##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D. C. 20549
 
 FORM 10-K/A
 Amendment No. 2
 (Mark One)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2005
 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 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 732 Montgomery Avenue, Narberth, Pennsylvania
    
    19072(Address of principal executive offices)
    
    (Zip Code)
 (610) 668-4700
 
 Securities registered pursuant to Section 12(b) of the Act:
    
    NoneSecurities registered pursuant to Section 12(g) of the Act:
    
    Class A Common Stock ($2.00 par value)Class B Common Stock ($.10 par value)
 o þ
 o þ
 þ o
 þ
 þ o




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TABLE OF CONTENTS  ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAPART IVITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-KSIGNATURESConsent of Independent Accountants from Beard Miller Company LLPConsent of Independent Accountants Grant Thornton LLPRule 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 OfficerOpinion letter of Independent Accounts Grant Thornton LLP    Table of Contents    EXPLANATORY NOTE
    2




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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, 2005 and 2004
 3




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
       
 
 4




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
  December 31,2005
    
    
    2004(In thousands, except share data)ASSETSCash and due from banks
    
    $
    17,095
    
    
    $
    26,109Federal funds sold
    
    
    13,800
    
    
    
    1,000Total cash and cash equivalents
    
    
    30,895
    
    
    
    27,109Investment securities held to maturity (fair value of $253,198 and
$211,865 in 2005 and 2004, respectively)
    
    
    255,467
    
    
    
    212,227Investment securities available for sale  at fair value
    
    
    326,189
    
    
    
    360,934Federal Home Loan Bank stock, at cost
    
    
    17,073
    
    
    
    11,100Loans held for sale
    
    
    803
    
    
    
    2,204Loans
    
    
    549,636
    
    
    
    467,294Less allowance for loan losses
    
    
    10,276
    
    
    
    12,519Net loans
    
    
    539,360
    
    
    
    454,775Premises and equipment, net
    
    
    8,373
    
    
    
    8,780Real estate owned via equity investments
    
    
    58,209
    
    
    
    63,653Accrued interest receivable
    
    
    14,843
    
    
    
    15,634Bank owned life insurance
    
    
    22,059
    
    
    
    21,214Other assets
    
    
    27,748
    
    
    
    27,644Total assets
    
    $
    1,301,019
    
    
    $
    1,205,274LIABILITIES AND STOCKHOLDERS EQUITYLiabilitiesDepositsNon-interest bearing
    
    $
    75,754
    
    
    $
    64,371Interest bearing
    
    
    621,655
    
    
    
    678,011Total deposits
    
    
    697,409
    
    
    
    742,382Accrued interest payable
    
    
    6,606
    
    
    
    5,602Other liabilities
    
    
    11,879
    
    
    
    8,736Borrowings
    
    
    354,000
    
    
    
    222,000Obligations related to equity investments in real estate
    
    
    47,356
    
    
    
    56,249Subordinated debentures
    
    
    25,774
    
    
    
    25,774Total liabilities
    
    
    1,143,024
    
    
    
    1,060,743Minority interests
    
    
    2,487
    
    
    
    3,655Stockholders equityCommon stockClass A, par value $2.00 per share; authorized, 18,000,000 shares;
issued, 10,699,592 and 10,276,672 shares in 2005 and 2004, respectively
    
    
    21,400
    
    
    
    20,553Class B, par value $0.10 per share; authorized, 2,000,000 shares;
issued, 1,992,957 and 1,939,490 shares in 2005 and 2004, respectively
    
    
    199
    
    
    
    194Undistributed Class B shares
    
    
    2
    
    
    
    Additional paid in capital
    
    
    104,285
    
    
    
    92,037Retained earnings
    
    
    32,827
    
    
    
    26,558Accumulated other comprehensive (loss) income
    
    
    (940
    )
    
    
    3,799157,773
    
    
    
    143,141Treasury stock  at cost, 215,388 Class A shares in 2005 and 2004
    
    
    (2,265
    )
    
    
    (2,265
    )Total stockholders equity
    
    
    155,508
    
    
    
    140,876Total liabilities and stockholders equity
    
    $
    1,301,019
    
    
    $
    1,205,274
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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
  Years ended December 31,2005
    
    
    2004
    
    
    2003(In thousands, except per share data)Interest incomeLoans, including fees
    
    $
    46,995
    
    
    $
    40,044
    
    
    $
    46,609Investment securities held to maturity
    
    
    10,122
    
    
    
    6,365
    
    
    
    3,087Investment securities available for sale
    
    
    19,229
    
    
    
    20,621
    
    
    
    22,007Deposits in banks
    
    
    56
    
    
    
    409
    
    
    
    475Federal funds sold
    
    
    58
    
    
    
    102
    
    
    
    142TOTAL INTEREST INCOME
    
    
    76,460
    
    
    
    67,541
    
    
    
    72,320Interest expenseDeposits
    
    
    17,549
    
    
    
    16,918
    
    
    
    22,193Borrowings
    
    
    13,690
    
    
    
    8,744
    
    
    
    7,748Obligations related to equity investments in real estate
    
    
    557
    
    
    
    1,639
    
    
    
    TOTAL INTEREST EXPENSE
    
    
    31,796
    
    
    
    27,301
    
    
    
    29,941NET INTEREST INCOME
    
    
    44,664
    
    
    
    40,240
    
    
    
    42,379Provision for loan losses
    
    
    1
    
    
    
    6
    
    
    
    674NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES
    
    
    44,663
    
    
    
    40,234
    
    
    
    41,705Other incomeService charges and fees
    
    
    1,293
    
    
    
    1,496
    
    
    
    1,125Gains on sale of investment securities available for sale
    
    
    227
    
    
    
    810
    
    
    
    719Income related to equity investments in real estate
    
    
    19,418
    
    
    
    7,133
    
    
    
    Income from bank owned life insurance
    
    
    845
    
    
    
    966
    
    
    
    248Gains on sale of other real estate
    
    
    2,494
    
    
    
    2,102
    
    
    
    568Gains on sale of loans
    
    
    508
    
    
    
    480
    
    
    
    637Other income
    
    
    41
    
    
    
    173
    
    
    
    40724,826
    
    
    
    13,160
    
    
    
    3,704Other expensesSalaries and employee benefits
    
    
    13,488
    
    
    
    10,767
    
    
    
    9,958Occupancy and equipment
    
    
    1,611
    
    
    
    1,509
    
    
    
    1,330Expenses related to equity investments
    
    
    262
    
    
    
    4,780
    
    
    
    Other operating expenses
    
    
    9,438
    
    
    
    8,391
    
    
    
    7,59924,799
    
    
    
    25,447
    
    
    
    18,887INCOME BEFORE INCOME TAXES
    
    
    44,690
    
    
    
    27,947
    
    
    
    26,522Income taxes
    
    
    12,637
    
    
    
    7,914
    
    
    
    7,996NET INCOME
    
    $
    32,053
    
    
    $
    20,033
    
    
    $
    18,526Per share dataNet income  basic
    
    $
    2.50
    
    
    $
    1.57
    
    
    $
    1.47Net income  diluted
    
    $
    2.49
    
    
    $
    1.56
    
    
    $
    1.46
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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    AccumulatedAdditional
    
    
    
    
    
    
    otherClass A common stock
    
    
    Class B common stock
    
    
    paid in
    
    
    Retained
    
    
    comprehensive
    
    
    Treasury
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    capital
    
    
    earnings
    
    
    income (loss)
    
    
    stock
    
    
    incomeBalance, December 31, 2002
    
    
    9,595
    
    
    $
    19,190
    
    
    
    1,861
    
    
    $
    186
    
    
    $
    76,984
    
    
    $
    24,819
    
    
    $
    2,415
    
    
    $
    (2,265
    )Net income for the year ended
December 31, 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,526
    
    
    
    
    
    
    
    
    
    
    $
    18,526Conversion of Class B common stock
to Class A common stock
    
    
    8
    
    
    
    16
    
    
    
    (7
    )
    
    
    (1
    )
    
    
    
    
    
    
    (15
    )
    
    
    
    
    
    
    
    
    
    
    3% stock dividends declared
    
    
    281
    
    
    
    562
    
    
    
    55
    
    
    
    6
    
    
    
    6,443
    
    
    
    (7,011
    )
    
    
    
    
    
    
    
    
    
    
    Cash in lieu of fractional shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    
    
    
    
    
    
    
    
    Stock options exercised
    
    
    143
    
    
    
    286
    
    
    
    
    
    
    
    
    
    
    
    2,021
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cash dividends on common stock
(Class A $0.96, Class B $1.11)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,321
    )
    
    
    
    
    
    
    
    
    
    
    Other comprehensive income, net of
reclassifications and taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,000
    
    
    
    
    
    
    
    4,000Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    22,526Balance, December 31, 2003
    
    
    10,027
    
    
    
    20,054
    
    
    
    1,909
    
    
    
    191
    
    
    
    85,448
    
    
    
    24,990
    
    
    
    6,415
    
    
    
    (2,265
    )Net income for the year ended
December 31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,033
    
    
    
    
    
    
    
    
    
    
    $
    20,033Conversion of Class B common stock
to Class A common stock
    
    
    10
    
    
    
    20
    
    
    
    (1
    )
    
    
    (1
    )
    
    
    
    
    
    
    (19
    )
    
    
    
    
    
    
    
    
    
    
    2% stock dividends declared
    
    
    196
    
    
    
    392
    
    
    
    31
    
    
    
    3
    
    
    
    5,842
    
    
    
    (6,236
    )
    
    
    
    
    
    
    
    
    
    
    Cash in lieu of fractional shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11
    )
    
    
    
    
    
    
    
    
    
    
    Stock options exercised
    
    
    44
    
    
    
    87
    
    
    
    
    
    
    
    
    
    
    
    747
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cash dividends on common stock
(Class A $1.00, Class B $1.15)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,199
    )
    
    
    
    
    
    
    
    
    
    
    Other comprehensive loss, net of
reclassifications and taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,616
    )
    
    
    
    
    
    
    (2,616
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    17,417Balance, December 31, 2004
    
    
    10,277
    
    
    
    20,553
    
    
    
    1,939
    
    
    
    194
    
    
    
    92,037
    
    
    
    26,558
    
    
    
    3,799
    
    
    
    (2,265
    )
  7




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    AccumulatedUn-
    
    
    Additional
    
    
    
    
    
    
    otherClass A common stock
    
    
    Class B common stock
    
    
    Distributed
    
    
    Paid in
    
    
    Retained
    
    
    comprehensive
    
    
    Treasury
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    B-shares
    
    
    Capital
    
    
    earnings
    
    
    income (loss)
    
    
    stock
    
    
    incomeBalance, December 31, 2004
    
    
    10,277
    
    
    $
    20,553
    
    
    
    1,939
    
    
    $
    194
    
    
    $
    
    
    
    $
    92,037
    
    
    $
    26,558
    
    
    $
    3,799
    
    
    $
    (2,265
    )Net income for the year ended
December 31, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,053
    
    
    
    
    
    
    
    
    
    
    $
    32,053Conversion of Class B common stock
to Class A common stock
    
    
    6
    
    
    
    11
    
    
    
    (4
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    (11
    )
    
    
    
    
    
    
    
    
    
    
    2% stock dividends declared (January)
    
    
    201
    
    
    
    402
    
    
    
    39
    
    
    
    3
    
    
    
    
    
    
    
    6,481
    
    
    
    (6,887
    )
    
    
    
    
    
    
    
    
    
    
    2% stock dividends declared (December)
    
    
    206
    
    
    
    412
    
    
    
    19
    
    
    
    3
    
    
    
    2
    
    
    
    5,599
    
    
    
    (6,015
    )Cash in lieu of fractional shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12
    )
    
    
    
    
    
    
    
    
    
    
    Stock options exercised
    
    
    10
    
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    168
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cash dividends on common stock
(Class A $1.03, Class B $1.18)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,859
    )
    
    
    
    
    
    
    
    
    
    
    Other comprehensive loss, net of
reclassifications and taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,739
    )
    
    
    
    
    
    
    (4,739
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    27,314Balance, December 31, 2005
    
    
    10,700
    
    
    $
    21,400
    
    
    
    1,993
    
    
    $
    199
    
    
    $
    2
    
    
    $
    104,285
    
    
    $
    32,827
    
    
    $
    (940
    )
    
    $
    (2,265
    )
  8




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   (As restatedsee Note A)2005
    
    
    2004
    
    
    2003(In thousands)Cash flows from operating activitiesNet income
    
    $
    32,053
    
    
    $
    20,033
    
    
    $
    18,526Adjustments to reconcile net income to net cash
provided by (used in) operating activitiesDepreciation and amortization
    
    
    1,307
    
    
    
    2,633
    
    
    
    1,035Provision for loan losses
    
    
    1
    
    
    
    6
    
    
    
    674Amortization of premiums and discounts on loans,
mortgage-backed securities and investments
    
    
    (1,106
    )
    
    
    7,577
    
    
    
    289Income tax benefit on stock options
    
    
    53
    
    
    
    331
    
    
    
    (Benefit)provision for deferred income taxes
    
    
    189
    
    
    
    (1,442
    )
    
    
    2,078Gains on sale other real estate
    
    
    (2,494
    )
    
    
    (2,102
    )
    
    
    (568
    )Gains on sale of loans
    
    
    (508
    )
    
    
    (480
    )
    
    
    (637
    )Gains on sales of investment securities available
for sale
    
    
    (227
    )
    
    
    (810
    )
    
    
    (719
    )Gains on sales of premises and equipment  VIEs
    
    
    (16,779
    )
    
    
    
    
    
    
    Gain from refinance of assets  VIE
    
    
    (1,892
    )
    
    
    
    
    
    
    Changes in assets and liabilities:Increase (decrease) in accrued interest receivable
    
    
    (1,400
    )
    
    
    719
    
    
    
    (2,575
    )Decrease (increase) in other assets
    
    
    8,216
    
    
    
    (9,191
    )
    
    
    (26,021
    )Increase (decrease) in accrued interest payable
    
    
    1,004
    
    
    
    (2,131
    )
    
    
    (3,673
    )Increase in other liabilities
    
    
    3,807
    
    
    
    3,666
    
    
    
    1,238Net cash provided by (used in) operating activities
    
    
    22,224
    
    
    
    18,809
    
    
    
    (10,353
    )Cash flows from investing activitiesProceeds from calls and maturities of investment securities
held to maturity
    
    
    46,685
    
    
    
    153,714
    
    
    
    9,982Purchases of investment securities held to maturity
    
    
    (90,025
    )
    
    
    (255,150
    )
    
    
    (89,310
    )Proceeds from calls and maturities of investment securities
available for sale
    
    
    38,066
    
    
    
    60,836
    
    
    
    201,341Proceeds from sales of investment securities available for sale
    
    
    13,897
    
    
    
    27,860
    
    
    
    91,339Purchase (redemption) of Federal Home Loan Bank stock
    
    
    (5,973
    )
    
    
    307
    
    
    
    (3,532
    )Purchases of investment securities available for sale
    
    
    (25,137
    )
    
    
    (13,812
    )
    
    
    (321,451
    )Net (increase) decrease in loans
    
    
    (84,372
    )
    
    
    46,256
    
    
    
    61,647Purchases of premises and equipment
    
    
    (900
    )
    
    
    (596
    )
    
    
    (513
    )Net proceeds from sale of premises and equipment VIEs
    
    
    88,171
    
    
    
    
    
    
    
    Net cash disbursed to partners  VIEs
    
    
    (22,068
    )
    
    
    
    
    
    
    Purchases of premises and equipment through VIE
    
    
    (58,691
    )
    
    
    (66,990
    )
    
    
    Net cash used in investing activities
    
    
    (100,347
    )
    
    
    (47,575
    )
    
    
    (50,497
    )
   9




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   (As restatedSee Note A)2005
    
    
    2004
    
    
    2003(In thousands, except per share data)Cash flows from financing activitiesIncrease (decrease) in non-interest bearing and interest bearing
demand deposits and savings accounts
    
    $
    (164,396
    )
    
    $
    (14,295
    )
    
    $
    63,511Increase (decrease) in time deposits
    
    
    119,424
    
    
    
    (34,382
    )
    
    
    (93,292
    )Principal payments on mortgage
    
    
    (63
    )
    
    
    (60
    )
    
    
    (62
    )Proceeds from subordinated debentures, net
    
    
    
    
    
    
    25,000
    
    
    
    Cash dividends in lieu of fractional shares
    
    
    (12
    )
    
    
    (11
    )
    
    
    (8
    )Proceeds from borrowings, net of repayments
    
    
    132,000
    
    
    
    10,000
    
    
    
    84,500Mortgage debt incurred   VIEs
    
    
    65,097
    
    
    
    56,249
    
    
    
    Repayment of mortgage debt  VIEs
    
    
    (57,472
    )
    
    
    
    
    
    
    Issuance of common stock under stock option plans
    
    
    190
    
    
    
    503
    
    
    
    2,021Cash dividends paid
    
    
    (12,859
    )
    
    
    (12,199
    )
    
    
    (11,321
    )Net cash provided by financing activities
    
    
    81,909
    
    
    
    30,805
    
    
    
    45,349Net increase (decrease) in cash and cash equivalents
    
    
    3,786
    
    
    
    2,039
    
    
    
    (15,501
    )Cash and cash equivalents at beginning of year
    
    
    27,109
    
    
    
    25,070
    
    
    
    40,571Cash and cash equivalents at end of year
    
    $
    30,895
    
    
    $
    27,109
    
    
    $
    25,070Supplemental disclosure of cash flow informationCash paid during the year forInterest
    
    $
    30,792
    
    
    $
    29,432
    
    
    $
    33,615Income taxes
    
    $
    13,450
    
    
    $
    8,705
    
    
    $
    7,000
   10




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    Basis of Financial Statement Presentation
       11




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
        12




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   Investment Securities
   Loans held for sale
   Loans and Allowance for Loan Losses
   13




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
        Other Real Estate
   14




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   Premises and Equipment
  Bank-Owned Life Insurance
  Income Taxes
    15




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   Per Share Information
   Stock Option Plans
   2005
    
    
    2004
    
    
    2003Net income, as reported
    
    $
    32,053
    
    
    $
    20,033
    
    
    $
    18,526Less: Stock-based compensation costs under
fair value based method for all awards, net of tax
    
    
    (682
    )
    
    
    (490
    )
    
    
    (425
    )Pro forma net income
    
    
    31,371
    
    
    
    19,543
    
    
    
    18,101Earnings per
share Basic    As Reported
    
    $
    2.50
    
    
    $
    1.57
    
    
    $
    1.47Pro forma
    
    
    2.45
    
    
    
    1.53
    
    
    
    1.43Earnings per share Diluted As Reported
    
    
    2.49
    
    
    
    1.56
    
    
    
    1.46Pro forma
    
    
    2.43
    
    
    
    1.52
    
    
    
    1.43
  16




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   Benefit Plans
  Cash and Cash Equivalents
  Financial Instruments
  Advertising Costs
  Comprehensive Income
   December 31, 2005Tax
    
    
    Net ofBefore tax
    
    
    (benefit)
    
    
    taxamount
    
    
    expense
    
    
    amountUnrealized losses on securitiesUnrealized holding losses arising during period
    
    $
    (6,978
    )
    
    $
    (2,387
    )
    
    $
    (4,591
    )Less reclassification adjustment for gains
realized in net income
    
    
    227
    
    
    
    79
    
    
    
    148Other comprehensive loss, net
    
    $
    (7,205
    )
    
    $
    (2,466
    )
    
    $
    (4,739
    )
  17




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   December 31, 2004Tax
    
    
    Net ofBefore tax
    
    
    (benefit)
    
    
    taxamount
    
    
    expense
    
    
    amountUnrealized losses on securitiesUnrealized holding gains arising during period
    
    $
    (3,150
    )
    
    $
    (1,069
    )
    
    $
    (2,081
    )Less reclassification adjustment for gains
realized in net income
    
    
    810
    
    
    
    275
    
    
    
    535Other comprehensive loss, net
    
    $
    (3,960
    )
    
    $
    (1,344
    )
    
    $
    (2,616
    )
 December 31, 2003Tax
    
    
    Net ofBefore tax
    
    
    (benefit)
    
    
    taxamount
    
    
    expense
    
    
    amountUnrealized gains on securitiesUnrealized holding gains arising during period
    
    $
    6,791
    
    
    $
    2,316
    
    
    $
    4,475Less reclassification adjustment for gains
realized in net income
    
    
    719
    
    
    
    244
    
    
    
    475Other comprehensive income, net
    
    $
    6,072
    
    
    $
    2,072
    
    
    $
    4,000
 Reclassifications
  Variable Interest Entities (VIE)
 Real estate owned via equity investments
   18




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
        19




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   Trust Preferred Securities
   Interest Rate Swaps
    December 31,(in thousands)
    
    2005
    
    
    2004Notional Amount
    
    $
    60,000
    
    
    $
    25,000Weighted average pay rate
    
    
    4.40
    %
    
    
    2.33
    %Weighted average receive rate
    
    
    3.87
    %
    
    
    2.50
    %Weighted average maturity (years)
    
    
    4.5
    
    
    
    1.72Unrealized loss relating to interest rate swaps
    
    
    ($1,281
    )
    
    
    ($135
    )
  20




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
       Year ended December 31, 2005As
    
    AsReported
    
    RestatedIn 2005
    
    for 2005(amounts in thousands)
    
    10-K
    
    10-K/ACash Flows from Operating Activities:Amortization of premiums and discounts on loans,
mortgage-backed securities and investments
    
    
    14
    
    
    
    (1,106
    )(Benefit) provision for deferred income taxes
    
    
    (2,493
    )
    
    
    189Gain on sale of premises and equipment  VIEs
    
    
    
    
    
    
    (16,779
    )Gain from refinance of assets  VIEs
    
    
    
    
    
    
    (1,892
    )Decrease (increase) in accrued interest receivable
    
    
    791
    
    
    
    (1,400
    )Decrease in other assets
    
    
    1,545
    
    
    
    8,216Increase in other liabilities
    
    
    1,975
    
    
    
    3,807Net cash provided by operating activities
    
    
    33,021
    
    
    
    22,224Cash flows from investing activities:Proceeds from calls and maturities of investments
available for sale
    
    
    33,729
    
    
    
    38,066Proceeds from sales of investment securities
available for sale
    
    
    15,600
    
    
    
    13,897Net (increase) in loans
    
    
    (73,996
    )
    
    
    (84,372
    )Net proceeds from sale of premises and equipment
VIEs
    
    
    
    
    
    
    88,171Net cash disbursed to partners  VIEs
    
    
    
    
    
    
    (22,068
    )Deconsolidation of premises and equipment  VIE
    
    
    57,966
    
    
    
    Purchase of premises and equipment through VIEs
    
    
    (52,522
    )
    
    
    (58,691
    )Net cash used in investing activities
    
    
    (94,573
    )
    
    
    (100,347
    )Cash flows from financing activities:Obligations through equity investments
    
    
    (8,893
    )
    
    
    Mortgage debt incurred   VIEs
    
    
    
    
    
    
    65,097Repayment of mortgage debt  VIEs
    
    
    
    
    
    
    (57,472
    )Issuance of common stock under stock option plan
    
    
    137
    
    
    
    190Net cash provided by financing activities
    
    
    65,338
    
    
    
    81,909
 21




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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
           22




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    Community
    
    
    Tax Lien
    
    
    Equity(in thousands)
    
    Bank
    
    
    Operation
    
    
    Investments
    
    
    ConsolidatedDecember 31, 2005Total assets
    
    $
    1,187,825
    
    
    $
    52,162
    
    
    $
    61,032
    
    
    $
    1,301,019Total deposits
    
    
    697,409
    
    
    
    
    
    
    
    
    
    
    
    697,409Net interest income (losses)
    
    
    43,356
    
    
    
    1,865
    
    
    
    (557
    )
    
    
    44,664Provision for loan losses
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1Total non-interest income
    
    
    3,827
    
    
    
    1,581
    
    
    
    19,418
    
    
    
    24,826Total non-interest expense
    
    
    21,751
    
    
    
    2,786
    
    
    
    262
    
    
    
    24,799Income taxes
    
    
    5,830
    
    
    
    297
    
    
    
    6,510
    
    
    
    12,637Net Income
    
    $
    19,602
    
    
    $
    362
    
    
    $
    12,089
    
    
    $
    32,053December 31, 2004Total assets
    
    $
    1,088,031
    
    
    $
    50,196
    
    
    $
    67,047
    
    
    $
    1,205,274Total deposits
    
    
    742,382
    
    
    
    
    
    
    
    
    
    
    
    742,382Net interest income
    
    
    38,846
    
    
    
    3,024
    
    
    
    (1,630
    )
    
    
    40,240Provision for loan loss
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    6Total non-interest income
    
    
    4,800
    
    
    
    1,227
    
    
    
    7,133
    
    
    
    13,160Total non-interest expense
    
    
    17,295
    
    
    
    3,372
    
    
    
    4,780
    
    
    
    25,447Income taxes
    
    
    7,272
    
    
    
    389
    
    
    
    253
    
    
    
    7,914Net Income
    
    $
    19,079
    
    
    $
    484
    
    
    $
    470
    
    
    $
    20,033December 31, 2003Total assets
    
    $
    1,103,619
    
    
    $
    50,791
    
    
    $
    
    
    
    $
    1,154,410Total deposits
    
    
    791,059
    
    
    
    
    
    
    
    
    
    
    
    791,059Net interest income
    
    
    38,773
    
    
    
    3,606
    
    
    
    
    
    
    
    42,379Provision for loan loss
    
    
    500
    
    
    
    174
    
    
    
    
    
    
    
    674Total non-interest income
    
    
    3,196
    
    
    
    508
    
    
    
    
    
    
    
    3,704Total non-interest expense
    
    
    16,023
    
    
    
    2,864
    
    
    
    
    
    
    
    18,887Income taxes
    
    
    7,528
    
    
    
    468
    
    
    
    
    
    
    
    7,996Net Income
    
    $
    17,918
    
    
    $
    608
    
    
    $
    470
    
    
    $
    18,526
   23




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    2005Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    Faircost
    
    
    gains
    
    
    losses
    
    
    valueInvestment securities held to maturityCorporate securities
    
    $
    60,300
    
    
    $
    1,902
    
    
    $
    
    
    
    $
    62,202U.S. government agencies
    
    
    195,000
    
    
    
    
    
    
    
    (4,171
    )
    
    
    190,829Mortgage backed securities
    
    
    167
    
    
    
    
    
    
    
    
    
    
    
    167$
    255,467
    
    
    $
    1,902
    
    
    $
    (4,171
    )
    
    $
    253,198
 2005Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    Faircost
    
    
    gains
    
    
    losses
    
    
    valueInvestment securities available for salePreferred and common stock
    
    $
    5,129
    
    
    $
    88
    
    
    $
    
    
    
    $
    5,217Corporate bonds
    
    
    109,564
    
    
    
    670
    
    
    
    (1,700
    )
    
    
    108,534U.S. government agencies
    
    
    104,979
    
    
    
    
    
    
    
    (3,281
    )
    
    
    101,698Trust preferred securities
    
    
    36,174
    
    
    
    3,559
    
    
    
    
    
    
    
    39,733Foreign bonds
    
    
    2,995
    
    
    
    20
    
    
    
    
    
    
    
    3,015Mortgage backed securities
    
    
    56,628
    
    
    
    126
    
    
    
    (862
    )
    
    
    55,892Other securities
    
    
    12,166
    
    
    
    81
    
    
    
    (147
    )
    
    
    12,100$
    327,635
    
    
    $
    4,564
    
    
    $
    (6,010
    )
    
    $
    326,189
   24




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   2004Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    Faircost
    
    
    gains
    
    
    losses
    
    
    valueInvestment securities held to maturityCorporate securities
    
    $
    26,995
    
    
    $
    371
    
    
    $
    
    
    
    $
    27,366U.S. government agencies
    
    
    185,000
    
    
    
    9
    
    
    
    (742
    )
    
    
    184,267Mortgage backed securities
    
    
    232
    
    
    
    
    
    
    
    
    
    
    
    232$
    212,227
    
    
    $
    380
    
    
    $
    (742
    )
    
    $
    211,865
 2004Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    Faircost
    
    
    gains
    
    
    losses
    
    
    valueInvestment securities available for salePreferred and common stock
    
    $
    5,113
    
    
    $
    250
    
    
    $
    
    
    
    $
    5,363Corporate bonds
    
    
    125,750
    
    
    
    4,104
    
    
    
    (48
    )
    
    
    129,806U.S. government agencies
    
    
    94,977
    
    
    
    
    
    
    
    (1,672
    )
    
    
    93,305Trust preferred securities
    
    
    37,196
    
    
    
    2,754
    
    
    
    (388
    )
    
    
    39,562Foreign bonds
    
    
    9,212
    
    
    
    293
    
    
    
    
    
    
    
    9,505Mortgage backed securities
    
    
    81,303
    
    
    
    496
    
    
    
    (130
    )
    
    
    81,669Other securities
    
    
    1,624
    
    
    
    100
    
    
    
    
    
    
    
    1,724$
    355,175
    
    
    $
    7,997
    
    
    $
    (2,238
    )
    
    $
    360,934
   25




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    2005Held to maturity
    
    
    Available for saleAmortized
    
    
    Fair
    
    
    Amortized
    
    
    Faircost
    
    
    value
    
    
    cost
    
    
    valueWithin 1 year
    
    $
    6
    
    
    $
    6
    
    
    $
    21,961
    
    
    $
    22,053After 1 but within 5 years
    
    
    205,316
    
    
    
    203,703
    
    
    
    136,362
    
    
    
    133,571After 5 but within 10 years
    
    
    50,000
    
    
    
    49,344
    
    
    
    33,841
    
    
    
    32,839After 10 years
    
    
    145
    
    
    
    145
    
    
    
    130,316
    
    
    
    132,509No contractual maturity
    
    
    
    
    
    
    
    
    
    
    5,155
    
    
    
    5,217$
    255,467
    
    
    $
    253,198
    
    
    $
    327,635
    
    
    $
    326,189
    Less than 12 months
    
    12 months or longer
    
    TotalFair
    
    Unrealized
    
    Fair
    
    Unrealized
    
    Fair
    
    UnrealizedDescription of Securities
    
    value
    
    losses
    
    value
    
    losses
    
    value
    
    lossesHeld to maturityUS government agencies
    
    $
    108,426
    
    
    $
    (1,574
    )
    
    $
    82,403
    
    
    $
    (2,597
    )
    
    $
    190,829
    
    
    $
    (4,171
    )Total held to maturity
    
    $
    108,426
    
    
    $
    (1,574
    )
    
    $
    82,403
    
    
    $
    (2,597
    )
    
    $
    190,829
    
    
    $
    (4,171
    )Available for SaleUS government agencies
    
    $
    9,886
    
    
    $
    (114
    )
    
    $
    91,812
    
    
    $
    (3,167
    )
    
    $
    101,698
    
    
    $
    (3,281
    )Mortgage backed securities
    
    
    22,387
    
    
    
    (381
    )
    
    
    17,992
    
    
    
    (481
    )
    
    
    40,379
    
    
    
    (862
    )Corporate bonds
    
    
    51,312
    
    
    
    (1,700
    )
    
    
    
    
    
    
    
    
    
    
    51,312
    
    
    
    (1,700
    )Other bonds
    
    
    10,121
    
    
    
    (167
    )
    
    
    
    
    
    
    
    
    
    
    10,121
    
    
    
    (167
    )Total available for sale
    
    $
    93,706
    
    
    $
    (2,362
    )
    
    $
    109,804
    
    
    $
    (3,648
    )
    
    
    203,510
    
    
    $
    (6,010
    )Total temporarily
impaired
securities
    
    $
    202,132
    
    
    $
    (3,936
    )
    
    $
    192,207
    
    
    $
    (6,245
    )
    
    $
    394,339
    
    
    $
    (10,181
    )
  26




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
     Less than 12 months
    
    12 months or longer
    
    TotalFair
    
    Unrealized
    
    Fair
    
    Unrealized
    
    Fair
    
    UnrealizedDescription of Securities
    
    value
    
    losses
    
    value
    
    losses
    
    value
    
    lossesHeld to MaturityUS government agencies
    
    $
    84,258
    
    
    $
    (742
    )
    
    $
    
    
    
    $
    (
    )
    
    $
    84,258
    
    
    $
    (742
    )Total held to maturity
    
    
    84,258
    
    
    
    (742
    )
    
    
    
    
    
    
    (
    )
    
    
    84,258
    
    
    
    (742
    )Available for SaleUS government agencies
    
    $
    14,941
    
    
    $
    (36
    )
    
    $
    78,364
    
    
    $
    (1,636
    )
    
    $
    93,305
    
    
    $
    (1,672
    )Mortgage backed securities
    
    
    401
    
    
    
    (2
    )
    
    
    23,217
    
    
    
    (128
    )
    
    
    23,618
    
    
    
    (130
    )Trust preferred
    
    
    10,000
    
    
    
    (385
    )
    
    
    4,330
    
    
    
    (3
    )
    
    
    14,330
    
    
    
    (388
    )Corporate bonds
    
    
    6,149
    
    
    
    (48
    )
    
    
    
    
    
    
    
    
    
    
    6,149
    
    
    
    (48
    )Total available for sale
    
    
    31,491
    
    
    
    (471
    )
    
    
    105,911
    
    
    
    (1,767
    )
    
    
    137,402
    
    
    
    (2,238
    )Total temporarily
impaired
securities
    
    $
    115,749
    
    
    $
    (1,213
    )
    
    $
    105,911
    
    
    $
    (1,767
    )
    
    $
    221,660
    
    
    $
    (2,980
    )
  27




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    2005
    
    
    2004Commercial and industrial
    
    $
    30,075
    
    
    $
    37,468Construction and land development
    
    
    177,102
    
    
    
    109,129Single family and residential
    
    
    41,900
    
    
    
    45,816Other real estate secured
    
    
    296,051
    
    
    
    273,099Leases (net of unearned income)
    
    
    2,623
    
    
    
    Other
    
    
    3,868
    
    
    
    3,322551,619
    
    
    
    468,834LessUnearned income
    
    
    (1,983
    )
    
    
    (1,540
    )Total loans
    
    $
    549,636
    
    
    $
    467,294
     28




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
     2005
    
    
    2004
    
    
    2003Balance at beginning of year
    
    $
    12,519
    
    
    $
    12,426
    
    
    $
    12,470Charge-offs
    
    
    (2,335
    )
    
    
    (204
    )
    
    
    (811
    )Recoveries
    
    
    91
    
    
    
    291
    
    
    
    93Net (charge-offs) recoveries
    
    
    (2,244
    )
    
    
    87
    
    
    
    (718
    )Provision for loan losses
    
    
    1
    
    
    
    6
    
    
    
    674Balance at end of year
    
    $
    10,276
    
    
    $
    12,519
    
    
    $
    12,426
   EstimatedUsefulLives
    
    2005
    
    
    2004Land
    
    
    
    $
    2,396
    
    
    $
    2,396Buildings and leasehold improvements
    
    7  31.5 years
    
    
    7,764
    
    
    
    8,178Furniture, fixtures and equipment
    
    3  7 years
    
    
    5,225
    
    
    
    6,81215,385
    
    
    
    17,386Less accumulated depreciation and amortization
    
    
    
    
    7,012
    
    
    
    8,606$
    8,373
    
    
    $
    8,780
   29




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
      2005
    
    
    2004Demand
    
    $
    75,754
    
    
    $
    64,371NOW and money market
    
    
    279,602
    
    
    
    451,671Savings
    
    
    20,109
    
    
    
    23,820Time, $100,000 and over
    
    
    203,611
    
    
    
    90,596Other time
    
    
    118,333
    
    
    
    111,924$
    697,409
    
    
    $
    742,382
  2006
    
    $
    120,6762007
    
    
    41,9202008
    
    
    74,1772009
    
    
    7,6302010
    
    
    74,183Thereafter
    
    
    3,358$
    321,944
  Advances from the Federal Home Loan Bank
   30




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    2006
    
    
    3.69
    %
    
    $
    104,5002007
    
    
    
    
    
    
    2008
    
    
    
    
    
    
    2009
    
    
    5.58
    %
    
    
    15,0002010
    
    
    4.92
    %
    
    
    147,500Thereafter
    
    
    3.33
    %
    
    
    87,000$
    354,000
 Subordinated Debentures
     31




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    2006
    
    $
    661,0002007
    
    
    664,0002008
    
    
    654,0002009
    
    
    475,0002010
    
    
    305,000Thereafter
    
    
    165,000$
    2,924,000
        2005
    
    
    2004
    
    
    2003Income tax expense (benefit)Current
    
    $
    12,448
    
    
    $
    9,356
    
    
    $
    9,221Deferred federal tax
    
    
    189
    
    
    
    (1,442
    )
    
    
    (1,225
    )$
    12,637
    
    
    $
    7,914
    
    
    $
    7,996
  32




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    2005
    
    
    2004
    
    
    2003Computed tax expense at statutory rate
    
    $
    15,642
    
    
    $
    9,781
    
    
    $
    9,286Tax-exempt income
    
    
    (361
    )
    
    
    (466
    )
    
    
    (263
    )Low-income housing tax credit
    
    
    (545
    )
    
    
    (545
    )
    
    
    (545
    )Reduction of valuation allowance
    
    
    (1,761
    )
    
    
    
    
    
    
    Other, net
    
    
    (338
    )
    
    
    (619
    )
    
    
    (482
    )Effect of 35% rate bracket
    
    
    
    
    
    
    (237
    )
    
    
    Applicable income tax expense
    
    $
    12,637
    
    
    $
    7,914
    
    
    $
    7,996
  2005
    
    
    2004Deferred tax assetsAllowance for loan losses
    
    $
    3,597
    
    
    $
    5,366Asset valuation reserves
    
    
    431
    
    
    
    836Goodwill from Knoblauch State Bank
    
    
    539
    
    
    
    808Accrued pension liability
    
    
    1,806
    
    
    
    1,156Net operating loss carryovers from Knoblauch State Bank
    
    
    1,761
    
    
    
    7,140Unrealized losses on investment securities available for
sale
    
    
    506
    
    
    
    Other
    
    
    
    
    
    
    468,640
    
    
    
    15,352Less valuation allowance
    
    
    
    
    
    
    (7,140
    )8,640
    
    
    
    8,212Deferred tax liabilitiesUnrealized gains on investment securities available for sale
    
    
    
    
    
    
    1,957Penalties on delinquent tax certificates
    
    
    182
    
    
    
    243Deferred tax related to VIEs
    
    
    662
    
    
    
    Other
    
    
    321
    
    
    
    7201,165
    
    
    
    2,920Net deferred tax asset, included in other assets
    
    $
    7,475
    
    
    $
    5,292
   33




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
       2005AverageIncome
    
    
    shares
    
    
    Per share(numerator)
    
    
    (denominator)
    
    
    amountBasic EPSIncome available to common shareholders
    
    $
    32,053
    
    
    
    12,797
    
    
    $
    2.50Effect of dilutive securitiesStock options
    
    
    
    
    
    
    95
    
    
    
    (0.01
    )Diluted EPSIncome available to common shareholders plus
assumed exercise of options
    
    $
    32,053
    
    
    
    12,892
    
    
    $
    2.49
    34




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   2004AverageIncome
    
    
    shares
    
    
    Per share(numerator)
    
    
    (denominator)
    
    
    AmountBasic EPSIncome available to common shareholders
    
    $
    20,033
    
    
    
    12,755
    
    
    $
    1.57Effect of dilutive securitiesStock options
    
    
    
    
    
    
    104
    
    
    
    (0.01
    )Diluted EPSIncome available to common shareholders plus
assumed exercise of options
    
    $
    20,033
    
    
    
    12,859
    
    
    $
    1.56
  2003AverageIncome
    
    
    shares
    
    
    Per share(numerator)
    
    
    (denominator)
    
    
    AmountBasic EPSIncome available to common shareholders
    
    $
    18,526
    
    
    
    12,640
    
    
    $
    1.47Effect of dilutive securitiesStock options
    
    
    
    
    
    
    54
    
    
    
    (0.01
    )Diluted EPSIncome available to common shareholders plus
assumed exercise of options
    
    $
    18,526
    
    
    
    12,694
    
    
    $
    1.46
   35




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    Outside Directors Stock Option Plan
   2005
    
    
    2004
    
    
    2003Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    
    average
    
    
    
    
    
    
    averageexercise
    
    
    
    
    
    
    exercise
    
    
    
    
    
    
    exerciseShares
    
    
    price
    
    
    Shares
    
    
    price
    
    
    Shares
    
    
    priceOutstanding at
beginning
of year
    
    
    80,485
    
    
    $
    16.95
    
    
    
    72,751
    
    
    $
    14.62
    
    
    
    81,897
    
    
    $
    13.84Granted
    
    
    16,830
    
    
    
    22.79
    
    
    
    17,167
    
    
    
    23.50
    
    
    
    17,017
    
    
    
    19.57Exercised
    
    
    (6,247
    )
    
    
    10.28
    
    
    
    (9,433
    )
    
    
    11.31
    
    
    
    (26,163
    )
    
    
    11.79Cancelled
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at end of
year
    
    
    91,068
    
    
    $
    18.53
    
    
    
    80,485
    
    
    $
    16.95
    
    
    
    72,751
    
    
    $
    14.62Weighted average fair
value of options
granted during the
year
    
    
    
    
    
    $
    4.48
    
    
    
    
    
    
    $
    5.15
    
    
    
    
    
    
    $
    3.55
  Options outstanding
    
    
    Options exercisableWeightedaverage
    
    
    Weighted
    
    
    
    
    
    
    Weightedremaining
    
    
    average
    
    
    
    
    
    
    averageRange of
    
    Number
    
    
    contractual
    
    
    exercise
    
    
    Number
    
    
    exerciseexercise prices
    
    outstanding
    
    
    life (years)
    
    
    price
    
    
    exercisable
    
    
    price$9.40
    
    
    2,151
    
    
    
    1.2
    
    
    $
    9.40
    
    
    
    2,194
    
    
    $
    9.40$10.89  18.81
    
    
    54,927
    
    
    
    5.5
    
    
    
    15.65
    
    
    
    60,788
    
    
    
    15.65$22.53  23.05
    
    
    33,990
    
    
    
    8.7
    
    
    
    22.79
    
    
    
    17,503
    
    
    
    23.0591,068
    
    
    
    
    
    
    
    
    
    
    
    80,485
  36




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   Employee Stock Option and Appreciation Right Plan
   2005
    
    
    2004
    
    
    2003Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    
    average
    
    
    
    
    
    
    averageexercise
    
    
    
    
    
    
    exercise
    
    
    
    
    
    
    exerciseShares
    
    
    price
    
    
    Shares
    
    
    price
    
    
    Shares
    
    
    priceOutstanding at
beginning
of year
    
    
    605,409
    
    
    $
    18.80
    
    
    
    437,001
    
    
    $
    15.45
    
    
    
    508,779
    
    
    $
    13.84Granted
    
    
    153,000
    
    
    
    22.53
    
    
    
    260,493
    
    
    
    23.50
    
    
    
    160,569
    
    
    
    19.57Exercised
    
    
    (5,398
    )
    
    
    14.52
    
    
    
    (35,336
    )
    
    
    11.31
    
    
    
    (122,921
    )
    
    
    11.21Cancelled
    
    
    (15,841
    )
    
    
    22.80
    
    
    
    (56,749
    )
    
    
    20.11
    
    
    
    (109,426
    )
    
    
    16.82Outstanding at end of
year
    
    
    737,170
    
    
    
    19.61
    
    
    
    605,409
    
    
    
    18.80
    
    
    
    437,001
    
    
    $
    15.45Weighted average fair
value of options
granted during the
year
    
    
    
    
    
    $
    4.48
    
    
    
    
    
    
    $
    5.15
    
    
    
    
    
    
    $
    3.55
  Options outstanding
    
    
    Options exercisableWeightedaverage
    
    
    Weighted
    
    
    
    
    
    
    Weightedremaining
    
    
    average
    
    
    
    
    
    
    averageRange of
    
    Number
    
    
    contractual
    
    
    exercise
    
    
    Number
    
    
    exerciseexercise prices
    
    Outstanding
    
    
    life (years)
    
    
    price
    
    
    exercisable
    
    
    price$9.39
    
    
    17,643
    
    
    
    1.2
    
    
    $
    9.39
    
    
    
    17,643
    
    
    $
    9.39$10.89  18.81
    
    
    347,596
    
    
    
    5.7
    
    
    
    15.72
    
    
    
    233,855
    
    
    
    14.77$22.53  23.04
    
    
    371,931
    
    
    
    8.6
    
    
    
    23.83
    
    
    
    46,666
    
    
    
    23.04737,170
    
    
    
    
    
    
    
    
    
    
    
    298,164
 37




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    2005
    
    
    2004Change in benefit obligationBenefit obligation at beginning of year
    
    $
    4,303
    
    
    $
    3,591Service cost
    
    
    1,725
    
    
    
    722Interest cost
    
    
    248
    
    
    
    205Other changes
    
    
    (32
    )
    
    
    (215
    )Benefits obligation at end of year
    
    $
    6,244
    
    
    $
    4,303
  December 312005
    
    2004Discount rate
    
    
    6.00
    %
    
    
    6.00
    %Rate of compensation increase
    
    
    4.00
    %
    
    
    4.00
    %
   2005
    
    
    2004
    
    
    2003Service cost
    
    $
    1,477
    
    
    $
    570
    
    
    $
    410Interest cost
    
    
    248
    
    
    
    205
    
    
    
    214Net periodic benefit cost
    
    $
    1,725
    
    
    $
    775
    
    
    $
    624
  38




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
        December 31.2005
    
    2004Financial instruments whose contract amounts represent credit
riskCommitments to extend credit
    
    $
    176,415
    
    
    $
    119,458Standby letters of credit and financial guarantees written
    
    
    3,228
    
    
    
    1,797Financial Instruments whose notional amount exceed the amount
the amount of credit risk.Interest rate swap agreements
    
    $
    60,000
    
    
    $
    25,000
   39




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
           40




---



##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    2005
    
    2004Estimated
    
    Carrying
    
    Estimated
    
    Carryingfair value
    
    amount
    
    fair value
    
    amountCash and cash equivalents
    
    $
    30,895
    
    
    $
    30,895
    
    
    $
    27,109
    
    
    $
    27,109Investment securities held to maturity
    
    
    253,198
    
    
    
    255,467
    
    
    
    211,865
    
    
    
    212,227Investment securities available for sale
    
    
    326,189
    
    
    
    326,189
    
    
    
    360,934
    
    
    
    360,934
  2005
    
    2004Estimated
    
    Carrying
    
    Estimated
    
    Carryingfair value
    
    amount
    
    fair value
    
    amountDeposits with stated maturities
    
    $
    327,879
    
    
    $
    321,944
    
    
    $
    208,198
    
    
    $
    202,520Borrowings
    
    
    355,547
    
    
    
    354,000
    
    
    
    224,437
    
    
    
    222,000Subordinated debt
    
    
    25,774
    
    
    
    25,774
    
    
    
    25,774
    
    
    
    25,774Obligations from equity investments
    
    
    47,356
    
    
    
    47,356
    
    
    
    56,249
    
    
    
    56,249
  2005
    
    2004Estimated
    
    Carrying
    
    Estimated
    
    Carryingfair value
    
    amount
    
    fair value
    
    amountCommitments to extend credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Standby letters of credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
   41




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   2005
    
    2004Estimated
    
    Carrying
    
    Estimated
    
    Carryingfair value
    
    amount
    
    fair value
    
    amountLoans held for sale
    
    $
    803
    
    
    $
    803
    
    
    $
    2,221
    
    
    $
    2,204Loans, net
    
    
    538,804
    
    
    
    539,360
    
    
    
    454,882
    
    
    
    454,775
     Payment of Dividends
   Capital Ratios
   42




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
      2005To be wellcapitalized underFor capital
    
    prompt correctiveActual
    
    adequacy purposes
    
    action provisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioTotal capital (to risk-weighted
assets)Company (consolidated)
    
    $
    193,125
    
    
    
    19.80
    %
    
    $
    78,021
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    141,673
    
    
    
    14.86
    %
    
    
    76,247
    
    
    
    8.00
    %
    
    $
    95,309
    
    
    
    10.00
    %Tier I capital (to risk-weighted
assets)Company (consolidated)
    
    
    182,849
    
    
    
    18.75
    %
    
    
    39,010
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    131,397
    
    
    
    13.79
    %
    
    
    38,123
    
    
    
    4.00
    %
    
    
    57,185
    
    
    
    6.00
    %Tier I capital (to average assets,
leverage)Company (consolidated)
    
    
    182,849
    
    
    
    14.24
    %
    
    
    38,528
    
    
    
    3.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    131,397
    
    
    
    10.43
    %
    
    
    37,790
    
    
    
    3.00
    %
    
    
    62,983
    
    
    
    5.00
    %
  43




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   2004To be wellcapitalized underFor capital
    
    prompt correctiveActual
    
    adequacy purposes
    
    action provisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioTotal capital (to risk-weighted
assets)Company (consolidated)
    
    $
    176,557
    
    
    
    20.43
    %
    
    $
    69,149
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    124,847
    
    
    
    14.55
    %
    
    
    68,663
    
    
    
    8.00
    %
    
    $
    85,829
    
    
    
    10.00
    %Tier I capital (to risk-weighted
assets)Company (consolidated)
    
    
    165,731
    
    
    
    19.17
    %
    
    
    34,574
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    114,096
    
    
    
    13.29
    %
    
    
    34,332
    
    
    
    4.00
    %
    
    
    51,497
    
    
    
    6.00
    %Tier I capital (to average assets,
leverage)Company (consolidated)
    
    
    165,731
    
    
    
    13.93
    %
    
    
    35,692
    
    
    
    3.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    114,096
    
    
    
    9.59
    %
    
    
    35,692
    
    
    
    3.00
    %
    
    
    59,487
    
    
    
    5.00
    %
   CONDENSED BALANCE SHEETS
 December 31,2005
    
    
    2004AssetsCash
    
    $
    24,119
    
    
    $
    30,326Investment in Royal Investments of Delaware, Inc.  at equity
    
    
    19,699
    
    
    
    21,178Investment in Royal Bank America  at equity
    
    
    130,009
    
    
    
    114,109Loans, net
    
    
    4,682
    
    
    
    Other assets
    
    
    2,773
    
    
    
    1,037$
    181,282
    
    
    $
    166,650Subordinated debentures
    
    $
    25,774
    
    
    $
    25,774Stockholders equity
    
    
    155,508
    
    
    
    140,876$
    181,282
    
    
    $
    166,650
  44




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   CONDENSED STATEMENTS OF INCOME
 Year ended December 31,2005
    
    
    2004
    
    
    2003IncomeEquity in undistributed net earnings of subsidiaries
    
    $
    19,160
    
    
    $
    7,888
    
    
    $
    7,241Dividends from subsidiary bank
    
    
    12,859
    
    
    
    12,199
    
    
    
    11,321Other income
    
    
    173
    
    
    
    
    
    
    
    25Total income
    
    
    32,192
    
    
    
    20,087
    
    
    
    18,587ExpensesOther expenses
    
    
    121
    
    
    
    83
    
    
    
    81Income tax expense (benefit)
    
    
    18
    
    
    
    (29
    )
    
    
    (20
    )Total expenses
    
    
    139
    
    
    
    54
    
    
    
    61Net income
    
    $
    32,053
    
    
    $
    20,033
    
    
    $
    18,526
   45




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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
   CONDENSED STATEMENTS OF CASH FLOWS
 Year ended December 31,2005
    
    
    2004
    
    
    2003Cash flows from operating activitiesNet income
    
    $
    32,053
    
    
    $
    20,033
    
    
    $
    18,526Adjustments to reconcile net income to net cash
provided by operating activitiesUndistributed earnings from subsidiaries
    
    
    (19,160
    )
    
    
    (7,888
    )
    
    
    (7,241
    )Operating expenses
    
    
    121
    
    
    
    83
    
    
    
    81Rental income
    
    
    
    
    
    
    
    
    
    
    (25
    )Non-cash income tax (benefit) expense
    
    
    18
    
    
    
    (29
    )
    
    
    (20
    )Net cash provided by operating activities
    
    
    13,032
    
    
    
    12,199
    
    
    
    11,321Cash flows from financing activitiesLoan funding
    
    
    (4,695
    )
    
    
    
    
    
    
    Cash dividends paid
    
    
    (12,859
    )
    
    
    (12,199
    )
    
    
    (11,321
    )Proceeds from subordinated debentures
    
    
    
    
    
    
    25,000
    
    
    
    Other, net
    
    
    (1,685
    )
    
    
    551
    
    
    
    2,248Net cash provided by (used in) financing
activities
    
    
    19,239
    
    
    
    13,352
    
    
    
    (9,073
    )Net increase (decrease) in cash
    
    
    (6,207
    )
    
    
    25,551
    
    
    
    2,248Cash at beginning of year
    
    
    30,326
    
    
    
    4,775
    
    
    
    2,527Cash at end of year
    
    $
    24,119
    
    
    $
    30,326
    
    
    $
    4,775
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##### Table of Contents



ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
    2005Fourth
    
    
    Third
    
    
    Second
    
    
    FirstQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterInterest income
    
    $
    20,281
    
    
    $
    19,645
    
    
    $
    19,330
    
    
    $
    17,204Net interest income
    
    
    12,297
    
    
    
    10,894
    
    
    
    11,635
    
    
    
    9,838Provision for loan losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Net interest income after provision
    
    
    12,297
    
    
    
    10,894
    
    
    
    11,635
    
    
    
    9,837Non interest income
    
    
    15,039
    
    
    
    3,294
    
    
    
    3,880
    
    
    
    2,613Non interest expenses
    
    
    3,345
    
    
    
    7,526
    
    
    
    7,569
    
    
    
    6,359Income before income taxes
    
    
    23,991
    
    
    
    6,662
    
    
    
    7,946
    
    
    
    6,091Net income
    
    $
    15,587
    
    
    $
    4,903
    
    
    $
    7,242
    
    
    $
    4,321Net income per shareBasic
    
    $
    1.22
    
    
    $
    0.38
    
    
    $
    0.57
    
    
    $
    0.33Diluted
    
    $
    1.21
    
    
    $
    0.38
    
    
    $
    0.57
    
    
    $
    0.33
 2004Fourth
    
    
    Third
    
    
    Second
    
    
    FirstQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterInterest income
    
    $
    16,990
    
    
    $
    16,515
    
    
    $
    16,508
    
    
    $
    17,528Net interest income
    
    
    10,181
    
    
    
    9,722
    
    
    
    9,539
    
    
    
    10,798Provision for loan losses
    
    
    
    
    
    
    1
    
    
    
    4
    
    
    
    1Net interest income after provision
    
    
    10,181
    
    
    
    9,721
    
    
    
    9,535
    
    
    
    10,797Non interest income
    
    
    2,691
    
    
    
    3,822
    
    
    
    3,464
    
    
    
    3,183Non interest expense
    
    
    5,864
    
    
    
    6,225
    
    
    
    6,782
    
    
    
    6,576Income before income taxes
    
    
    7,008
    
    
    
    7,318
    
    
    
    6,217
    
    
    
    7,404Net income
    
    $
    5,363
    
    
    $
    5,112
    
    
    $
    4,394
    
    
    $
    5,164Net income per shareBasic
    
    $
    0.42
    
    
    $
    0.40
    
    
    $
    0.34
    
    
    $
    0.41Diluted
    
    $
    0.42
    
    
    $
    0.40
    
    
    $
    0.34
    
    
    $
    0.40
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##### Table of Contents



PART IV
 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 a.
    
    1.   Financial Statements
        2.
    
    Financial Statement Schedules
  3.
    
    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.)
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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 May 16,
2005 (Incorporated by reference to the Registrants Registration
Statement N0.
333-25855, on form S-8 filed with the Commission on November 22, 2005).10.2
    
    Outside Directors Stock Option Plan. (Incorporated by
reference to the Registrants Registration Statement N0. 333-25855, on form S-8
filed with the Commission on April 5, 1997).10.3
    
    Employment agreement between Royal Bancshares of Pennsylvania, Inc. and Joseph
P. Campbell, President and Chief Executive Officer, entered into on April 23, 2004.
(Incorporated by reference to Exhibit 10.1 to Registrants Quarterly Report on Form
10- Q filed with the Commission on November 9, 2004.)10.4
    
    Employment agreement between Royal Bancshares of Pennsylvania, Inc. and James
J. McSwiggan, Executive Vice President, entered into on April 23, 2004.
(Incorporated by reference to Exhibit 10.3 to Registrants Quarterly Report on Form
10-Q filed with the Commission on November 9, 2004.)10.5
    
    Employment agreement between Royal Bank America and Robert R. Tabas, entered
into on April 23, 2004. (Incorporated by reference to Exhibit 10.6 to Registrants
Quarterly Report on Form 10-Q filed with the Commission on November 9, 2004.)10.6
    
    Employment agreement between Royal Bancshares of Pennsylvania, Inc. and Murray
Stempel, Senior Vice President, entered into on April 23, 2004. (Incorporated by
reference to Exhibit 10.4 to Registrants Quarterly Report on Form 10-Q filed with
the Commission on November 9, 2004.)10.7
    
    Employment agreement between Royal Bancshares of Pennsylvania, Inc. and John
Decker, Senior Vice President, entered into on April 23, 2004. (Incorporated by
reference to Exhibit 10.2 to Registrants Quarterly Report on Form 10-Q filed with
the Commission on November 9, 2004.)10.8
    
    Employment agreement between Royal Bank America and Edward Shin, entered into
on April 23, 2004. (Incorporated by reference to Exhibit 10.5 to Registrants
Quarterly Report on Form 10-Q filed with the Commission on November 9, 2004.)11.
    
    Statement Re: Computation of Earnings Per Share. Included at
Item 8, hereof, Note K, Per Share Information.12.
    
    Statement re: Computation of Ratios. (Included at Item 8 here
of, Note P, Regulatory Matters.)14.
    
    Royal Bancshares of Pennsylvania, Inc. Code of Ethics.21.
    
    Subsidiaries of Registrant.
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##### Table of Contents



23a.
    
    Consent of Independent Accountants from Beard Miller Company
LLP.23b.
    
    Consent of Independent Accountants from Grant Thornton
LLP.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.99.1
    
    Opinion letter of Independent Accountants Grant Thornton LLP.
 (b)
    
    Reports on Form 8-K filed by the Registrant during the fourth quarter and through this Form
10K filing are as follows:
  nd
  rd
  (c)
    
    The exhibits required to be filed by this Item are listed under Item 14(a)3 above.(d)
    
    Not applicable.
 50




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##### Table of Contents



SIGNATURES
  ROYAL BANCSHARES OF PENNSYLVANIA, INC./s/ Joseph P. CampbellJoseph P. CampbellChief Executive Officer
January 23, 2007. ROYAL BANCSHARES OF PENNSYLVANIA, INC.
ANNUAL REPORT ON FORM 10-K
EXHIBIT INDEX
 23.1
    
    Consent of Independent Accountants from Beard Miller Company LLP.23.2
    
    Consent of Independent Accountants Grant Thornton LLP.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.99.1
    
    Opinion letter of Independent Accounts Grant Thornton LLP.
 51