal
expenditures
    
    
    1,157
    
    
    
    1,088Obligations of state and political subdivisions in the U.S.
    
    
    63
    
    
    
    78Lease financing receivables (net of unearned income)
    
    
    19,778
    
    
    
    13,404All other loans
    
    
    267
    
    
    
    167Less: Net deferred loan fees
    
    
    1,545
    
    
    
    1,564Total loans and leases, net of unearned income
    
    $
    644,475
    
    
    $
    592,214
 .
  (Continued)
 95




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
           96




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    Year ended December 31,2007
    
    
    2006
    
    
    2005Balance at the beginning of the year
    
    $
    11,455
    
    
    $
    10,276
    
    
    $
    12,519Charge-offs
    
    
    (5,466
    )
    
    
    (745
    )
    
    
    (2,335
    )Recoveries
    
    
    267
    
    
    
    121
    
    
    
    91Net charge-offs
    
    
    (5,199
    )
    
    
    (624
    )
    
    
    (2,244
    )Provision for loan losses and leases
    
    
    13,026
    
    
    
    1,803
    
    
    
    1Balance at the end of year
    
    $
    19,282
    
    
    $
    11,455
    
    
    $
    10,276
   EstimatedUsefulLives
    
    
    2007
    
    
    2006Land
    
    
    
    
    
    $
    2,396
    
    
    $
    2,396Buildings and leasehold improvements
    
    5 - 31.5 years
    
    
    
    8,149
    
    
    
    7,854Furniture, fixtures and equipment
    
    3 - 7 years
    
    
    
    6,198
    
    
    
    5,77216,743
    
    
    
    16,022Less accumulated depreciation and amortization
    
    
    
    
    
    
    9,302
    
    
    
    8,256$
    7,441
    
    
    $
    7,766
  97




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    2007
    
    
    2006Demand
    
    $
    59,573
    
    
    $
    61,002NOW
    
    
    52,766
    
    
    
    52,585Money Market
    
    
    197,678
    
    
    
    223,606Savings
    
    
    15,352
    
    
    
    17,185Time, $100 and over
    
    
    265,250
    
    
    
    285,484Other time
    
    
    179,533
    
    
    
    219,595$
    770,152
    
    
    $
    859,457
  2008
    
    $
    298,5822009
    
    
    33,1952010
    
    
    74,7542011
    
    
    33,3122012
    
    
    1,903Thereafter
    
    
    3,037$
    444,783
  98




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   Advances from the Federal Home Loan Bank
    2008
    
    
    4.36
    %
    
    $
    102,0002009
    
    
    5.58
    %
    
    
    15,0002010
    
    
    5.30
    %
    
    
    92,5002011
    
    
    0.00
    %
    
    
    2012
    
    
    4.32
    %
    
    
    30,000Thereafter
    
    
    2.64
    %
    
    
    50,000$
    289,500
 Other borrowings
   Unsecured federal funds advances
   99




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   Subordinated Debentures
     2008
    
    $
    990,0432009
    
    
    779,0362010
    
    
    509,1612011
    
    
    199,2952012
    
    
    45,841Thereafter
    
    
    $
    2,523,376
   100




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
        2007
    
    
    2006
    
    
    2005Income tax expense (benefit)Current
    
    $
    2,620
    
    
    $
    11,952
    
    
    $
    12,448Deferred
    
    
    (4,188
    )
    
    
    (1,937
    )
    
    
    189$
    (1,568
    )
    
    $
    10,015
    
    
    $
    12,637
   101




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   Computed tax expense at statutory rate
    
    $
    (351
    )
    
    $
    11,054
    
    
    $
    15,642Tax-exempt income
    
    
    (229
    )
    
    
    (257
    )
    
    
    (361
    )Low-income housing tax credit
    
    
    
    
    
    
    (544
    )
    
    
    (545
    )Nondeductible expense
    
    
    78
    
    
    
    65
    
    
    
    Bank Owned Life insurance
    
    
    (875
    )
    
    
    (847
    )
    
    
    (845
    )Insurance
Premium Cap I
    
    
    (1,118
    )
    
    
    
    
    
    
    Reduction of valuation allowance
    
    
    
    
    
    
    
    
    
    
    (1,761
    )Other, net
    
    
    927
    
    
    
    544
    
    
    
    507Applicable income tax expense (benefit)
    
    $
    (1,568
    )
    
    $
    10,015
    
    
    $
    12,637
   102




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    2007
    
    
    2006Deferred tax assetsAllowance for loan losses
    
    $
    6,749
    
    
    $
    4,009Asset valuation reserves
    
    
    431
    
    
    
    431Goodwill from Knoblauch State Bank
    
    
    
    
    
    
    270Investment in partnerships
    
    
    1,957
    
    
    
    511Accrued pension liability
    
    
    3,239
    
    
    
    3,546Accrued stock-based compensation
    
    
    486
    
    
    
    256Net operating loss carryovers from Knoblauch State Bank
    
    
    1,409
    
    
    
    1,585Unrealized losses on investment securities available for sale
    
    
    222
    
    
    
    Other
    
    
    
    
    
    
    2914,493
    
    
    
    10,637Deferred tax liabilitiesUnrealized gains on investment securities available for sale
    
    
    
    
    
    
    124Penalties on delinquent tax certificates
    
    
    183
    
    
    
    156Accretion on investments
    
    
    369
    
    
    
    206Prepaid Deductions
    
    
    170
    
    
    
    Other
    
    
    1
    
    
    
    21723
    
    
    
    507Net deferred tax asset, included in other assets
    
    $
    13,770
    
    
    $
    10,130
   103




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
        104




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    2007Average sharesIncome
    
    
    shares
    
    
    Per share(numerator)
    
    
    (denominator)
    
    
    AmountBasic EPS
    
    $
    564
    
    
    
    13,433
    
    
    $
    0.04Income available to common shareholdersEffect of dilutive securities:
    
    
    
    
    
    
    14
    
    
    
    0.00Stock optionsDiluted EPSIncome available to common shareholders plus
    
    $
    564
    
    
    
    13,447
    
    
    $
    0.04
    105




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   2006Average sharesIncome
    
    
    shares
    
    
    Per share(numerator)
    
    
    (denominator)
    
    
    AmountBasic EPS
    
    $
    21,568
    
    
    
    13,460
    
    
    $
    1.60Income available to common shareholdersEffect of dilutive securities:
    
    
    
    
    
    
    111
    
    
    
    (0.01
    )Stock optionsDiluted EPSIncome available to common shareholders plus
assumed exercise of options
    
    $
    21,568
    
    
    
    13,571
    
    
    $
    1.59
  2005Average sharesIncome
    
    
    shares
    
    
    Per share(numerator)
    
    
    (denominator)
    
    
    AmountBasic EPS
    
    $
    32,053
    
    
    
    13,437
    
    
    $
    2.39Income available to common shareholdersEffect of dilutive securities:
    
    
    
    
    
    
    100
    
    
    
    (0.02
    )Stock optionsDiluted EPSIncome available to common shareholders plus
assumed exercise of options
    
    $
    32,053
    
    
    
    13,537
    
    
    $
    2.37
   106




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
      Year EndedDecember 31,(in thousands)
    
    2005Net income, as reported
    
    $
    32,053Less: Stock-based compensation costs under
fair value based method for all awards, net of tax
    
    
    (682
    )Pro forma net income
    
    
    31,371Earnings per share Basic As Reported
    
    $
    2.39Pro forma
    
    
    2.33Earnings per share Diluted As Reported
    
    
    2.37Pro forma
    
    
    2.32
   107




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   (1) 2007
    
    (2)2007
    
    2006
    
    2005Dividend yield
    
    
    4.85
    %
    
    
    4.85
    %
    
    
    4.09
    %
    
    
    4.85
    %Expected life
    
    7.5 years
    
    
    5.5 years
    
    
    7 years
    
    
    7 yearsExpected volatility
    
    
    29.68
    %
    
    
    26.35
    %
    
    
    24.47
    %
    
    
    26.64
    %Risk-free interest rate
    
    
    4.79
    %
    
    
    4.58
    %
    
    
    4.71
    %
    
    
    4.69
    %
 
 (1)
    
    Amounts represent weighted average assumption for options granted during 2007 to
employees under the Long Terrm
Incentive Plan.(2)
    
    Amounts represent weighted average assumption for options granted during 2007 to
directors under the Long Terrm
Incentive Plan.  Outside Directors Stock Option Plan
   108




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    2007
    
    
    
    
    
    
    
    
    
    2006
    
    
    
    
    
    
    
    
    
    2005Weighted
    
    Weighted
    
    
    
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    Average
    
    Average
    
    
    
    
    
    Average
    
    Average
    
    
    
    
    
    AverageExercise
    
    Remaining
    
    Intrinsic
    
    
    
    
    
    Exercise
    
    Intrinsic
    
    
    
    
    
    ExerciseOptions
    
    Price
    
    Term (yrs)
    
    Value (1)
    
    Options
    
    Price
    
    Value (1)
    
    Options
    
    PriceOptions outstanding at
beginning of year
    
    
    102,552
    
    
    $
    18.41
    
    
    
    
    
    
    
    
    
    
    
    95,621
    
    
    $
    17.65
    
    
    
    
    
    
    
    84,509
    
    
    $
    16.41Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,325
    
    
    
    21.78
    
    
    
    
    
    
    
    17,672
    
    
    
    21.70Exercised
    
    
    (2,258
    )
    
    
    9.13
    
    
    
    
    
    
    
    
    
    
    
    (10,394
    )
    
    
    17.96
    
    
    
    
    
    
    
    (6,560
    )
    
    
    9.79Forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options outstanding at
the end of the year
    
    
    100,294
    
    
    $
    18.62
    
    
    
    5.3
    
    
    $
    
    
    
    
    102,552
    
    
    $
    18.41
    
    
    $
    807,084
    
    
    
    95,621
    
    
    $
    17.65Options exercisable at
the end of the year
    
    
    100,294
    
    
    $
    18.62
    
    
    
    5.3
    
    
    $
    
    
    
    
    85,227
    
    
    $
    17.72
    
    
    $
    729,351
    
    
    
    
    
    
    $
    18.62Weighted-average fair value
of options
granted during the year
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    4.91
    
    
    
    
    
    
    
    
    
    
    $
    4.27
 
 (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, 2007. This amount changes based on the
changes in the market value in Royal Bancshares stock.  Options outstandingWeighted
    
    WeightedAverage
    
    AverageRange of
    
    Number
    
    Exercise
    
    Remainingexercise prices
    
    Outstanding
    
    price
    
    Term (yrs)$10.57
    
    
    4,178
    
    
    $
    10.57
    
    
    
    1.3$11.72 - $17.91
    
    
    31,321
    
    
    $
    14.42
    
    
    
    3.0$18.27 - $22.38
    
    
    64,795
    
    
    $
    21.14
    
    
    
    6.9100,294
    
    
    $
    18.62
    
    
    
    5.3
   109




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   Employee Stock Option and Appreciation Right Plan
   2007
    
    
    
    
    
    2006
    
    
    
    
    
    2005Weighted
    
    Weighted
    
    
    
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    Average
    
    Average
    
    
    
    
    
    Average
    
    Average
    
    
    
    
    
    AverageExercise
    
    Remaining
    
    Intrinsic
    
    
    
    
    
    Exercise
    
    Intrinsic
    
    
    
    
    
    ExerciseOptions
    
    Price
    
    Term (yrs)
    
    Value (1)
    
    Options
    
    Price
    
    Value (1)
    
    Options
    
    PriceOptions outstanding at
beginning of year
    
    
    853,804
    
    
    $
    19.47
    
    
    
    
    
    
    
    
    
    
    
    774,029
    
    
    $
    18.68
    
    
    
    
    
    
    
    635,679
    
    
    $
    17.90Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    157,500
    
    
    
    21.78
    
    
    
    
    
    
    
    160,650
    
    
    
    21.46Exercised
    
    
    (24,718
    )
    
    
    11.83
    
    
    
    
    
    
    
    
    
    
    
    (46,877
    )
    
    
    14.14
    
    
    
    
    
    
    
    (5,668
    )
    
    
    13.83Forfeited
    
    
    (29,255
    )
    
    
    21.60
    
    
    
    
    
    
    
    
    
    
    
    (30,848
    )
    
    
    22.01
    
    
    
    
    
    
    
    (16,632
    )
    
    
    21.71Options outstanding at
the end of the year
    
    
    799,831
    
    
    $
    19.63
    
    
    
    5.9
    
    
    $
    
    
    
    
    853,804
    
    
    $
    19.48
    
    
    $
    5,806,867
    
    
    
    774,029
    
    
    $
    18.68Options exercisable at
the end of the year
    
    
    479,441
    
    
    $
    18.57
    
    
    
    4.9
    
    
    $
    
    
    
    
    390,819
    
    
    $
    17.04
    
    
    $
    3,610,239
    
    
    
    
    
    
    $
    Weighted-average fair
value of options
granted during the year
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    4.91
    
    
    
    
    
    
    
    
    
    
    $
    4.27
 
 (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, 2007. This amount changes based on the
changes in the market value in Royal Bancshares stock.  110




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    Options outstanding
    
    Options exercisableWeighted
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    Average
    
    
    
    
    
    AverageRange of
    
    Number
    
    Exercise
    
    Remainin
    
    Number
    
    Exerciseexercise prices
    
    Outstanding
    
    Price
    
    Term (yrs)
    
    Outstanding
    
    Price$10.57
    
    
    16,094
    
    
    $
    10.57
    
    
    
    1.3
    
    
    
    16,094
    
    
    $
    10.57$11.72 - $17.91
    
    
    191,292
    
    
    $
    14.68
    
    
    
    3.5
    
    
    
    191,292
    
    
    $
    14.68$18.27 - $22.38
    
    
    592,445
    
    
    $
    21.50
    
    
    
    6.9
    
    
    
    272,055
    
    
    $
    21.17799,831
    
    
    $
    19.63
    
    
    
    5.9
    
    
    
    479,441
    
    
    $
    18.57
  Number
    
    
    Weighted averageof shares
    
    
    grant date fair valueNon-vested options December 31, 2006
    
    
    462,985
    
    
    $
    21.35Granted
    
    
    
    
    
    
    Vested
    
    
    142,595
    
    
    
    21.68Non-vested options December 31, 2007
    
    
    320,390
    
    
    $
    21.20
   111




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   Long Term Incentive Plan
    2007Weighted
    
    
    WeightedAverage
    
    
    AverageExercise
    
    
    RemainingOptions
    
    
    Price
    
    
    Term (yrs)Options outstanding at beginning of year
    
    
    
    
    
    $
    
    
    
    
    Granted
    
    
    76,940
    
    
    
    20.08Exercised
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Options outstanding at the end of the year
    
    
    76,940
    
    
    $
    20.08
    
    
    
    9.6Options exercisable at the end of the year
    
    
    
    
    
    $
    
    
    
    
    Weighted-average fair value of options
granted during the year
    
    
    
    
    
    $
    4.12
 112




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
         2007WeightedAverageExerciseOptions
    
    
    PriceUnvested at the beginning of year
    
    
    
    
    
    $
    Granted
    
    
    18,682
    
    
    
    11.43Exercised
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Unvested at the end of the year
    
    
    18,682
    
    
    $
    11.43
  113




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
      114




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    2007
    
    
    2006Change in benefit obligationBenefit obligation at beginning of year
    
    $
    8,541
    
    
    $
    6,244Service cost
    
    
    513
    
    
    
    773Interest cost
    
    
    491
    
    
    
    347Benefits paid
    
    
    (56
    )
    
    
    (16
    )Actuarial loss (gain)
    
    
    (333
    )
    
    
    1,193Benefits obligation at end of year
    
    $
    9,156
    
    
    $
    8,541Unrecognized prior service cost
    
    
    721
    
    
    
    815Unrecognized actuarial loss
    
    
    1,077
    
    
    
    3,036$
    1,798
    
    
    $
    3,851
  December 31,2007
    
    2006Discount rate
    
    
    5.75
    %
    
    
    5.41
    %Rate of compensation increase
    
    
    4.00
    %
    
    
    4.00
    %
  2007
    
    
    2006
    
    
    2005Service cost
    
    $
    513
    
    
    $
    773
    
    
    $
    1,477Interest cost
    
    
    491
    
    
    
    347
    
    
    
    248Amortization prior service cost
    
    
    94
    
    
    
    
    
    
    
    Amortization prior service gain
    
    
    80
    
    
    
    
    
    
    
    Net periodic benefit cost
    
    $
    1,178
    
    
    $
    1,120
    
    
    $
    1,725
  115




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   Non Qualified(amounts in thousands)
    
    Pension Plans (1)2008
    
    $
    562009
    
    
    3212010
    
    
    3572011
    
    
    4262012
    
    
    465Thereafter
    
    
    4177$
    5,802
 
  Defined Contribution Plan
     116




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
     December 31,2007
    
    2006Financial instruments whose contract amounts represent credit riskOpen-end lines of credit
    
    $
    135,166
    
    
    $
    103,169Commitments to extend credit
    
    
    27,006
    
    
    
    28,543Standby letters of credit and financial guarantees written
    
    
    6,886
    
    
    
    4,862Financial instruments whose notional amount exceed the amount
of credit risk
    
    
    Interest rate swap agreements
    
    
    60,502
    
    
    $
    60,588
      117




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
       2007
    
    2006Estimated
    
    Carrying
    
    Estimated
    
    Carryingfair value
    
    amount
    
    fair value
    
    amountCash and cash equivalents
    
    $
    10,905
    
    
    $
    10,905
    
    
    $
    82,436
    
    
    $
    82,436Investment securities held to maturity
    
    
    143,456
    
    
    
    142,905
    
    
    
    254,249
    
    
    
    255,429Investment securities available for sale
    
    
    375,328
    
    
    
    375,328
    
    
    
    302,036
    
    
    
    302,036
  2007
    
    2006Estimated
    
    Carrying
    
    Estimated
    
    Carryingfair value
    
    amount
    
    fair value
    
    amountDeposits with stated maturities
    
    $
    446,911
    
    
    $
    444,783
    
    
    $
    513,335
    
    
    $
    505,080Borrowings
    
    
    300,402
    
    
    
    294,911
    
    
    
    245,648
    
    
    
    246,087Subordinated debt
    
    
    25,774
    
    
    
    25,774
    
    
    
    25,774
    
    
    
    25,774Obligations from equity investments
    
    
    18,566
    
    
    
    18,566
    
    
    
    29,342
    
    
    
    29,342
  118




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    2007
    
    2006Estimated
    
    Carrying
    
    Estimated
    
    Carryingfair value
    
    amount
    
    fair value
    
    amountCommitments to extend credit
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Standby letters of credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
  2007
    
    2006Estimated
    
    Carrying
    
    Estimated
    
    Carryingfair value
    
    amount
    
    fair value
    
    amountLoans, net
    
    $
    624,290
    
    
    $
    625,193
    
    
    $
    583,504
    
    
    $
    580,759
     119




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
     Payment of Dividends
   Capital Ratios
    120




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
      2007To be wellcapitalized underFor capital
    
    prompt correctiveActual
    
    adequacy purposes
    
    action provisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioTotal capital (to risk-
weighted assets)Company (consolidated)
    
    $
    186,932
    
    
    
    18.27
    %
    
    $
    81,833
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/ARoyal Bank
    
    
    133,944
    
    
    
    14.48
    %
    
    
    74,007
    
    
    
    8.00
    %
    
    $
    92,509
    
    
    
    10.00
    %Royal Asian
    
    
    15,587
    
    
    
    21.46
    %
    
    
    5,810
    
    
    
    8.00
    %
    
    
    7,262
    
    
    
    10.00
    %Tier I Capital (to risk-
weighted assets)Company (consolidated)
    
    $
    174,065
    
    
    
    17.02
    %
    
    $
    40,916
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/ARoyal Bank
    
    
    122,297
    
    
    
    13.22
    %
    
    
    37,004
    
    
    
    4.00
    %
    
    
    55,505
    
    
    
    6.00
    %Royal Asian
    
    
    14,679
    
    
    
    20.21
    %
    
    
    2,905
    
    
    
    4.00
    %
    
    
    4,357
    
    
    
    6.00
    %Tier I Capital (to average
assets, leverage)Company (consolidated)
    
    $
    174,065
    
    
    
    13.57
    %
    
    $
    38,493
    
    
    
    3.00
    %
    
    
    N/A
    
    
    
    N/ARoyal Bank
    
    
    122,297
    
    
    
    10.23
    %
    
    
    35,882
    
    
    
    3.00
    %
    
    
    59,803
    
    
    
    5.00
    %Royal Asian
    
    
    14,679
    
    
    
    15.68
    %
    
    
    2,809
    
    
    
    3.00
    %
    
    
    4,682
    
    
    
    5.00
    %
  121




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   2006To be wellcapitalized underFor capital
    
    prompt correctiveActual
    
    adequacy purposes
    
    action provisionAmount
    
    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
    
    
    
    10.00
    %Tier 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
    
    
    
    6.00
    %Royal Asian
    
    
    14,727
    
    
    
    24.04
    %
    
    
    2,450
    
    
    
    4.00
    %
    
    
    3,676
    
    
    
    6.00
    %Tier 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
    
    
    
    5.00
    %Royal Asian
    
    
    14,727
    
    
    
    23.03
    %
    
    
    1,918
    
    
    
    3.00
    %
    
    
    3,197
    
    
    
    5.00
    %
   122




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    CONDENSED BALANCE SHEETS
 December 31,2007
    
    
    2006AssetsCash
    
    $
    4,221
    
    
    $
    7,932Investment in Non bank subsidiaries  at equity
    
    
    48,644
    
    
    
    43,109Investment in Royal Bank America  at equity
    
    
    96,970
    
    
    
    113,814Investment in Royal Asian  at equity
    
    
    14,863
    
    
    
    14,804Loans, net
    
    
    6,489
    
    
    
    5,899Other assets
    
    
    954
    
    
    
    3,470$
    172,141
    
    
    $
    189,028Subordinated debentures
    
    $
    25,774
    
    
    $
    25,774Stockholders equity
    
    
    146,367
    
    
    
    163,254$
    172,141
    
    
    $
    189,028
 123




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   CONDENSED STATEMENTS OF INCOME
 Year ended December 31,2007
    
    
    2006
    
    
    2005IncomeDividends from subsidiary banks
    
    $
    15,474
    
    
    $
    14,267
    
    
    $
    12,859Other income
    
    
    98
    
    
    
    826
    
    
    
    173Total Income
    
    
    15,572
    
    
    
    15,093
    
    
    
    13,032ExpensesOther expenses
    
    
    220
    
    
    
    125
    
    
    
    121Interest on subordinated debentures
    
    
    1,736
    
    
    
    1,685
    
    
    
    1,465Total Expenses
    
    
    1,956
    
    
    
    1,810
    
    
    
    1,586Income before income taxes and equity in undistributed net loss
    
    
    13,616
    
    
    
    13,283
    
    
    
    11,446Income tax expense (benefit)
    
    
    (43
    )
    
    
    245
    
    
    
    18Equity in undistributed net (loss) earnings
    
    
    (13,095
    )
    
    
    8,530
    
    
    
    20,625Net Income
    
    $
    564
    
    
    $
    21,568
    
    
    $
    32,053
  124




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   CONDENSED STATEMENTS OF CASH FLOWS
 Year ended December 31,2007
    
    
    2006
    
    
    2005Cash flows from operating activitiesNet income
    
    $
    564
    
    
    $
    21,568
    
    
    $
    32,053Adjustments to reconcile net income to net cash
provided by operating activities:Undistributed
(losses) earnings from subsidiaries
    
    
    14,831
    
    
    
    (6,845
    )
    
    
    (19,160
    )Operating expenses
    
    
    220
    
    
    
    125
    
    
    
    121Non-cash income tax (benefit) expense
    
    
    (43
    )
    
    
    245
    
    
    
    18Net cash provided by operating activities
    
    
    15,572
    
    
    
    15,093
    
    
    
    13,032Cash flows from investing activitiesInvestment in Royal Asian
    
    
    
    
    
    
    (15,000
    )
    
    
    Net cash (used) in investing activities
    
    
    
    
    
    
    (15,000
    )
    
    
    Cash flows from financing activities:Loan Funding
    
    
    (590
    )
    
    
    (1,217
    )
    
    
    (4,695
    )Cash dividends paid
    
    
    (15,473
    )
    
    
    (14,256
    )
    
    
    (12,859
    )Issuance of common stock under stock option plan
    
    
    334
    
    
    
    666
    
    
    
    190Purchase of treasury stock
    
    
    (3,760
    )
    
    
    
    
    
    
    Income tax benefit on stock options
    
    
    114
    
    
    
    358
    
    
    
    Other, net
    
    
    92
    
    
    
    (1,831
    )
    
    
    (1,875
    )Net cash used in financing activities
    
    
    (19,283
    )
    
    
    (16,280
    )
    
    
    (19,239
    )Net decrease in cash and cash equivalents
    
    
    (3,711
    )
    
    
    (16,187
    )
    
    
    (6,207
    )Cash and cash equivalents at beginning of period
    
    
    7,932
    
    
    
    24,119
    
    
    
    30,326Cash and cash equivalents at end of period
    
    $
    4,221
    
    
    $
    7,932
    
    
    $
    24,119
  125




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    Summary of Quarterly Results
 2007Fourth
    
    
    Third
    
    
    Second
    
    
    FirstQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterInterest income
    
    $
    22,327
    
    
    $
    22,348
    
    
    $
    22,601
    
    
    $
    19,460Net interest income
    
    
    10,244
    
    
    
    10,098
    
    
    
    10,019
    
    
    
    7,502Provision for loan losses
    
    
    5,759
    
    
    
    6,896
    
    
    
    159
    
    
    
    212Net interest income after provision
    
    
    4,485
    
    
    
    3,202
    
    
    
    9,860
    
    
    
    7,290Non interest income
    
    
    5,774
    
    
    
    1,847
    
    
    
    2,714
    
    
    
    2,553Non interest expenses
    
    
    6,468
    
    
    
    18,857
    
    
    
    6,829
    
    
    
    6,575Income before income taxes
    
    
    3,791
    
    
    
    (13,808
    )
    
    
    5,745
    
    
    
    3,268Net income
    
    $
    3,459
    
    
    $
    (9,180
    )
    
    $
    3,958
    
    
    $
    2,327Net income (loss) per shareBasic
    
    $
    0.27
    
    
    $
    (0.69
    )
    
    $
    0.29
    
    
    $
    0.17Diluted
    
    $
    0.27
    
    
    $
    (0.69
    )
    
    $
    0.29
    
    
    $
    0.17
 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
    
    $
    0.38
    
    
    $
    0.48
    
    
    $
    0.34
    
    
    $
    0.40Diluted
    
    $
    0.38
    
    
    $
    0.48
    
    
    $
    0.34
    
    
    $
    0.39
  126




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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
   
    
    The Company did not have adequate internal control over financial reporting to properly
account for such impaired loans and their related specific reserves as of September 30,
2007 in accordance with Statement of Financial Accounting Standards No. 114 (SFAS No. 114)
and SEC Staff Accounting Bulletin No. 102 (SAB No. 102), due primarily to documentation
deficiencies and the failure to obtain updated appraisals; and
    
    The Company did not have sufficient policies and procedures in place to properly account
for investments in real estate joint ventures in accordance to American Institute of
Certified Public Accountants Practice Bulletin 1 and for real estate partnerships in
accordance to SFAS No. 66, Accounting for Sales of Real Estate and Accounting Research
Bulletin No. 51, Consolidated Financial Statements.
    
    A lack of effective controls over the
financial statement reporting process, including controls to ensure that
footnote disclosures are complete and accurate, and timely preparation and
review of the financial statements and related footnotes.
  127




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##### Table of Contents




    
    The Company appointed a new head of its Special Assets Division. This
division is responsible for the management of impaired loans;
    
    The Company hired a Chief Credit Officer. This new position will have
primary responsibility for the credit function in connection with the
Companys lending activities;
    
    The Company engaged an independent third party consultant to assist in
the preparation of an updated allowance for loan and lease policy.
This updated policy will include policies and procedures related to
the financial reporting for impaired loans; and
    
    The Company revised its policies and procedures relating to accounting
for investments in joint ventures and real estate partnerships.
     128




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PART III.
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS OF REGISTRANT AND CORPORATE GOVERNANCE
   129




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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
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##### Table of Contents



PART IV
 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 (a.)
    1.
    Financial StatementsThe following financial statements are included by reference in Part II, Item 8 hereof.
     Report of Independent Registered Public Accounting Firm
     Consolidated Balance Sheets.
     Consolidated Statements of Income.
     Consolidated Statements of Changes in Stockholders Equity.
     Consolidated Statement of Cash Flows.
     Notes to Consolidated Financial Statements.
 2.
    
    Financial Statement SchedulesFinancial Statement Schedules are omitted because the required information is either not
applicable, not required or is shown in the respective financial statements or in the
notes thereto.
 (b.)
    .
    The following Exhibits are filed herewith or incorporated by reference as a part of this
Annual Report.
 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.)
 131




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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, 2005 (Incorporated by reference to the Registrants Registration Statement
N0. 333-135226, on form S-8 filed with the Commission on June 22, 2006).10.2
    
    Stock Option and Appreciation Right Plan. As amended on May 16,
2005 (Incorporated by reference to the Registrants Registration Statement N0.
333-129894, on form S-8 filed with the Commission on November 22, 2005).10.3
    
    Outside Directors Stock Option Plan. (Incorporated by
reference to the Registrants Registration Statement N0. 333-25855, on form S-8
filed with the Commission on April 5, 1997).10.4
    
    Employment Agreement dated September 22, 2006 by and among
Royal Bancshares of Pennsylvania, Inc. (Corporation), Royal Bank America
(Bank), and Joseph P.
Campbell, President and Chief Executive Officer of the Corporation and the
Bank. (Incorporated by reference to Exhibit 10.1 to Registrants Quarterly Report
on Form 10-Q dated March 31, 2007, as filed with the Commission on May 15,
2007.)10.5
    
    Employment Agreement dated September 22, 2006 by and among Royal Bancshares of
Pennsylvania, Inc. (Corporation), Royal Bank America (Bank), and James J.
McSwiggan, Jr., Chief Operating Officer of the Corporation and the Bank.
(Incorporated by reference to Exhibit 10.2 to Registrants Quarterly Report
on Form 10-Q dated March 31, 2007, as filed with the Commission on May 15,
2007.)10.6
    
    Employment Agreement dated February 22, 2007 by and among Royal Bancshares of
Pennsylvania, Inc. (Corporation), Royal Bank America (Bank), and Murray
Stempel, II, Executive Vice President and Chief Lending Officer of the
Corporation and the Bank.
(Incorporated by reference to Exhibit 10.3 to Registrants Quarterly Report
on Form 10-Q dated March 31, 2007, as filed with the Commission on May 15,
2007.)10.7
    
    Employment Agreement dated February 23, 2007 by and among Royal Bancshares of
Pennsylvania, Inc. (Corporation), Royal Bank America (Bank), and John
Decker, Executive Vice President Mezzanine/Equity Lending of the Corporation
and the Bank.
(Incorporated by reference to Exhibit 10.4 to Registrants Quarterly Report
on Form 10-Q dated March 31, 2007, as filed with the Commission on May 15,
2007.)10.8
    
    Employment Agreement dated February 23, 2007 by and among Royal
Bancshares of Pennsylvania, Inc. (Corporation), Royal Bank America (Bank),
and Robert R. Tabas, Executive Vice President of the Corporation and the Bank.
(Incorporated by reference to Exhibit 10.5 to Registrants Quarterly Report on
Form 10-Q dated March 31, 2007, as filed with the Commission on May 15, 2007.)
 132




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##### Table of Contents



10.9
    
    Employment agreement between Royal Bank America and Edward Shin, entered into
on April 23, 2004. (Incorporated by reference to Exhibit 10.5 to Registrants
Quarterly Report on Form 10-Q filed with the Commission on November 9, 2004.)10.10
    
    Royal Bancshares of Pennsylvania, Inc. 2007 Long-Term Incentive Plan.
(Incorporated
by reference to Exhibit A to the Companys definitive Proxy Statement dated
April 6, 2007).11.
    
    Statement Re: Computation of Earnings Per Share. Included at
Item 8, hereof, Note K, Per Share Information.12.
    
    Statement re: Computation of Ratios. (Included at Item 8 here
of, Note P, Regulatory Matters.)14.
    
    Royal Bancshares of Pennsylvania, Inc. Code of Ethics.21.
    
    Subsidiaries of Registrant.23.
    
    Consent of Independent Registered Public Accounting Firm.31.1
    
    Rule 13a-14(a)/15-d-14(a) Certification of Chief Executive Officer31.2
    
    Rule 13a-14(a)/15-d-14(a) Certification of Chief Financial Officer32.1
    
    Section 1350 Certification of Chief Executive Officer.32.2
    
    Section 1350 Certification of Chief Financial Officer.
 133




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##### Table of Contents



SIGNATURES
  ROYAL BANCSHARES OF PENNSYLVANIA, INC.
 /s/ Joseph P. Campbell

Joseph P. CampbellChief Executive OfficerMarch 17, 2008.
  SIGNATURESBy: /s/ Joseph P. Campbell
    
    March 17, 2008Joseph P. CampbellCEO/ President/DirectorBy:/s/ James J. McSwiggan
    
    March 17, 2008James J. McSwigganChief Operating Officer/ DirectorInterim Chief Financial Officer(Principal Accounting Officer)By: /s/ Robert R. Tabas
    
    March 17, 2008Robert R. TabasChairman of the BoardBy: /s/ Albert Ominsky
    
    March 17, 2008Albert OminskyDirectorBy: /s/ Anthony Micale
    
    March 17, 2008Anthony MicaleDirectorBy: /s/ Gregory Reardon
    
    March 17, 2008Gregory ReardonDirector
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##### Table of Contents



By: /s/ Murray Stempel, III
    
    March 17, 2008Murray Stempel, IIIChief Lending Officer/ DirectorBy: /s/ John M. Decker
    
    March 17, 2008John M. DeckerDirectorBy: /s/ Carl M. Cousins
    
    March 17, 2008Carl M. CousinsDirectorBy: /s/ Howard Wurzak
    
    March 17, 2008Howard WurzakDirectorBy: /s/ Evelyn R. Tabas
    
    March 17, 2008Evelyn R. TabasDirectorBy: /s/ Mitchell L. Morgan
    
    March 17, 2008Mitchell L. MorganDirectorBy: /s/ Edward B. Tepper
    
    March 17, 2008Edward B. TepperDirectorBy: /s/ Linda Tabas Stempel
    
    March 17, 2008Linda Tabas StempelDirectorBy: /s/ Patrick McCormick
    
    March 17, 2008Patrick McCormickDirectorBy: /s/ Samuel Goldstein
    
    March 17, 2008Samuel GoldsteinDirector
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OYAL 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.)4.7
    
    Guarantee Agreement by and between Royal Bancshares of
Pennsylvania, Inc. and JPMorgan Chase Bank, as Guarantee Trustee, October 27,
2004. (Incorporated by reference to Exhibit 10.4 to Registrants Current
Report on Form 8-K filed with the Commission on November 1, 2004.)10.1
    
    Stock Option and Appreciation Right Plan. As amended on March
15, 2005 (Incorporated by reference to the Registrants Registration Statement
N0. 333-135226, on form S-8 filed with the Commission on June 22, 2006).
 136




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##### Table of Contents



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 dated September 22, 2006 by and among
Royal Bancshares of Pennsylvania, Inc. (Corporation), Royal Bank America
(Bank), and Joseph P.
Campbell, President and Chief Executive Officer of the Corporation and the
Bank.
(Incorporated by reference to Exhibit 10.1 to Registrants Quarterly Report
on Form 10-Q dated March 31, 2007, as filed with the Commission on May 15,
2007.)10.5
    
    Employment Agreement dated September 22, 2006 by and among Royal Bancshares of
Pennsylvania, Inc. (Corporation), Royal Bank America (Bank), and James J.
McSwiggan, Jr., Chief Operating Officer of the Corporation and the Bank.
(Incorporated by reference to Exhibit 10.2 to Registrants Quarterly Report
on Form 10-Q dated March 31, 2007, as filed with the Commission on May 15,
2007.)10.6
    
    Employment Agreement dated February 22, 2007 by and among Royal Bancshares of
Pennsylvania, Inc. (Corporation), Royal Bank America (Bank), and Murray
Stempel, II, Executive Vice President and Chief Lending Officer of the
Corporation and the Bank.
(Incorporated by reference to Exhibit 10.3 to Registrants Quarterly Report
on Form 10-Q dated March 31, 2007, as filed with the Commission on May 15,
2007.)10.7
    
    Employment Agreement dated February 23, 2007 by and among Royal Bancshares of
Pennsylvania, Inc. (Corporation), Royal Bank America (Bank), and John
Decker, Executive Vice President Mezzanine/Equity Lending of the Corporation
and the Bank.
(Incorporated by reference to Exhibit 10.4 to Registrants Quarterly Report
on Form 10-Q dated March 31, 2007, as filed with the Commission on May 15,
2007.)10.8
    
    Employment Agreement dated February 23, 2007 by and among Royal
Bancshares of Pennsylvania, Inc. (Corporation), Royal Bank America (Bank),
and Robert R. Tabas, Executive Vice President of the Corporation and the Bank.
(Incorporated by reference to Exhibit 10.5 to Registrants Quarterly Report on
Form 10-Q dated March 31, 2007, as filed with the Commission on May 15, 2007.)10.9
    
    Employment agreement between Royal Bank America and Edward Shin, entered into
on April 23, 2004. (Incorporated by reference to Exhibit 10.5 to Registrants
Quarterly Report on Form 10-Q filed with the Commission on November 9, 2004.)10.10
    
    Royal Bancshares of Pennsylvania, Inc. 2007 Long-Term Incentive Plan.
(Incorporated by reference to Exhibit A to the Companys definitive Proxy Statement dated April 6,
2007).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.
 137




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##### Table of Contents



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.
 138