<PAGE>

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549

                                   ----------

                                    FORM 10-K

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

                   For the fiscal year ended DECEMBER 31, 2004

                                       or

     [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

   For the transition period from ____________________ to ____________________

                         Commission File Number 0-26366

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

                PENNSYLVANIA                             23-2812193
       -------------------------------               -------------------
      (State of other jurisdiction of                 (I.R.S. Employer
       incorporation 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)

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

Securities registered pursuant to Section           CLASS A COMMON STOCK
12(g) of the Act:                                   ($2.00 PAR VALUE)
                                                    CLASS B COMMON STOCK
                                                    ($.10 PAR VALUE)

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

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]

The aggregate market value of Registrant's Common Stock held by non-affiliates
is $98,464,214, based on the June 30, 2004 closing price of the Registrant's
Common Stock of $00.00 per share (restated for stock dividend).

As of February 28, 2005, the Registrant had 10,482,060 and 1,978,347 shares
outstanding of Class A and Class B common stock, respectively.

Portions of the following documents are incorporated by reference: the
definitive Proxy Statement of the Registrant relating to Registrant's Annual
meeting of Shareholders to be held on May 18, 2005--Part III.

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                                     PART I

ITEM 1.  BUSINESS

ROYAL BANCSHARES

        Royal Bancshares of Pennsylvania, Inc. ("Royal Bancshares"), is a
Pennsylvania business corporation and a bank holding company registered under
the Federal Bank Holding Company Act of 1956, as amended (the "Holding Company
Act"). Royal Bancshares is supervised by the Board of Governors of the Federal
Reserve System (Federal Reserve Board). Its legal headquarters is located at 732
Montgomery Avenue, Narberth, PA. On June 29, 1995, pursuant to the plan of
reorganization approved by the shareholders of Royal Bank America, formerly
Royal Bank of Pennsylvania ("Royal Bank"), all of the outstanding shares of
common stock of Royal Bank were acquired by Royal Bancshares and were exchanged
on a one-for-one basis for common stock of Royal Bancshares. The principal
activities of Royal Bancshares is owning and supervising Royal Bank, which
engages in a general banking business in principally Montgomery, Philadelphia
and Berks counties in Pennsylvania and Southern New Jersey. Royal Bancshares
also has a wholly owned non-bank subsidiary, Royal Investments of Delaware,
Inc., which is engaged in investment activities. At December 31, 2004, Royal
Bancshares had consolidated total assets of approximately $1.21 billion, total
deposits of approximately $742 million and shareholders' equity of approximately
$141 million.

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

        Royal Bancshares has three reportable operating segments, Community
Banking, Tax Liens, and Equity Investments which resulted from the adoption of
FIN46(R) as described in Note B of the Notes to Consolidated Financial
Statements included in this Report. The segment reporting information in Note B
is incorporated by reference into this Item 1.

ROYAL BANK AMERICA

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

        During 2004, Royal Bank started a banking division called Royal Asian
Bank ("Royal Asian") which operates three branches in Pennsylvania and
anticipates opening two branches in Northern New Jersey in early 2005.

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

        Service Area. Royal Bank's primary service area includes Montgomery,
Chester, Bucks, Delaware, Berks and Philadelphia counties, New Jersey and the
State of Delaware. This area includes residential areas and industrial and
commercial businesses of the type usually found within a major metropolitan
area. Royal Bank serves this area from twenty

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branches located throughout Montgomery, Philadelphia and Berks counties and New
Jersey. Royal Bank also considers the states of Pennsylvania, New Jersey, New
York and Delaware as a part of its service area for certain products and
services. Frequently, Royal Bank will do business with clients located outside
of its service area. Royal Bank has loans in twenty-nine states via
participations with other lenders who have broad experience in those respective
markets. Royal Bank's legal headquarters are located at 732 Montgomery Avenue,
Narberth, PA.

        Royal Bank conducts business operations as a commercial bank offering
checking accounts, savings and time deposits, and loans, including residential
mortgages, home equity and SBA loans. Royal Bank also offers safe deposit boxes,
collections, internet banking and bill payment along with other customary bank
services (excluding trust) to its customers. Drive-up, ATM, and night depository
facilities are available. Services may be added or deleted from time to time.
The services offered and the business of Royal Bank is not subject to
significant seasonal fluctuations. Royal Bank is a member of the Federal Reserve
Fedline Wire Transfer System.

        Competition. The financial services industry in our service area is
extremely competitive. Competitors within our service area include banks and
bank holding companies with greater resources. Many competitors have
substantially higher legal lending limits.

        In addition, savings banks, savings and loan associations, credit
unions, money market and other mutual funds, mortgage companies, leasing
companies, finance companies and other financial services companies offer
products and services similar to those offered by Royal Bank, on competitive
terms.

        Many bank holding companies have elected to become financial holding
companies under the Gramm-Leach-Bliley Act of 1999, which give a broader range
of products with which Royal Bank must compete. Although the long-range effects
of this development cannot be predicted, it will likely further narrow the
differences and intensify competition among commercial banks, investment banks,
insurance firms and other financial services companies.

        Employees. Royal Bancshares employed approximately 183 persons on a
full-time equivalent basis as of December 31, 2004.

        Deposits. At December 31, 2004, total deposits of Royal Bank were
distributed among demand deposits (9%), money market deposit accounts, savings
and Super Now (64%) and time deposits (27%). At year-end 2004, deposits
decreased $49 million from year-end 2003, or 6%, primarily due to maturing
brokered deposits and reduction in the Money Market accounts due to a reduction
of interest rates paid.

        Lending. At December 31, 2004, Royal Bank had a total loan portfolio of
$469 million, representing 39% of total assets. The loan portfolio is
categorized into commercial demand, commercial mortgages, residential mortgages
(including home equity lines of credit), construction, real estate tax liens and
installment loans. At year-end 2004, loans decreased $46 million from year end
2003, or 9.0% primarily due to an increased number of loans being paid in full
as compared to new origination.

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

NON-BANK SUBSIDIARIES

        On June 30, 1995, Royal Bancshares established a special purpose
Delaware investment company, Royal Investment of Delaware, ("RID") as a wholly
owned subsidiary. Its legal headquarters is at 103 Springer Building, 3411
Silverside Road, Wilmington, DE. RID buys, holds and sells investment
securities. At December 31, 2004, total assets of RID were $21.4 million, of
which $16.1 million was held in cash and cash equivalents and $5.3 million was
held in investment securities.

        Royal Bancshares through its wholly owned subsidiary Royal Bank hold a
60% ownership in Crusader Servicing Corporation ("CSC"). Its legal headquarters
is at 732 Montgomery Avenue, Narberth, PA. CSC acquires, through auction,
delinquent property tax liens in various jurisdictions, assuming a lien position
that is generally superior to any mortgage liens

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on the property, and obtaining certain foreclosure rights as defined by local
statute. At December 31, 2004, total assets of CSC were $50.2 million.

        On June 23, 2003, Royal Bancshares through its wholly owned subsidiary
Royal Bank of Pennsylvania established Royal Investments of Pennsylvania, LLC
("RIP") as a wholly owned subsidiary. Its legal headquarters is at 732
Montgomery Avenue, Narberth, Pennsylvania. RIP was formed to invest in equity
real estate ventures subject to limitations imposed by regulation. At December
31, 2004, total assets of RIP prior to consolidation under FIN46(R) were
$10.4 million. During the early part of 2005, RIP changed its name to Royal
Investments America.

        On October 27, 2004, Royal Bancshares formed two Delaware trust
affiliates, Royal Bancshares Capital Trust I and Royal Bancshares Capital Trust
II from the completion of an aggregate of $25.0 million private placement of
trust preferred securities.

WEBSITE ACCESS TO COMPANY REPORTS

        We post publicly available reports required to be filed with the SEC on
our website, www.royalbankamerica.com, as soon as reasonably practicable after
filing such reports with the SEC. The required reports are available free of
charge through our website.

PRODUCTS AND SERVICES WITH REPUTATION RISK

        Royal Bancshares offers a diverse range of financial and banking
products and services. In the event one or more customers and/or governmental
agencies become dissatisfied or object to any product or service offered by
Royal Bancshares or any of its subsidiaries, whether legally justified or not,
negative publicity with respect to any such product or service could have a
negative impact on Royal Bancshares's reputation. The discontinuance of any
product or service, whether or not any customer or governmental agency has
challenged any such product or service, could have a negative impact on Royal
Bancshares' reputation.

FUTURE ACQUISITIONS

        Royal Bancshares' acquisition strategy consists of identifying financial
institutions, insurance agencies and other financial companies with business
philosophies that are similar to our business philosophies, which operate in
strong markets that are geographically compatible with our operations, and which
can be acquired at an acceptable cost. In evaluating acquisition opportunities,
we generally consider potential revenue enhancements and operating efficiencies,
asset quality, interest rate risk, and management capabilities. Royal Bancshares
currently has no formal commitments with respect to future acquisitions although
discussions with acquisition candidates take place occasionally.

CONCENTRATIONS, SEASONALITY

        Royal Bancshares does not have any portion of its business dependent on
a single or limited number of customers, the loss of which would have a material
adverse effect on its business. No substantial portion of loans or investments
is concentrated within a single industry or group of related industries, except
a significant majority of loans are secured by real estate much of which is
located in southeastern Pennsylvania. The business of Royal Bancshares and its
subsidiaries is not seasonal in nature.

ENVIRONMENT COMPLIANCE

        Royal Bancshares and its subsidiaries' compliance with federal, state
and local environment protection laws had no material effect on capital
expenditures, earnings or their competitive position in 2004, and is not
expected to have a material effect on such expenditures, earnings or competitive
position in 2005.

SUPERVISION AND REGULATION

        Bank holding companies and banks operate in a highly regulated
environment and are regularly examined by federal and state regulatory
authorities.

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        The following discussion concerns various federal and state laws and
regulations and the potential impact of such laws and regulation on Royal
Bancshares and its subsidiaries.

        To the extent that the following information describes statutory or
regulatory provisions, it is qualified in its entirety by reference to the
particular statutory or regulatory provisions themselves. Proposals to change
laws and regulations are frequently introduced in Congress, the state
legislatures, and before the various bank regulatory agencies. Royal Bancshares
cannot determine the likelihood or timing of any such proposals or legislations
or the impact they may have on Royal Bancshares and its subsidiaries. A change
in law, regulations or regulatory policy may have a material effect on Royal
Bancshares's business.

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

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

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

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

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

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

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

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

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

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

        The Pennsylvania Department of Banking and the FDIC routinely examine
Pennsylvania state-chartered, non-member banks such as Royal Bank in areas such
as reserves, loans, investments, management practices and other aspects of
operations. These examinations are designed for the protection of depositors
rather that Royal Bancshares' shareholders.

        Federal and state banking laws and regulations govern, among other
things, the scope of a bank's business, the investments a bank may make, the
reserves against deposits a bank must maintain, the types and terms of loans a
bank may make and the collateral it may take, the activities of banks with
respect to mergers and consolidations, and the establishment of branches.
Pennsylvania law permits statewide branching.

        Under the Federal Deposit Insurance Act ("FDIC Act"), the FDIC possesses
the power to prohibit institutions regulated by it (such as Royal Bank) from
engaging in any activity that would be an unsafe and unsound banking practice or
in violation of applicable law. Moreover, the FDIC Act: (i) empowers the FDIC to
issue cease-and-desist or civil money penalty orders against Royal Bank or its
executive officers, directors and/or principal shareholders based on violations
of law or unsafe and unsound banking practices; (ii) authorizes the FDIC to
remove executive officers who have participated in such violations or unsound
practices; (iii) restricts lending by Royal Bank to its executive officers,
directors, principal shareholders or related interests thereof; (iv) restricts
management personnel of a bank from serving as directors or in other management
positions with certain depository institutions whose assets exceed a specified
amount or which have an office within a specified geographic area. Additionally,
the FDIC Act provides that no person may acquire control of Royal Bank unless
the FDIC has been given 60-days prior written notice and within that time has
not disapproved the acquisition or extended the period for disapproval.

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

        A subsidiary bank of a holding company is subject to certain
restrictions imposed by the Federal Reserve Act, as amended, on any extensions
of credit to Royal Bank holding company or its subsidiaries, on investments in
the stock or other securities of Royal Bank holding company or its subsidiaries,
and on taking such stock or securities as collateral for loans. The Federal
Reserve Act, as amended, and Federal Reserve Board regulations also place
certain limitations and reporting requirements on extensions of credit by a bank
to principal shareholders of its parent holding company, among others, and to
related interests of such principal shareholders. In addition, such legislation
and regulations may affect the

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terms upon which any person who becomes a principal shareholder of a holding
company may obtain credit from banks with which the subsidiary bank maintains a
correspondent relationship.

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

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

FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991

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

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

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

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

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

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

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

        The FDIC's guidelines establish the following limits for LTV ratios:

            Loan Category                                      LTV Limit
            -----------------------------------------          ---------
            Raw Land                                              65%
            Land Development
            Construction:
                Commercial, Multifamily (includes
                 condos and co-ops), and other
                 Nonresidential                                   80%
                Improved Property                                 85%
            Owner occupied 1-4 Family and Home Equity
                (without credit enhancements)                     90%

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

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

GRAMM-LEACH-BLILEY ACT OF 1999. On November 12, 1999, President Clinton signed
the Gramm-Leach-Bliley Act of 1999, also known as the Financial Services
Modernization Act. The Financial Services Modernization Act repeals the two
affiliation provisions of the Glass-Steagall Act:

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

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

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

                                        8
<PAGE>

        In general, the Financial Services Modernization Act:

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

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

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

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

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

        o   Modifies the laws governing the implementation of the CRA; and

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

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

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

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

                                        9
<PAGE>

        USA PATRIOT ACT OF 2001. In October 2001, the USA Patriot Act of 2001
was enacted in response to the terrorist attacks in New York, Pennsylvania and
Washington D.C., which occurred on September 11, 2001. The Patriot Act is
intended to strengthen U.S. law enforcements' and the intelligence communities'
abilities to work cohesively to combat terrorism on a variety of fronts. The
potential impact of the Patriot Act on financial institutions of all kinds is
significant and wide ranging. The Patriot Act contains sweeping anti-money
laundering and financial transparency laws and imposes various regulations,
including standards for verifying client identification at account opening, and
rules to promote cooperation among financial institutions, regulators and law
enforcement entities in identifying parties that may be involved in terrorism or
money laundering.

        SARBANES-OXLEY ACT OF 2002. On July 30, 2002, the Sarbanes-Oxley Act of
2002 was enacted "SOX". The stated goals of the SOX are to increase corporate
responsibility, to provide for enhanced penalties for accounting and auditing
improprieties at publicly traded companies and to protect investors by improving
the accuracy and reliability of corporate disclosures pursuant to the securities
laws.

        SOX is the most far-reaching U.S. securities legislation enacted in some
time. SOX generally applies to all companies, both U.S. and non-U.S., that file
or are required to file periodic reports with the SEC under the Securities
Exchange Act of 1934, or the Exchange Act. Given the extensive SEC role in
implementing rules relating too many of SOX's new requirements, the final scope
of the requirements remains to be determined.

        The SOX addresses, among other matters:

        o       New requirements for audit committees of reporting companies,
                including independence, expertise, and responsibilities;

        o       Certification of financial statements by the chief executive
                officer and chief financial officer;

        o       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;

        o       Increased disclosure and reporting obligations for the reporting
                company and their directors and executive officers with other
                banks regulatory requirements;

        o       Disclosure of off-balance sheet transactions;

        o       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;

        o       Disclosure of a code of ethics and filing a Form 8-K for a
                change or waiver of such code;

        o       "Real time" filing of periodic reports;

        o       The formation of an independent public accounting oversight
                board;

        o       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

        o       Various increased civil and criminal penalties for fraud and
                other violations of securities laws.

        Section 404 of SOX requires Royal Bancshares to include in its Annual
Report on Form 10-K for fiscal years ending after November 15, 2004, a report by
its management and an attestation report by its independent registered public
accounting firm on the adequacy of Royal Bancshares' internal control over
financial reporting. Management's internal control report must, among other
things, set forth management's assessment of the effectiveness of Royal
Bancshares' internal control over financial reporting as of the end of its most
recent fiscal year, including a statement as to whether or not internal control
over financial reporting is effective. See Item 9A of this Report.

                                       10
<PAGE>

REGULATION W. Transactions between a bank and its "affiliates" are
quantitatively and qualitatively restricted under the Sections 23A and 23B of
Federal Reserve Act. The FDIC Act applies Sections 23A and 23B to insured
nonmember banks in the same manner and to the same extent as if they were
members of the Federal Reserve System. The Federal Reserve Board has also
recently issued Regulation W, which codifies prior regulations under Sections
23A and 23B of the Federal Reserve Act and interpretative guidance with respect
to affiliate transactions. Regulation W incorporates the exemption from the
affiliate transaction rules but expands the exemption to cover the purchase of
any type of loan or extension of credit from an affiliate. Affiliates of a bank
include, among other entities, Royal Bank's holding company and companies that
are under common control with Royal Bank. Royal Bancshares is considered to be
an affiliate of Royal Bank. In general, subject to certain specified exemptions,
a bank or its subsidiaries are limited in their ability to engage in "covered
transactions" with affiliates:

        o       To an amount equal to 10% of Royal Bank's capital and surplus,
                in the case of covered transactions with any one affiliate; and

        o       To an amount equal to 20% of Royal Bank's capital and surplus,
                in the case of covered transactions with all affiliates.

        In addition, a bank and its subsidiaries may engage in covered
transactions and other specified transactions only on terms and under
circumstances that are substantially the same, or at least as favorable to Royal
Bank or its subsidiary, as those prevailing at the time for comparable
transactions with nonaffiliated companies. A "covered transaction" includes:

        o       A loan or extension of credit to an affiliate;

        o       A purchase of, or an investment in, securities issued by an
                affiliate;

        o       A purchase of assets from an affiliate, with some exceptions;

        o       The acceptance of securities issued by an affiliate as
                collateral for a loan or extension of credit to any party; and

        o       This issuance of a guarantee, acceptance or letter of credit on
                behalf of an affiliate.

        In addition, under Regulation W:

        o       A bank and its subsidiaries may not purchase a low-quality asset
                from an affiliate;

        o       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

        o       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.

        Regulation W generally excludes all non-bank and non-savings association
subsidiaries of banks from treatment as affiliates, except to the extent that
the Federal Reserve Board decides to treat these subsidiaries as affiliates.

        Concurrently with the adoption of Regulation W, the Federal Reserve
Board has proposed a regulation which would further limit the amount of loans
that could be purchased by a bank from an affiliate to not more than 100% of
Royal Bank's capital and surplus.

MONETARY POLICY

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

                                       11
<PAGE>

distribution of bank loans and investments and deposits. Their use may also
affect rates charged on loans or paid for deposits.

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

EFFECTS OF INFLATION

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

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

        The accounting and reporting policies of Royal Bancshares conform to
accounting principles generally accepted in the United States of America and
general practices within the financial services industry. Critical accounting
policies, judgments and estimates relate to loans, the allowance for loan losses
and deferred tax assets. The policies which significantly affect the
determination of Royal Bancshares's financial position, results of operations
and cash flows, are summarized in Note A "Summary of Significant Accounting
Polices" of the Notes to Consolidated Financial Statements and are discussed in
the section captioned "Recent Accounting Pronouncements" of Management's
Discussion and Analysis of Financial Condition and Results of Operations,
included in Items 7 and 8 of this Report, each of which is incorporated herein
by reference.

        Royal Bancshares considers that the determination of the allowance for
loan losses involves a higher degree of judgment and complexity than its other
significant accounting policies. The allowance for loan losses is calculated
with the objective of maintaining a reserve level believed by management to be
sufficient to absorb estimated credit losses. Management's determination of the
adequacy of the allowance is based on periodic evaluations of the loan portfolio
and other relevant factors. However, this evaluation is inherently subjective as
it requires material estimates, including, among others, expected default
probabilities, loss given default, expected commitment usage, the amounts of
timing of expected future cash flows on impaired loans, mortgages, and general
amounts for historical loss experience. The process also considers economic
conditions, uncertainties in estimating losses and inherent risks in the loan
portfolio. All of these factors may be susceptible to significant change. To the
extent actual outcomes differ from management estimates, additional provisions
for loan losses may be required that would adversely impact earnings in future
periods.

        Royal Bancshares recognizes deferred tax assets and liabilities for the
future tax effects of temporary differences, net operating loss carry forwards
and tax credits. Deferred tax assets are subject to management's judgment based
upon available evidence that future realization is more likely than not. If
management determines that Royal Bancshares may be unable to realize all or part
of net deferred tax assets in the future, a direct charge to income tax expense
may be required to reduce the recorded value of the net deferred tax asset to
the expected realizable amount.

AVAILABLE INFORMATION

        Upon a shareholder's written request, a copy of Royal Bancshares' Annual
Report on 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K,
as required to be filed with the SEC pursuant to Securities Exchange Act
Rule 13a-1, may be obtained without charge, on our website
www.royalbankamerica.com or from Jeffrey T. Hanuscin, Chief Financial Officer,
Royal Bank America, 732 Montgomery Avenue, Narberth, PA 19072.

                                       12
<PAGE>

ITEM 2.  PROPERTIES

        Royal Bank has twenty banking offices, which are located in Pennsylvania
and New Jersey.

                               ROYAL BANK AMERICA

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

Walnut Street Office       Shillington Office                Bridgeport Office (1)
------------------------   -------------------------------   --------------------------
1230 Walnut Street         516 East Lancaster Avenue         105 W. 4th Street
Philadelphia, PA 19107     Shillington, PA 19607             Bridgeport, PA 19406

Fairmont Office (1)        Trooper Office (1)                Henderson Road Office
------------------------   -------------------------------   --------------------------
401 Fairmont Avenue        Trooper and Egypt Roads           Bielder and Henderson Roads
Philadelphia, PA 19123     Trooper, PA 19401                 King of Prussia, PA 19406

Castor Office (1)          Reading Office                    Phoenixville Office (1)
------------------------   -------------------------------   --------------------------
6331 Castor Avenue         501 Washington Avenue             808 Valley Forge Road
Philadelphia, PA 19149     Reading, PA 19601                 Phoenixville, PA 19460

15th Street Office         Jenkintown Office (1)             Turnersville Office
------------------------   -------------------------------   --------------------------
30 South Street            600 Old York Road                 3501 Black Horse Pike
Philadelphia, PA 19102     Jenkintown, PA 19046              Turnersville, NJ 08012

Grant Avenue Office (1)    Narberth Training Center (1)(2)   Storage Facility (1)
------------------------   -------------------------------   --------------------------
1650 Grant Avenue          814 Montgomery Avenue             3836 Spring Garden Street
Philadelphia, PA 19115     Narberth, PA 19072                Philadelphia, PA 19104
</TABLE>

                            ROYAL ASIAN BANK DIVISION

<TABLE>
<S>                        <C>                               <C>
Northeast Office           Cheltenham Office                 Upper Darby Office
------------------------   -------------------------------   --------------------------
6526 Castor Avenue         418 Oak Lane                      7001 West Chester Pike
Philadelphia, PA 19149     Philadelphia, PA 19126            Upper Darby, PA 19082
</TABLE>

Loan Production Office
----------------------
215 Main Street
Fort Lee, NJ 07024

        (1) Owned
        (2) Used for employee training

        Royal Bank owns eleven of the above properties. One property is subject
to a mortgage. The remaining ten properties are leased with expiration dates
between 2005 and 2012. During 2004, Royal Bank made aggregate lease payments of
approximately $664,000. Royal Bank believes that all of its properties are
attractive, adequately insured, and well maintained and are adequate for Royal
Bank's purposes. Royal Bank also owns a property located at 144 Narberth Avenue,
Narberth, PA, which may serve as a site for future expansion.

ITEM 3.  LEGAL PROCEEDINGS

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

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

        None.

                                       13
<PAGE>

                                     PART II

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

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

                                   BID PRICES

        2004                                    HIGH       LOW        CLOSE
        -----------------------------------   --------   --------   --------
        First Quarter......................   $ 26.471   $ 23.922   $ 25.000
        Second Quarter.....................     25.588     20.931     24.314
        Third Quarter......................     24.892     21.618     23.794
        Fourth Quarter.....................     29.304     23.441     26.490

        2003                                    HIGH       LOW        CLOSE
        -----------------------------------   --------   --------   --------
        First Quarter......................   $ 20.713   $ 17.061   $ 18.704
        Second Quarter.....................     21.146     18.618     20.588
        Third Quarter......................     26.384     20.118     25.808
        Fourth Quarter.....................     26.105     23.357     24.510

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

        The bid information shown above is derived from statistical reports of
the NASDAQ Stock Market and reflects inter-dealer prices without retail mark-up,
mark-down or commissions and may not necessarily represent actual transactions.
The bid prices reflect the 2% stock dividend that was declared on December 15,
2004. The NASDAQ Stock Market, Inc., is a wholly-owned subsidiary of National
Association of Securities Dealers, Inc.

        The approximate number of recorded holders of Royal Bancshares' Class A
and Class B Common Stock, as of February 28, 2005, is shown below:

        TITLE OF CLASS                        NUMBER OF RECORD HOLDERS
        -----------------------------------   ------------------------
        Class A Common Stock                             367
        Class B Common Stock                             147

        Because substantially all of the holders of Class B Common Stock are
also holders of Class A Common stock the number of record holders of the two
classes on a combined basis was approximately 420 as of February 28, 2005.

                                       14
<PAGE>

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

        The following two tables discloses the number of outstanding options,
warrants and rights granted by Royal Bancshares to participants in equity
compensation plans, as well as the number of securities remaining available for
future issuance under the plans. The tables provide this information separately
for equity compensation plans that have and have not been approved by security
holders.

<TABLE>
<CAPTION>
                                                                                                           (c)
                                                                                                   Number of securities
                                                      (a)                                         remaining available for
                                            Number of securities to             (b)                future issuance under
                                                be issued upon            Weighted-average          equity compensation
                                            exercise of outstanding       exercise price of          plans (excluding
                                             options, warrants and       outstanding options,     securities reflected in
                                                    rights               warrants and rights            column (a))
                                           ------------------------   ------------------------   ------------------------
<S>                                                          <C>                       <C>                         <C>
OUTSIDE DIRECTORS STOCK OPTION PLAN
 Equity compensation plan approved
 by stockholders                                             79,044                    $ 17.29                     66,903

Equity compensation plan not
 approved by stockholders                                        --                         --                         --
                                           ------------------------                              ------------------------
Total                                                        79,044                    $ 17.29                     66,903
</TABLE>

<TABLE>
<CAPTION>
                                                                                                           (c)
                                                                                                   Number of securities
                                                      (a)                                         remaining available for
                                            Number of securities to             (b)                future issuance under
                                                be issued upon            Weighted-average          equity compensation
                                            exercise of outstanding       exercise price of          plans (excluding
                                             options, warrants and       outstanding options,     securities reflected in
                                                    rights               warrants and rights            column (a))
                                           ------------------------   ------------------------   ------------------------
<S>                                                         <C>                        <C>                         <C>
EMPLOYEES STOCK OPTION PLAN
 Equity compensation plan approved
 by stockholders                                            593,539                    $ 19.18                     77,026

Equity compensation plan not
 approved by stockholders                                        --                         --                         --
                                           ------------------------                              ------------------------
Total                                                       593,539                    $ 19.18                     77,026
</TABLE>

DIVIDENDS

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

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

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

                                       15
<PAGE>

        On January 16, 2002, the Board of Directors of Royal Bancshares declared
a 6% stock dividend on both its Class A Common Stock and Class B Common Stock
shares payable on February 8, 2002, to shareholders of record on January 28,
2002. The stock dividend resulted in the issuance of 517,635 additional shares
of Class A common stock and 108,282 additional shares of Class B common stock.

        On January 15, 2003, the Board of Directors of Royal Bancshares declared
a 3% stock dividend on both its Class A Common Stock and Class B Common Stock
shares payable on February 12, 2003, to shareholders of record on January 29,
2003. The stock dividend resulted in the issuance of 281,196 additional shares
of Class A common stock and 55,820 additional shares of Class B common stock.

        On January 21, 2004, the Board of Directors of Royal Bancshares declared
a 2% stock dividend on both its Class A Common Stock and Class B Common Stock
shares payable on February 18, 2004, to shareholders of record on February 4,
2004. The stock dividend resulted in the issuance of 195,861 additional shares
of Class A common stock and 38,216 additional shares of Class B common stock.

        On December 15, 2004, the Board of Directors of Royal Bancshares
declared a 2% stock dividend on both its Class A Common Stock and Class B Common
Stock shares payable on January 12, 2005, to shareholders of record on December
29, 2004. The stock dividend resulted in the issuance of 200,814 additional
shares of Class A common stock and 38,865 additional shares of Class B common
stock. Future stock dividends, if any, will be at the discretion of the Board of
Directors and will be dependent on the level of earnings and compliance with
regulatory requirements.

        Cash Dividends. Royal Bancshares paid cash dividends in each quarter of
2004 and 2003 for holders of Class A Common Stock and for holders of Class B
Common Stock. This resulted in a charge to retained earnings of approximately
$12.2 million and $11.3 million for 2004 and 2003, respectively. The following
table sets forth on a quarterly basis dividends, paid to holders of each Class A
and Class B Common Stock for 2004 and 2003, adjusted to give effect to the stock
dividends paid.

                                                     CASH DIVIDENDS PER SHARE
                                                   -----------------------------
        2004                                          CLASS A         CLASS B
        ----------------------------------------   -------------   -------------
        First Quarter...........................   $       .2500   $       .2875
        Second Quarter..........................   $       .2500   $       .2875
        Third Quarter...........................   $       .2500   $       .2875
        Fourth Quarter..........................   $       .2500   $       .2875

                                                     CASH DIVIDENDS PER SHARE
                                                   -----------------------------
        2003                                          CLASS A         CLASS B
        ----------------------------------------   -------------   -------------
        First Quarter...........................   $       .2375   $       .2731
        Second Quarter..........................   $       .2375   $       .2731
        Third Quarter...........................   $       .2375   $       .2731
        Fourth Quarter..........................   $       .2500   $       .2875

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

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

                                       16
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

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

<TABLE>
<CAPTION>
                                                                       YEARS ENDED DECEMBER 31,
                                                                (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                      ---------------------------------------------------------
INCOME STATEMENT DATA (IN THOUSANDS)                     2004        2003        2002        2001        2000
----------------------------------------------------  ---------   ---------   ---------   ---------   ---------
<S>                                                   <C>         <C>         <C>         <C>         <C>
Interest income                                       $  67,541   $  72,320   $  77,104   $  69,224   $  58,875
Interest expense                                         27,301      29,941      36,491      31,808      22,549
                                                      ---------   ---------   ---------   ---------   ---------
Net interest income                                      40,240      42,379      40,613      37,416      36,326
Provision for loan losses                                     6         674         250          --         250
                                                      ---------   ---------   ---------   ---------   ---------
Net interest income after loan losses                    40,234      41,705      40,363      37,416      36,076
     Gains on sale of loans                                 480         637         767         372          --
     Gains on sale of real estate                         2,102         568         455         188          53
     Gains (losses) on investment securities                810         719         790          60      (1,302)
     Income related to equity investments ("VIE")         7,133          --          --          --          --
     Other income                                         2,635       1,780       1,188       1,118       1,207
                                                      ---------   ---------   ---------   ---------   ---------
Total other income                                       13,160       3,704       3,200       1,738         (42)
Income before other expenses & income taxes              53,394      45,410      43,563      39,154      36,034
Non-interest expense
     Salaries and benefits                               10,767       9,959       9,440      10,479       7,979
     Expenses related to equity investments ("VIE")       4,780          --          --          --          --
     Other                                                9,900       8,929       9,481       7,124       5,813
                                                      ---------   ---------   ---------   ---------   ---------
Total operating expenses                                 25,447      18,888      18,921      17,603      13,792
                                                      ---------   ---------   ---------   ---------   ---------
Income before taxes                                      27,947      26,522      24,642      21,551      22,242
Incomes taxes                                             7,914       7,996       7,237       5,797       7,982
                                                      ---------   ---------   ---------   ---------   ---------
Net income                                            $  20,033   $  18,526   $  17,405   $  15,754   $  14,260
                                                      =========   =========   =========   =========   =========

Basic earnings per share (1)                          $    1.60   $    1.49   $    1.41   $    1.29   $    1.18
                                                      ---------   ---------   ---------   ---------   ---------
Diluted earnings per share (1)                        $    1.59   $    1.49   $    1.38   $    1.27   $    1.16
                                                      ---------   ---------   ---------   ---------   ---------
</TABLE>

(1)     Earnings per share has the weighted average number of shares used in the
        calculation adjusted to reflect a 2% stock dividend in December 2004, a
        2% stock dividend in January 2004, a 3% stock dividend in 2003, a 6%
        stock dividend in 2002, a 5% stock dividend in 2001, and a 5% stock
        dividend in 2000.

                                       17
<PAGE>

<TABLE>
<CAPTION>
                                                                 AS OF DECEMBER 31,
                                    ----------------------------------------------------------------------------
BALANCE SHEET DATA (IN THOUSANDS)       2004            2003            2002            2001            2000
---------------------------------   ------------    ------------    ------------    ------------    ------------
<S>                                 <C>             <C>             <C>             <C>             <C>
Total assets                        $  1,205,274    $  1,154,410    $  1,088,484    $    930,980    $    630,081
Total average assets                   1,194,008       1,160,354       1,048,875         788,419         573,780
Loans, net                               454,775         500,131         564,264         634,347         411,973
Total deposits                           742,382         791,059         820,840         701,860         472,582
Total borrowings                         222,000         212,000         124,500          70,225          30,000
Total stockholders equity                140,876         134,833         121,331         108,449         103,502
Total average stockholders equity        137,622         127,728         114,655         105,072          99,746
Return on average assets                     1.7%            1.6%            1.7%            2.0%            2.5%
Return on average equity                    14.6%           14.5%           15.2%           15.0%           14.3%
Average equity to average assets            11.5%           11.0%           10.9%           13.3%           17.4%
Cash dividend payout ratio                  60.9%           61.1%           60.8%           56.9%           55.0%
</TABLE>

AVERAGE BALANCES

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

<TABLE>
<CAPTION>
                                                         2004                                          2003
                                     --------------------------------------------    ------------------------------------------
                                       AVERAGE                          YIELD/         AVERAGE                        YIELD/
                                       BALANCE         INTEREST          RATE          BALANCE        INTEREST         RATE
                                     ------------    ------------    ------------    ------------   ------------   ------------
<S>                                  <C>             <C>                     <C>     <C>            <C>                    <C>
ASSETS (In thousands)

Interest bearing deposits            $     34,702    $        409            1.18%   $     40,856   $        475           1.16%
Federal funds                               8,644             102            1.18%         13,598            142           1.04%
Investment securities
  Held to maturity                        141,799           6,365            4.49%         46,302          3,087           6.67%
  Available for sale                      399,361          20,621            5.16%        446,210         22,007           4.93%
                                     ------------    ------------    ------------    ------------   ------------   ------------
Total investment securities               541,160          26,986            4.99%        492,512         25,094           5.10%
Loans
  Commercial and Industrial               199,645          14,241            7.13%        225,224         15,812           7.02%
  Real estate secured                     267,757          25,504            9.53%        333,168         30,532           9.16%
  Other loans                               4,124             299            7.25%          4,373            265           6.06%
                                     ------------    ------------    ------------    ------------   ------------   ------------
        Total loans                       471,526          40,044            8.49%        562,765         46,609           8.28%
                                     ------------    ------------    ------------    ------------   ------------   ------------
Total interest earnings
 assets                                 1,056,032          67,541            6.40%      1,109,731         72,320           6.52%
Non interest earnings assets
  Cash & due from banks                     9,720                                           8,348
  Other assets                            142,455                                          56,780
  Allowance for loan loss                 (12,503)                                        (12,472)
  Unearned discount                        (1,696)                                         (2,033)
                                     ------------                                   -------------
Total non-interest earning
 assets                                   137,976                                          50,623
                                     ------------                                   -------------
Total assets                         $  1,194,008                                   $   1,160,354
                                     ============                                   =============

<CAPTION>
                                                         2002
                                     -------------------------------------------
                                       AVERAGE                         YIELD/
                                       BALANCE         INTEREST         RATE
                                     ------------    ------------    -----------
<S>                                  <C>             <C>                    <C>
ASSETS (In thousands)

Interest bearing deposits            $     32,760    $        682           2.08%
Federal funds                              16,780             272           1.62%
Investment securities
  Held to maturity                         53,226           4,019           7.55%
  Available for sale                      297,457          18,817           6.33%
                                     ------------    ------------    -----------
Total investment securities               350,683          22,836           6.51%
Loans
  Commercial and Industrial               230,556          17,020           7.38%
  Real estate secured                     383,816          36,070           9.40%
  Other loans                               2,784             224           8.05%
                                     ------------    ------------    -----------
        Total loans                       617,156          53,314           8.64%
                                     ------------    ------------    -----------
Total interest earnings                 1,017,379          77,104           7.58%
 assets
Non interest earnings assets
  Cash & due from banks                     8,597
  Other assets                             38,039
  Allowance for loan loss                 (12,108)
  Unearned discount                        (3,032)
                                     ------------
Total non-interest earning
 assets                                    31,496
                                     ------------
Total assets                         $  1,048,875
                                     ------------
</TABLE>

                                       18
<PAGE>

<TABLE>
<CAPTION>
                                                         2004                                          2003
                                     --------------------------------------------    ------------------------------------------
                                       AVERAGE                          YIELD/         AVERAGE                        YIELD/
                                       BALANCE         INTEREST          RATE          BALANCE        INTEREST         RATE
                                     ------------    ------------    ------------    ------------   ------------   ------------
<S>                                  <C>             <C>                     <C>     <C>            <C>                    <C>
LIABILITIES & SHAREHOLDERS' EQUITY

Deposits:
    Savings                          $     24,278    $        152            0.63%   $     23,714   $        182           0.77%
    Now                                    34,181             244            0.71%         32,510            339           1.04%
    Money market                          426,895           7,721            1.81%        442,873          9,661           2.18%
    Time deposits                         218,756           8,577            3.92%        269,293         12,011           4.46%
                                     ------------    ------------    ------------    ------------   ------------   ------------
Total interest bearing deposits           704,110          16,694            2.37%        768,390         22,193           2.89%
Federal funds                                  --              --              --              --             --             --
Borrowings                                221,741           8,744            3.94%        183,339          7,748           4.23%
Obligation through equity
 investments                               55,558           1,639            2.95%             --             --             --
Subordinate debt                            4,448             224            5.06%             --             --             --
                                     ------------    ------------    ------------    ------------   ------------   ------------
Total interest bearing liabilities        985,857          27,301            2.77%        951,729         29,941           3.15%
                                     ------------    ------------    ------------    ------------   ------------   ------------
    Non interest bearing deposits          57,789                                          56,814
    Other liabilities                      12,740                                          24,083
                                     ------------                                    ------------
Total liabilities                       1,056,386                                       1,032,626
    Shareholders' equity                  137,622                                         127,728
                                     ------------                                    ------------
Total liabilities and
    Shareholders' equity             $  1,194,008                                    $  1,160,354
                                     ============                                    ============
Net interest income                                  $     40,240                                   $     42,379
                                                     ============                                   ============
Net interest margin                                                          3.81%                                         3.82%
                                                                     ============                                  ============

<CAPTION>
                                                         2002
                                     -------------------------------------------
                                       AVERAGE                         YIELD/
                                       BALANCE         INTEREST         RATE
                                     ------------    ------------    -----------
<S>                                  <C>             <C>                    <C>

LIABILITIES & SHAREHOLDERS' EQUITY

Deposits:
    Savings                          $     25,658    $        370            1.44%
    Now                                    34,866             697            2.00%
    Money market                          270,454           8,491            3.14%
    Time deposits                         385,370          19,358            5.02%
                                     ------------    ------------    ------------
Total interest bearing deposits           716,348          28,916            4.04%
Federal funds                                  --              --              --
Borrowings                                137,460           7,575            5.51%
Obligation through equity
 investments                                   --              --              --
Subordinate debt                               --              --              --
                                     ------------    ------------    ------------
Total interest bearing liabilities        853,808          36,491            4.27%
                                     ------------    ------------    ------------
    Non interest bearing deposits          53,800
    Other liabilities                      26,602
                                     ------------
Total liabilities                         934,210
    Shareholders' equity                  114,665
                                     ------------
Total liabilities and
    Shareholders' equity             $  1,048,875
                                     ============
Net interest income                                  $     40,613
                                                     ============
Net interest margin                                                          3.99%
                                                                     ============
</TABLE>

(1) Nonaccruing loans have been included in the appropriate average loan balance
category, but interest on these loans has not been included.

                                       19
<PAGE>

RATE VOLUME

        The following table sets forth a rate/volume analysis, which segregates
in detail the major factors contributing to the change in net interest income
for the years ended December 31, 2004 and 2003, as compared to respective
previous periods, into amounts attributable to both rate and volume variances.

<TABLE>
<CAPTION>
                                                         2004 VS 2003                        2003 VS 2002
                                                        CHANGES DUE TO:                     CHANGES DUE TO:
                                               --------------------------------    --------------------------------
                                                VOLUME       RATE        TOTAL      VOLUME       RATE        TOTAL
                                               --------    --------    --------    --------    --------    --------
                                                                          (IN THOUSANDS)
<S>                                            <C>         <C>         <C>         <C>         <C>         <C>
INTEREST INCOME

Interest bearing deposits in banks             $    (73)   $      7    $    (66)   $    142    $   (349)   $   (207)
Federal funds sold                                  (57)         17         (40)        (45)        (85)       (130)
Investments securities
    Held to maturity                              4,573      (1,295)      3,278        (491)       (441)       (932)
    Available for sale                           (2,384)        998      (1,386)      7,972      (4,782)      3,190
                                               --------    --------    --------    --------    --------    --------
Total investment securities                       2,189        (297)      1,892       7,481      (5,223)      2,258
Loans
    Commercial and industrial                    (1,820)        249      (1,571)       (387)       (821)     (1,208)
    Mortgages secured by real estate             (6,192)      1,164      (5,028)     (4,659)       (880)     (5,538)
    Other loans                                     (16)         50          34         106         (65)         41
                                               --------    --------    --------    --------    --------    --------
Total loans                                      (8,028)      1,463      (6,565)     (4,940)     (1,766)     (6,705)
                                               --------    --------    --------    --------    --------    --------
Total increase (decrease) in interest income     (5,969)      1,190      (4,779)      2,638      (7,423)     (4,784)

INTEREST EXPENSE

Deposits
    Savings                                    $      4    $    (34)   $    (30)   $    (26)   $   (162)   $   (188)
    Now and Money Market                           (959)     (1,076)     (2,035)      4,109      (3,297)        812
    Time deposits                                (2,106)     (1,328)     (3,434)     (5,353)     (1,994)     (7,347)
                                               --------    --------    --------    --------    --------    --------
           Total deposits                        (3,061)     (2,438)     (5,499)     (1,270)     (5,453)     (6,723)
    Borrowings                                    3,200        (341)      2,859       2,182      (2,009)        173
                                               --------    --------    --------    --------    --------    --------
Total increase(decrease) in interest expense        139      (2,779)     (2,640)        912      (7,462)     (6,550)

Total increase(decrease) in net interest
 income                                        $ (6,108)   $  3,969    $ (2,139)   $  1,726    $     39    $  1,766
                                               ========    ========    ========    ========    ========    ========
</TABLE>

LOANS

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

<TABLE>
<CAPTION>
                                                              AS OF DECEMBER 31,
                                                                (IN THOUSANDS)
                              ----------------------------------------------------------------------------------
                                        2004                         2003                         2002
                              ------------------------     ------------------------     ------------------------
<S>                           <C>                  <C>     <C>                  <C>     <C>                  <C>
Comm'l and Industrial         $  208,204            44%    $  225,268            44%    $  241,373            42%
Real Estate Secured              258,747            55%       286,997            55%       333,972            57%
Other                              4,087             1%         4,942             1%         3,509             1%
                              ----------    ----------     ----------    ----------     ----------    ----------
    Total gross loans            471,038           100%       517,207           100%       578,854           100%
Unearned income                   (1,540)                      (1,203)                      (1,082)
Discount on loans purchased           --                         (290)                      (1,038)
                              ----------                   ----------                   ----------
                                 469,498                      515,714                      576,734
Allowance for loan loss          (12,519)                     (12,426)                     (12,470)
                              ----------                   ----------                   ----------
    Total net loans           $  456,979                   $  503,288                   $  564,264
                              ==========                   ==========                   ==========

<CAPTION>
                                                 AS OF DECEMBER 31,
                                                   (IN THOUSANDS)
                              -----------------------------------------------------
                                        2001                         2000
                              ------------------------     ------------------------
<S>                           <C>                  <C>     <C>                  <C>
Comm'l and Industrial         $  218,498            34%    $  193,398            45%
Real Estate Secured              417,028            64%       230,999            54%
Other                             13,909             2%         4,561             1%
                              ----------    ----------     ----------    ----------
    Total gross loans            649,435           100%       428,958           100%
Unearned income                   (1,056)                      (1,992)
Discount on loans purchased       (2,144)                      (3,020)
                              ----------                   ----------
                                 646,235                      423,946
Allowance for loan loss          (11,888)                     (11,973)
                              ----------                   ----------
    Total net loans           $  634,347                   $  411,973
                              ==========                   ==========
</TABLE>

                                       20
<PAGE>

ANALYSIS OF ALLOWANCE FOR LOAN LOSS

<TABLE>
<CAPTION>
                                                                 YEAR ENDING DECEMBER 31,
                                                                      (IN THOUSANDS)
                                           --------------------------------------------------------------------
                                              2004          2003           2002          2001           2000
                                           ----------    ----------     ----------    ----------     ----------
<S>                                        <C>           <C>            <C>           <C>            <C>
Total Loans                                $  469,498    $  515,714     $  576,734    $  646,235     $  423,946
                                           ==========    ==========     ==========    ==========     ==========
Daily average loan balance                 $  471,526    $  562,765     $  617,156    $  543,854     $  404,794
                                           ==========    ==========     ==========    ==========     ==========
Allowance for loan loss:
   Balance at the beginning of the year    $   12,426    $   12,470     $   11,888    $   11,973     $   11,737
   Charge offs by loan type:
      Commercial                                   --            22             47            82            523
      Real  estate                                204           789            878           435            105
                                           ----------    ----------     ----------    ----------     ----------
   Total charge offs                              204           811            925           517            628
   Recoveries by loan type:
      Commercial                                   37            26             19           212            596
      Individual                                    4             2             32            32              4
      Real estate                                 250            65          1,206           188             14
                                           ----------    ----------     ----------    ----------     ----------
   Total recoveries                               291            93          1,257           432            614
                                           ----------    ----------     ----------    ----------     ----------
   Net recoveries (loan charge offs)               87          (718)           332           (85)           (14)
      Provision for loan loss                       6           674            250            --            250
                                           ----------    ----------     ----------    ----------     ----------
Balance at end of year                     $   12,519    $   12,426     $   12,470    $   11,888     $   11,973
                                           ==========    ==========     ==========    ==========     ==========
Net charge offs to average loans                 0.02%        (0.13%)         0.05%        (0.02%)           --
                                           ==========    ==========     ==========    ==========     ==========
Allowance to total loans at year end             2.67%         2.41%          2.16%         1.84%          2.82%
                                           ==========    ==========     ==========    ==========     ==========
</TABLE>

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

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

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

                                       21
<PAGE>

LOANS AND LEASE FINANCING RECEIVABLES

        The following table summarizes the loan portfolio by loan category and
amount that corresponds to the appropriate regulatory definitions.

<TABLE>
<CAPTION>
                                                                              AS OF DECEMBER 31,
                                                                                (IN THOUSANDS)
                                                                      ---------------------------------
                                                                         2004        2003        2002
                                                                      ---------   ---------   ---------
<S>                                                                   <C>         <C>         <C>
Loans secured by real estate
   Construction and land development                                  $ 106,428   $ 107,463   $  82,736
   Secured by 1-4 family residential properties:
   Revolving, open-end loans secured by 1-4 family residential
    properties and extended under lines of credit                         7,369       5,854       7,564
      All other loans secured by 1-4 family residential properties:
         Secured by first liens                                          36,136      50,716     116,248
         Secured by junior liens                                          4,515       3,796       3,418
   Secured by multi family (5 or more) residential properties            15,256      21,728      33,017
   Secured by nonfarm nonresidential properties                          85,545      97,902      87,448
   Commercial and industrial loans to US addresses                      208,204     225,268     241,373
Loans to individuals for household, family, and other personal
 expenditures                                                             1,346       1,182       3,146
Obligations of state and political subdivisions in the US                 1,769       3,134       3,541
All other loans                                                           4,470         163         363
Less: Any unearned income on loans listed above                           1,540       1,492       2,120
                                                                      ---------   ---------   ---------
   Total loans and leases, net of unearned income                     $ 469,498   $ 515,714   $ 576,734
                                                                      =========   =========   =========
</TABLE>

CREDIT QUALITY

        The following table presents the principal amounts of nonaccruing loans
and other real estate.

<TABLE>
<CAPTION>
                                                                            AS OF DECEMBER 31,
                                                                             (IN THOUSANDS)
                                                 -----------------------------------------------------------------------
                                                     2004           2003          2002           2001           2000
                                                 -----------    -----------    -----------    -----------    -----------
<S>                                              <C>            <C>            <C>            <C>            <C>
Non-accruing loans (1)(2)                        $     4,526    $    11,328    $    11,908    $    10,794    $     3,548
Other real estate                                      5,424          4,371          1,444            884             --
                                                 -----------    -----------    -----------    -----------    -----------
         Total nonperforming assets              $     9,950    $    15,699    $    13,352    $    11,678    $     3,548
                                                 ===========    ===========    ===========    ===========    ===========
Nonperforming assets to total assets                    0.83%          1.36%          1.23%          1.25%          0.56%
                                                 ===========    ===========    ===========    ===========    ===========
Nonperforming loans to total loans                      0.96%          2.20%          2.06%          1.67%          0.84%
                                                 ===========    ===========    ===========    ===========    ===========
Allowance for loan loss to nonperforming loans        276.54%        109.69%        104.72%        110.14%        337.46%
                                                 ===========    ===========    ===========    ===========    ===========
</TABLE>

(1) Generally, a loan is placed on nonaccruing status when it has been
    delinquent for a period of 90 days or more unless the loan is both well
    secured and in the process of collection.
(2) If interest had been accrued on these nonaccruing loans, such income would
    have approximated $209,000 for 2004, $401,000 for 2003, $473,000 for 2002,
    $526,000 for 2001, $319,000 for 2000.

                                       22
<PAGE>

INVESTMENT SECURITIES

        The contractual maturity distribution and weighted average rate of Royal
Bancshares' investments held to maturity and available for sale portfolios at
December 31, 2004 are presented in the following table. Weighted average rates
on tax-exempt obligations have been computed on a fully taxable equivalent basis
assuming a tax rate of 35%.

<TABLE>
<CAPTION>
                                                         AS OF DECEMBER 31, 2004
                                                              (IN THOUSANDS)
                              ------------------------------------------------------------------------------
                                                            AFTER 1 YEAR BUT           AFTER 5 YEARS, BUT
                                   WITHIN 1 YEAR              WITHIN 5 YEARS             WITHIN 10 YEARS
                              -----------------------    -----------------------    ------------------------
                                AMOUNT        RATE         AMOUNT        RATE         AMOUNT         RATE
                              ----------   ----------    ----------   ----------    ----------    ----------
<S>                           <C>                 <C>    <C>                 <C>    <C>                  <C>
SECURITIES HELD TO MATURITY
Mortgage backed
 securities                   $       --           --%   $       52          9.0%   $       --            --%
Agencies                              --           --%      125,000          3.6%       60,000           4.0%
Other securities                  16,695          8.3%       10,300          5.7%           --            --%
                              ----------   ----------    ----------   ----------    ----------    ----------
Total                         $   16,695          8.3%   $  135,352          3.7%   $   60,000           4.0%
                              ==========   ==========    ==========   ==========    ==========    ==========

AVAILABLE FOR SALE
Mortgage backed
 securities                   $       --           --%   $    4,128          3.5%   $    6,028           3.5%
CMO'S                                 --           --%           --           --%           --            --%
Agencies                              --           --%           --           --%       58,793           3.8%
Foreign                            6,380          8.2%        3,125          8.0%           --            --%
Trust Preferred                       --           --%           --           --%           --            --%
Other securities                  21,227          3.4%      110,475          5.5%        3,843           5.7%
                              ----------   ----------    ----------   ----------    ----------    ----------
         Total                $   27,607          4.5%   $  117,728          5.5%   $   68,664           3.9%
                              ==========   ==========    ==========   ==========    ==========    ==========

<CAPTION>
                                   AFTER 10 YEARS                  TOTAL
                              ------------------------   ------------------------
                                AMOUNT        RATE         AMOUNT        RATE
                              ----------   ----------    ----------   ----------
<S>                           <C>                 <C>    <C>                <C>
SECURITIES HELD TO MATURITY
Mortgage backed
 securities                   $      180          3.8%   $      232          5.0%
Agencies                              --           --%      185,000          3.7%
Other securities                      --           --%       26,995          7.3%
                              ----------   ----------    ----------   ----------
Total                         $      180          3.8%   $  212,227          4.2%
                              ==========   ==========    ==========   ==========

AVAILABLE FOR SALE

Mortgage backed
 securities                   $   42,039          4.5%   $   52,195          4.3%
CMO'S                             29,473          4.4%       29,473          4.4%
Agencies                          34,512          4.9%       93,305          4.2%
Foreign                               --           --%        9,505          8.1%
Trust Preferred                   39,562          9.7%       39,562          9.7%
Other securities                   1,348          6.0%      136,893          5.2%
                              ----------   ----------    ----------   ----------
         Total                $  146,935          6.0%   $  360,934          5.3%
                              ==========   ==========    ==========   ==========
</TABLE>

        The following tables presents the consolidated book values and
approximate fair value at December 31, 2004 and 2003, respectively, for each
major category of Royal Bancshares' investment securities portfolio for held to
maturity securities and available for sale securities.

                                       23
<PAGE>

<TABLE>
<CAPTION>
                                                          AS OF DECEMBER 31,
                                                            (IN THOUSANDS)
                                ---------------------------------------------------------------------
                                        2004                    2003                    2002
                                ---------------------   ---------------------   ---------------------
                                AMORTIZED     FAIR      AMORTIZED     FAIR      AMORTIZED     FAIR
                                   COST       VALUE        COST       VALUE       COST        VALUE
                                ---------   ---------   ---------   ---------   ---------   ---------
<S>                             <C>         <C>         <C>         <C>         <C>         <C>
SECURITIES HELD TO MATURITY

Mortgage backed securities      $     232         232   $     340   $     340   $     538   $     538
US agencies                       185,000     184,267      91,630      91,333          --          --
Other securities                   26,995      27,366      21,121      22,602      30,076      32,207
                                ---------   ---------   ---------   ---------   ---------   ---------
         Total                  $ 212,227   $ 211,865   $ 113,091   $ 114,275   $  30,614   $  32,745
                                =========   =========   =========   =========   =========   =========

SECURITIES AVAILABLE FOR SALE

Mortgage backed securities      $  81,303   $  81,669   $ 110,596   $ 111,875   $ 235,965   $ 236,633
US agencies                        94,997      93,305     122,785     121,112          --          --
Trust preferred securities         37,196      39,562      36,251      37,139      39,160      37,329
Other securities                  141,679     146,398     161,488     170,713     130,598     135,405
                                ---------   ---------   ---------   ---------   ---------   ---------
         Total                  $ 355,175   $ 360,934   $ 431,120   $ 440,839   $ 405,723   $ 409,367
                                =========   =========   =========   =========   =========   =========
</TABLE>

DEPOSITS

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

<TABLE>
<CAPTION>
                                                          AS OF DECEMBER 31,
                                                            (IN THOUSANDS)
                                -----------------------------------------------------------------------
                                        2004                    2003                    2002
                                ---------------------    ---------------------    ---------------------
                                 AVERAGE                  AVERAGE                  AVERAGE
                                 BALANCE      RATE        BALANCE      RATE        BALANCE      RATE
                                ---------   ---------    ---------   ---------    ---------   ---------
<S>                             <C>              <C>     <C>              <C>     <C>              <C>
Demand deposits:
   Non interest bearing         $  57,789          --%   $  56,814          --%   $  53,800          --%
   Interest bearing (NOW)          34,181        0.71%      32,510        1.04%      34,866        2.00%
Money market deposits             426,895        1.81%     442,873        2.18%     270,454        3.14%
Savings deposits                   24,278        0.63%      23,714        0.77%      25,658        1.44%
Certificate of deposit            218,756        3.92%     269,293        4.46%     385,370        5.02%
                                ---------                ---------                ---------
         Total deposits         $ 761,899                $ 825,204                $ 770,148
                                =========                =========                =========
</TABLE>

                                       24
<PAGE>

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

                                            AS OF DECEMBER 31,
                                              (IN THOUSANDS)
                                          -----------------------
MATURITY                                     2004         2003
--------                                  ----------   ----------
Three months or less                      $   13,309   $    6,396
Over three months through twelve months       27,426       47,549
Over twelve months through five years         48,590       46,128
Over five years                                1,271        4,050
                                          ----------   ----------
         Total                            $   90,596   $  104,123
                                          ==========   ==========

SHORT AND LONG TERM BORROWINGS

<TABLE>
<CAPTION>
                                                             YEAR ENDING DECEMBER 31,
                                                                 (IN THOUSANDS)
                                            ---------------------------------------------------------
                                               2004        2003        2002        2001        2000
                                            ---------   ---------   ---------   ---------   ----------
<S>                                         <C>         <C>         <C>         <C>         <C>
Short term borrowings                       $  17,500   $      --   $   3,000   $  30,000   $   3,000
Long term borrowings:
   Other borrowings                                --          --          --       2,725          --
   Obligations through equity investments      56,249          --          --          --          --
   Subordinated debt                           25,774          --          --          --          --
   FHLB advances                              204,500     212,000     124,500      67,500      30,000
                                            ---------   ---------   ---------   ---------   ---------
         Total  borrowings                  $ 304,023   $ 212,000   $ 127,500   $ 100,225   $  30,000
                                            =========   =========   =========   =========   =========
</TABLE>

                                       25
<PAGE>

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

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

FINANCIAL CONDITION

        Total assets increased $51 million, or 4%, to $1.21 billion at December
31, 2004 from $1.15 billion at year-end 2003.

        Cash and Cash Equivalents. Cash and cash equivalents are comprised of
cash on hand, and cash in interest bearing and non-interest bearing accounts in
banks, in addition to federal funds sold. Cash and cash equivalents increased
$2.0 million, to $27.1 million at December 31, 2004. The average balance of cash
and cash equivalents was approximately $53.1 million for 2004 versus
$62.8 million for 2003. The majority of this average balance is held in
interest-bearing accounts or invested daily in overnight fed funds. The average
balance of these funds that earn interest was $43.3 million in 2004. The
increase in the balance of cash and cash equivalents at year end was primarily
due to larger balances maintained with the Federal Reserve Bank along with
pending funding needs.

        Investment Securities Held to Maturity. Held to maturity ("HTM")
investment securities represents approximately 13.4% of average earning assets
during 2004 and are comprised of primarily government agency bonds and corporate
debt securities of investment grade quality, at the time of purchase. During
2004, HTM investment securities increased by $99.1 million to $212.2 million at
December 31, 2004, from $113.1 million at December 31, 2003. The increase was
primarily due to a change with the investments committee strategy to hold
government agency bonds with a maximum maturity of five years as Held to
Maturity.

        Investment Securities Available for Sale. AFS investment securities
represent 37.8% of average earning assets during 2004 and are primarily
comprised of government secured agency bonds and government secured
mortgaged-backed securities, capital trust security issues of regional banks,
domestic corporate debt and U.S. denominated foreign corporate debt. At December
31, 2004, AFS investment securities were $360.9 million as compared to
$440.8 million at December 31, 2003, a decrease of $79.9 million. This decrease
was primarily due to maturities, calls and principal payments of existing
portfolio.

        Loans. Royal Bancshares' primary earning assets are loans, representing
approximately 44.7% of average earning assets during 2004. The loan portfolio
has historically been comprised primarily of business demand loans and
commercial mortgages in roughly equal amounts, and to a significantly lesser
extent, consumer loans comprised of one to four family residential and home
equity loans. During 2004, total loans decreased $45.3 million from
$500.1 million at December 31, 2003 to $454.8 million at December 31, 2004
primarily due to an increased number of loans being paid in full as compared to
new originations. In the current interest rate environment, Royal Bank has
avoided lending in transactions where its management perceived the risk/reward
ratio to be too high.

        Deposits. Royal Bancshares' deposits are the primary source of funding.
Total deposits decreased $48.7 million, or 6.2%, from $791.1 million at December
31, 2003 to $742.4 million at December 31, 2004. This decrease in deposits is
primarily due to allowing brokered deposits to mature and not replacing the high
cost funds. At December 31, 2004, brokered deposits were $65.3 million as
compared to $80.9 million at December 31, 2003. Certificate of deposit accounts
decreased $34.4 million, or 14.5% from $236.9 million at December 31, 2003 to
$202.5 million at December 31, 2004. Other deposit categories comprised of
demand, NOW, money markets and savings deposits decreased $14.3 million during
2004 over their levels at December 31, 2004. The decrease in all savings
categories is primarily due to a reduction in interest rates offered.

        FHLB Borrowings. Borrowings are comprised of long-term borrowings
(advances) and short-term borrowings (overnight borrowings, advances). Long-term
FHLB borrowings decreased $7.5 million to $204.5 million at December 31, 2004
from $212.0 million at December 31, 2003 due to an advance being reclassified as
a result of its remaining maturity being less than one year. At December 31,
2004 short term FHLB borrowings was $17.5 million. The average balance of
borrowings during 2004 was $221.7 million versus $183.3 million for 2003.

                                       26
<PAGE>

        Other Borrowings. During 2004, Royal Bancshares completed a private
placement of preferred trust securities in the aggregate amount of $25 million
for a term of 30 years with a call feature of 5 years. In addition, as result of
the adoption of FIN46(R) Royal Bancshares consolidated into its statement of
condition $56.2 million of debt related to real estate equity investment of
which $0 is guaranteed by Royal Bancshares.

        Shareholders' Equity. Shareholders' equity increased $6.0 million or
4.5% in 2004 to $140.9 million primarily due to net income of $20.0 million
partially offset by $12.2 million in cash dividends paid in 2004. Additionally,
shareholders' equity was affected by the decrease in market value of AFS
investment securities during 2004, which resulted in an downward adjustment of
$2.6 million.

RESULTS OF OPERATIONS

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

        Net Income. Net income in 2004 was $20.0 million as compared to $18.5
million in 2003 and $17.4 million in 2002. Basic earnings per share were $1.60,
$1.49 and $1.41 for 2004, 2003, and 2002, respectively. The $1.5 million
increase in net income for 2004 represents an 8% increase over 2003, and is
primarily attributable to an increase in non-interest income specifically with
income from Bank Owned Life Insurance and gains from the disposition of Other
Real Estate Owned. The $1.1 million increase in net income for 2003 represents a
6% increase over 2002, and is primarily attributed to the reduction of interest
paid on deposits and borrowings as compared to income relating to loans and
investment security portfolio, and to lesser extent, non-recurring fees and
accretion income.

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

        Net interest income was $40.2 million in 2004 as compared to $42.4
million in 2003. The decrease in net interest income in 2004 of $2.2 million was
primarily due to the reduction of the yield on earning assets along with a
decline in the spread of earning assets as compared to costing liabilities in
2004.

        The increase in 2003 of net interest income of $1.8 million is primarily
due to the reduction of interest paid on deposits and borrowings. Interest paid
on interest bearing liabilities decreased $6.6 million from $36.5 million in
2002, to $29.9 million in 2003. The reduction is primarily due the reduction of
rates offered during 2003.

                                       27
<PAGE>

LOANS AND MORTGAGES

<TABLE>
<CAPTION>
                                          2004              2003              2002
                                     --------------    --------------    --------------
        <S>                          <C>               <C>               <C>
        Average loan outstandings    $  471,525,000    $  562,765,000    $  617,156,000
        Interest and fees on loans   $   40,044,000    $   46,609,000    $   53,314,000
        Average Yield                          8.49%             8.28%             8.64%
</TABLE>

        Royal Bancshares continues to originate both fixed rate and variable
rate loans. At December 31, 2004 variable rate loans represented 45% of total
loans. Together with some match funding of fixed rate deposits to fixed rate
loans, variable rate loans have helped Royal Bank manage interest rate risk.

        In 2004, the average balance of loans decreased $91.2 million to $471.5
million primarily due a large amount of loans being paid off as interest rates
remained at historically low levels. The average yield on loans increased by 21
basis points in 2004 primarily due to the average loan run off being at a lower
yield than the 2003 average yield , along with the Federal Reserve increasing
the short term rates in the second half of 2004.

        In 2003, the average balance of loans decreased $54.3 million to $562.8
million primarily due a large amount of loans being paid off as interest rates
remained at historically low levels. The average yield on loans decreased 36
basis points in 2003 primarily due to interest rates re-pricing at lower levels
on variable rate loans.

HTM INVESTMENT SECURITIES

<TABLE>
<CAPTION>
                                                 2004              2003              2002
                                            --------------    --------------    --------------
        <S>                                 <C>               <C>               <C>
        Average HTM investment securities   $  141,799,000    $   46,302,000    $   53,226,000
        Interest income                     $    6,365,000    $    3,087,000    $    4,019,000
        Average yield                                 4.49%             6.67%             7.55%
</TABLE>

        HTM investment securities are comprised primarily of taxable corporate
debt issues and US government agencies. The corporate debt issues are investment
grade at the time of purchase. It is Royal Bancshares' expressed intention to
hold these securities to maturity.

        In 2004, the yield on HTM investment securities decreased 218 basis
points to 4.49% from 6.67% in 2003. This decrease was primarily due to the
purchasing of low credit risk government agency bonds that are yielding 3.0% to
4.5 %. The government agencies at December 31, 2004 have step up and/or call
features.

        In 2003, the yield on HTM investment securities decreased 88 basis
points to 6.67% from 7.55% in 2002. This decrease was primarily due to higher
yielding investments that have maturing and being replaced with lower yielding
investments as a result of current market conditions.

AFS INVESTMENT SECURITIES

<TABLE>
<CAPTION>
                                                2004               2003              2002
                                            --------------    --------------    --------------
        <S>                                 <C>               <C>               <C>
        Average AFS investment securities   $  399,361,000    $  446,210,000    $  297,457,000
        Interest and dividend income        $   20,621,000    $   22,007,000    $   18,817,000
        Average yield                                 5.16%             4.93%             6.33%
</TABLE>

                                       28
<PAGE>

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

        In 2004, the average balance of AFS investment securities decreased
$46.8 million to $399.4 million primarily due classifying new purchases from
investment runoff as held to maturity. The 23 basis point increase in average
yield is primarily due to higher yields earned on mortgage back securities
resulting from slower principal repayments speeds.

        In 2003, the average balance of AFS investment securities increased
$148.8 million to $446.2 million primarily due to the redeployment of excess
cash on hand to achieve a higher rate of return than overnight funds. The 140
basis point decrease in average yield is primarily due to the lower yields on
the new investment purchases.

INTEREST EXPENSE ON NOW AND MONEY MARKET DEPOSITS

<TABLE>
<CAPTION>
                                                   2004              2003              2002
                                              --------------    --------------    --------------
        <S>                                   <C>               <C>               <C>
        Average NOW & Money Market deposits   $  461,076,000    $  475,383,000    $  305,320,000
        Interest expense                      $    7,965,000    $   10,000,000    $    9,188,000
        Average cost of funds                           1.73%             2.10%             3.01%
</TABLE>

        In 2004 the average cost of funds on NOW and money market deposits
decreased 37 basis points to 1.73% from 2.10% in 2003 primarily due to a decline
in the interest rate paid on these deposits. In 2003 the average cost of funds
on NOW and money market deposits decreased 91 basis points to 2.10% from 3.01%
in 2002 primarily due to a decline in the interest rate paid on these deposits.

INTEREST EXPENSE ON TIME DEPOSITS

<TABLE>
<CAPTION>
                                                   2004              2003              2002
                                              --------------    --------------    --------------
        <S>                                   <C>               <C>               <C>
        Average time deposits                 $  218,756,000    $  269,293,000    $  385,370,000
        Interest expense                      $    8,577,000    $   12,011,000    $   19,358,000
        Average cost of funds                           3.92%             4.46%             5.02%
</TABLE>

        In 2004, the average balance of time deposits decreased $50.5 million to
$218.8 million. This decrease in average time deposits is primarily due to the
maturity of higher yielding brokered deposits that were not renewed. In 2003,
the average balance of time deposits decreased $116.1 million to $269.3 million.
This decrease in average time deposits is primarily due to the maturity of
higher yielding brokered deposits.

        Although rates in general continued to move upward in 2004, the reaction
of deposits to rate changes (both increases and decreases) is slower than the
change in the prime rate because these time deposits must mature before a rate
adjustment would become effective. At December 31, 2004, 45% of time deposits
were comprised of certificates of deposits accounts with balances of $100,000 or
more, while in 2003, 44% of time deposits were comprised of certificates of
deposit accounts with balances of $100,000 or more. These types of deposit have
traditionally been considered more rate volatile than other types of deposits,
however Royal Bank's penalty for early redemption somewhat mitigates this
volatility.

PROVISION FOR POSSIBLE LOAN LOSSES

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

        In 2004, a provision for loan losses was recorded at $6 thousand, as
compared to $674 thousand in 2003 due to charges off's relating to delinquent
tax liens held by Crusader Servicing Corporation. During 2004 senior management

                                       29
<PAGE>

determined that loan loss reserve was adequate and no additional provision was
required for the period. Net recoveries were $87 thousand in 2004 as compared to
net charge-offs of $718 thousand in 2003.

        In 2003, a provision for loan losses was recorded at $674 thousand, as
compared to $250 thousand in 2002 due to senior management assessment that the
level of loan loss reserve was not adequate. Net charge-offs were $718 thousand
in 2003 as compared to net recoveries of $332 thousand for 2002.

        The allowance for possible loan loss at December 31, 2004 was $12.5
million, or 2.67% of net loans as compared to $12.4 million at December 31, 2003
or 2.41% of net loans, and $12.5 million at December 31, 2002, or 2.16% of net
loans.

NON-INTEREST INCOME

        Non-interest income includes service charges on depositors' accounts,
safe deposit rentals and various services such as cashing checks, issuing money
orders and traveler's checks, and similar activities. In addition, other forms
of non-interest income is derived from changes in the cash value of BOLI, fees
collected on the sale of residential mortgages in the secondary market and
income relating to the VIE's which Royal Bancshares has an investment. Most
components of non-interest income are a modest and stable source of income, with
exceptions of one-time gains and losses from the sale of investments securities
and other real estate owned, from period to period these sources of income may
vary considerably. Service charges on depositors' accounts, safe deposit rentals
and other fees are periodically reviewed by management to remain competitive
with other local banks.

        In 2004, total non-interest income increased $9.5 million to $13.2
million at December 31, 2004. This increase is primarily due income earned on
the purchase of BOLI, income related to the consolidation of the VIEs and the
sale of other real estate owned.

        In 2003, total non-interest income increased $0.5 million primarily due
income earned on the purchase of Bank Owned Life Insurance ("BOLI") and the sale
of insurance products through an affiliation with the MONY Group.

NON-INTEREST EXPENSE

        Non-interest expense includes compensation and employee benefits,
occupancy, advertising, FDIC insurance, state taxes, depreciation, and other
expenses such as auditing, automatic teller machines (ATMs), data processing,
legal, outside service charges, postage, printing and other expenses relating to
other real estate owned. Effective 2004, Royal Bancshares through the adoption
of FIN46(R) consolidates the expenses related to equity investments.

        Non-interest expense increased $6.5 million to $25.4 million in 2004,
from $18.9 million in 2003. Salaries and employee benefits increased $809
thousand to $10.8 million in 2004, from $10.0 million in 2003. This was
primarily due to annual salary increases and the addition of the Royal Asian
Bank, a division of Royal Bank. Occupancy expense increased $179 thousand to
$1.5 million in 2004 primarily due to the addition Royal Asian Bank. Other
operating expenses increased $792 thousand to $8.4 million in 2004. As a result
of consolidation of the "VIE" non-interest expense increased $4.8 million during
2004.

        Non-interest expense decreased $34 thousand to $18.9 million in 2003,
from $18.9 million in 2002. Salaries and employee benefits increased $519
thousand to $10.0 million in 2003, from $9.4 million in 2002. This was primarily
due to annual salary increases and an increase in pension cost. Occupancy
expense increased $151 thousand to $1.3 million in 2003 primarily due the
addition of our Turnersville Branch. Other operating expenses decreased $704
thousand to $7.6 million in 2003.

ACCOUNTING FOR INCOME TAXES

        The provision for federal income taxes was $7.9 million in 2004 as
compared to $8.0 million for 2003, and $7.2 million for 2002 representing an
effective tax rate of 28%, 30% and 29%, respectively. The reduction in effective
tax rate in 2004 was primarily due to the addition of BOLI and increased level
of earnings offset by the use of tax goodwill related to the acquisition of
Knoblauch State Bank in 1995.

                                       30
<PAGE>

ACCOUNTING FOR DEBT AND EQUITY SECURITIES

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

ASSET LIABILITY MANAGEMENT

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

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

     Royal Bancshares generally maintains a liquidity ratio equal to or greater
than 25% of total deposits and short-term liabilities. Liquidity is specifically
defined as the ratio of net cash, short term and marketable assets to net
deposits and short-term liabilities. The liquidity ratio for the years ended
December 31, 2004, 2003 and 2002 was 39%, 60% and 42%, respectively. Management
believes that Royal Bancshares' liquidity position continues to be adequate,
continues to be in excess of its peer group level and meets or exceeds the
liquidity target set forth in the Asset/Liability Management Policy. Management
believes that due to its financial position, it will be able to raise deposits
as needed to meet liquidity demands. However, any financial institution could
have unmet liquidity demands at any time.

        Contractual Obligations and Other Commitments. The following table sets
forth contractual obligations and other commitments representing required and
potential cash outflows as of December 31, 2004.

<TABLE>
<CAPTION>
                                                Less than                           More than 5
        (in thousands)                Total      1 year     1-3 years   4-5 years      years
        -------------------------   ---------   ---------   ---------   ---------   -----------
        <S>                         <C>         <C>         <C>         <C>         <C>
        FHLB Advances               $ 222,000   $  17,500   $  30,000   $  15,000   $   159,500
        Operating leases                2,541         648         937         702           254
        Standby letters of credit       1,797       1,637         160          --            --
        Time deposits                 202,520      86,566      58,255      53,130         4,569
                                    ---------   ---------   ---------   ---------   -----------
             Total                  $ 428,858   $ 106,351   $  89,352   $  68,832   $   164,323
                                    =========   =========   =========   =========   ===========
</TABLE>

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

        The interest rate sensitivity analysis is an important management tool,
however, it does have some inherent shortcomings. It is a "static" analysis.
Although certain assets and liabilities may have similar maturities or
repricing,

                                       31
<PAGE>

they may react in different degrees to changes in market interest rates.
Additionally, repricing characteristics of certain assets and liabilities may
vary substantially within a given period.

        The following table summarizes repricing intervals for interest earning
assets and interest bearing liabilities as of December 31, 2004, and the
difference or "gap" between them on an actual and cumulative basis for the
periods indicated. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities.
During a period of falling interest rates, a positive gap would tend to
adversely affect net interest income, while a negative gap would tend to result
in an increase in net interest income. During a period of rising interest rates,
a positive gap would tend to result in an increase in net interest income while
a negative gap would tend to affect net interest income adversely. At December
31, 2004, Royal Bancshares is in an asset sensitive positive of $191.4 million,
which indicates assets will reprice somewhat faster than liabilities within one
year.

INTEREST RATE SENSITIVITY
(IN  MILLIONS)

<TABLE>
<CAPTION>
                                              DAYS
                                     ----------------------      1 TO 5       OVER 5     NON-RATE
                                      0 - 90      91 - 365        YEARS        YEARS     SENSITIVE      TOTAL
                                     ---------    ---------     ---------    ---------   ---------    ---------
<S>                                  <C>          <C>           <C>          <C>         <C>          <C>
ASSETS (1)
Interest-bearing deposits in banks   $    13.3    $      --     $      --    $      --   $    12.8    $    26.1
Federal funds sold                         1.0           --            --           --          --          1.0
Investment securities:
  Available for sale                       5.6         38.0         237.3         80.0          --        360.9
  Held to maturity                        32.8         34.1         145.3           --          --        212.2
                                     ---------    ---------     ---------    ---------   ---------    ---------
      Total investment securities         38.4         72.1         382.6         80.0          --        573.1
Loans:(2)
  Fixed rate                              52.9         40.6         146.0         18.8          --        258.3
  Variable rate                          187.9         21.1            --           --       (12.5)       196.5
                                     ---------    ---------     ---------    ---------   ---------    ---------
      Total loans                        240.8         61.7         146.0         18.8       (12.5)       454.8
  Other assets                              --           --            --           --       150.3        150.3
                                     ---------    ---------     ---------    ---------   ---------    ---------
  Total Assets                       $   293.5    $   133.8     $   528.6    $    98.8   $   150.6    $ 1,205.3
                                     =========    =========     =========    =========   =========    =========

LIABILITIES & CAPITAL
Deposits:
  Non interest bearing deposits      $      --    $      --     $      --    $      --   $    64.4    $    64.4
  Interest bearing deposits               29.8         89.4         356.3           --          --        475.5
  Certificate of deposits                 29.1         27.4         141.4          4.6          --        202.5
                                     ---------    ---------     ---------    ---------   ---------    ---------
      Total deposits                      58.9        116.8         497.7          4.6        64.4        742.4
Borrowings                                22.7         37.5         107.3         79.5        57.0        304.0
Other liabilities                           --           --            --           .3        17.7         18.0
Capital                                     --           --            --           --       140.9        140.9
                                     ---------    ---------     ---------    ---------   ---------    ---------
      Total liabilities & capital    $    81.6    $   154.3     $   605.3    $    84.1   $   280.0    $ 1,205.3
                                     =========    =========     =========    =========   =========    =========

Net interest rate GAP                $   211.9    $   (20.5)    $   (76.7)   $    14.7   $  (129.4)
                                     =========    =========     =========    =========   =========

Cumulative interest rate GAP         $   211.9    $   191.4     $   114.7    $   129.4   $      --
                                     =========    =========     =========    =========   =========

GAP to total assets                         18%          -2%
                                     =========    =========

GAP to total equity                        150%         -15%
                                     =========    =========

Cumulative GAP to total assets              18%          16%
                                     =========    =========

Cumulative GAP to total equity             150%         136%
                                     =========    =========
</TABLE>

(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.

                                       32
<PAGE>

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

CAPITAL ADEQUACY

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

                                                                     REGULATORY
                                           2004     2003     2002      MINIMUM
                                           ----     ----     ----    ----------
        CAPITAL LEVEL
           Leverage ratio                  13.9%    11.1%    11.4%          3.0%
           Risk based capital ratio:
              Tier 1                       19.2%    15.3%    14.6%          4.0%
              Total                        20.4%    16.5%    15.9%          8.0%

        CAPITAL PERFORMANCE
           Return on average assets         1.7%     1.6%     1.7%            -
           Return on average equity        14.6%    14.5%    15.2%            -

        Royal Bancshares' sources of capital have been derived from the issuance
of stock as well as retained earnings. While Royal Bancshares has not had a
stock offering since 1986, total shareholders' equity has increased primarily
due to steady increases in retained earnings. At December 31, 2004, Royal
Bancshares had an average equity to average asset ratio of 11.5%. Royal
Bancshares has no current plans to raise capital through new stock offerings and
indeed, seeks ways to leverage its existing capital.

        The capital ratios set forth above compare favorably to the minimum
required amounts of Tier 1 and total capital to risk-weighted assets and the
minimum Tier 1 leverage ratio, as defined by the banking regulators. At December
31, 2004, Royal Bancshares was required to have minimum Tier 1 and total capital
ratios of 4.0% and 8.0%, respectively, and a minimum Tier 1 leverage ratio of
4.0%. In order for Royal Bancshares to be considered well capitalized, as
defined by the banking regulators, Royal Bancshares must have Tier 1 and total
capital ratios of 6.0% and 10.0%, respectively, and a minimum Tier 1 leverage
ratio of 5.0%. At December 31, 2004, Royal Bancshares met the criteria for a
well capitalized institution, and management believes that, under current
regulations, Royal Bancshares will continue to meet its minimum capital
requirements in the foreseeable future.

MANAGEMENT OPTIONS TO PURCHASE SECURITIES

        In May 2001, the directors of the Royal Bancshares approved the amended
Royal Bancshares of Pennsylvania Non-qualified Stock Option and Appreciation
Right Plan (the Plan). The shareholders in connection with the formation of the
holding company reapproved the Plan. The Plan is an incentive program under
which Bank officers and other key employees may be awarded additional
compensation in the form of options to purchase up to 1,500,000 shares of the
Royal Bancshares' Class A common stock (but not in excess of 15% of outstanding
shares). At the time a stock option is granted, a stock appreciation right for
an identical number of shares may also be granted. The option price is equal to
the fair market value at the date of the grant. At December 31, 2004, 593,539
options have been granted which are exercisable at 20% per year. At December 31,
2004, options covering 186,112 shares were exercisable by 94 employees.

         In May 2001, the directors of the Royal Bancshares approved an amended
non-qualified Outside Directors Stock Option Plan. The shareholders in
connection with the formation of the holding company reapproved this Plan. Under
the terms of the plan, 250,000 shares of Class A stock are authorized for
grants. Each director is entitled to a grant of an option to purchase 1,500
shares of stock annually, which is exercisable one year from the grant date. The
options were granted at the fair market value at the date of the grant. At
December 31, 2004, 79,044 options were outstanding and options covering 62,214
shares were exercisable.

                                       33
<PAGE>

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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

                 As of December 31, 2004 (Dollars in Thousands)

                                      Market Value of        Percent of
           Changes in Rates           Portfolio Equity         Change
           ------------------         ----------------       ----------
           + 200 basis points              153,256              -4.9%
           + 100 basis points              160,427              -0.5%
           Flat rate                       161,202                 0%
           - 100 basis points              153,474              -4.8%
           - 200 basis points              135,774             -15.8%

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

                        RECENT ACCOUNTING PRONOUNCEMENTS

     In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46). In general, a variable interest entity is a
corporation, partnership, trust or any other legal structures used for business
purposes that either (a) does not have equity investors with voting rights or
(b) has equity investors that do not provide sufficient financial resources for
the entity to support its activities. FIN 46 requires certain variable interest
entities to be consolidated by the primary beneficiary if the investors do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The consolidation
requirements of FIN 46 apply immediately to interest entities created after
January 31, 2003. In December 2003, the FASB issued FIN 46(R) with respect to
variable interest entities created before January 31, 2003, which among other
things revised the implementation date to the first fiscal year or interim
period ended after March 15, 2004, with the exception of Special Purpose
Entities (SPE). Royal Bancshares currently has no SPEs. Royal Bancshares adopted
the provisions of FIN 46 effective for the period ending March 31, 2004, which
required Royal Bancshares to consolidate its investment in real estate
partnerships. Prior to FIN 46 and 46(R), Royal Bancshares accounted for its
investment in the real estate partnerships under the equity method of
accounting.

     The SEC recently released Staff Accounting Bulletin No. 105, Application of
Accounting Principles to Loan Commitments. SAB 105 provides guidance about the
measurements of loan commitments recognized at fair value under FASB Statement
No. 133, Accountings for Derivative Instruments and Hedging Activities. SAB 105
also requires companies to disclose their accounting policy for those loan
commitments including methods and assumptions used to estimate fair value and
associated hedging strategies. SAB 105 is effective for all loan commitments
accounted for as derivatives that are entered into after March 31, 2004. The
adoption of SAB 105 is not expected to have a material effect on our
consolidated financial statements.

                                       34
<PAGE>

        In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement 123(R), "Share-Based Payment," an Amendment of FASB Statements No. 123
and APB No. 95. The Statement addresses the accounting for share-based payment
transactions in which an enterprise receives employee services in exchange for
(a) equity instruments of the enterprise or (b) liabilities that are based on
the fair value of the enterprise's equity instruments or that may be settled by
the issuance of such equity instruments. Statement 123(R) requires that all
forms of share-based payments to employees, including employee stock options,
would be treated the same as other forms of compensation by recognizing the
related cost in the income statement. The expense of the award would generally
be measured at fair value at the grant date. Current accounting guidance
requires that the expense relating to fixed plan employee stock options only be
disclosed in the footnotes to the financial statements. The Statement eliminates
the ability to account for share-based compensation transactions using APB
Opinion No. 25, "Accounting for Stock Issued to Employees." Royal Bancshares is
currently evaluating this Statement and its effects on its results of
operations.

                                       35
<PAGE>

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, 2004 AND 2003

                                       36
<PAGE>

             Report of Independent Registered Public Accounting Firm

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

        We have audited the accompanying consolidated balance sheet of Royal
Bancshares of Pennsylvania, Inc. and Subsidiaries as of December 31, 2004, and
the related consolidated statements of income, changes in stockholders' equity
and cash flows for the year then ended. These financial statements are the
responsibility of Royal Bancshares's management. Our responsibility is to
express an opinion on these financial statements based on our audit. The
consolidated financial statements of Royal Bancshares of Pennsylvania, Inc. for
the years ended December 31, 2003 and 2002 were audited by other auditors, whose
report dated January 22, 2004, expressed an unqualified opinion on those
statements.

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

        As discussed in Note A to the consolidated financial statements, Royal
Bancshares of Pennsylvania, Inc. adopted the provisions of Financial Accounting
Standards Board Interpretation No. 46, "Consolidation of Variable Interest
Entities," on March 31, 2004.

        In our opinion, the 2004 consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Royal Bancshares of Pennsylvania, Inc. and Subsidiaries as of
December 31, 2004, and the consolidated results of their operations and their
consolidated cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.

        We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of Royal
Bancshares of Pennsylvania, Inc. and Subsidiaries internal control over
financial reporting as of December 31, 2004, based on the criteria established
in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated March 14,
2005 expressed an unqualified opinion on management's assessment of internal
control over financial reporting and an adverse opinion on the effectiveness of
internal control over financial reporting because of the effects of a material
weakness identified in management's assessment process.


/s/ Beard Miller Company LLP

Reading, Pennsylvania
March 14, 2005

                                       37
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                                          December 31,
                                                                               ---------------------------------
                                                                                    2004                 2003
                                                                               ---------------   ---------------
                                                                               (In thousands, except share data)
<S>                                                                            <C>               <C>
      ASSETS

Cash and due from banks                                                        $        26,109   $        17,470
Federal funds sold                                                                       1,000             7,600
                                                                               ---------------   ---------------
      Total cash and cash equivalents                                                   27,109            25,070

Investment securities held to maturity (fair value of $211,865 and
 $114,275 in 2004 and 2003, respectively)                                              212,227           113,091
Investment securities available for sale - at fair value                               360,934           440,839
Federal Home Loan Bank stock, at cost                                                   11,100            11,407
Loans held for sale                                                                      2,204             3,157

Loans                                                                                  467,294           512,557
Less allowance for loan losses                                                          12,519            12,426
                                                                               ---------------   ---------------
      Net loans                                                                        454,775           500,131

Premises and equipment, net                                                              8,780             7,480
Real estate owned via equity investments                                                63,653                 -
Accrued interest receivable                                                             15,634            16,353
Bank owned life insurance                                                               21,214            20,248
Other assets                                                                            27,644            16,634
                                                                               ---------------   ---------------
      Total assets                                                             $     1,205,274   $     1,154,410
                                                                               ===============   ===============
      LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities
  Deposits
    Non-interest bearing                                                       $        64,371   $        58,942
    Interest bearing                                                                   678,011           732,117
                                                                               ---------------   ---------------
      Total deposits                                                                   742,382           791,059

  Accrued interest payable                                                               5,602             7,733
  Other liabilities                                                                      8,736             7,920
  Borrowings                                                                           222,000           212,000
  Obligations related to equity investments                                             56,249                 -
  Subordinated debentures                                                               25,774                 -
                                                                               ---------------   ---------------
      Total liabilities                                                              1,060,743         1,018,712

Minority interests                                                                       3,655               865

Stockholders' equity
  Common stock
    Class A, par value $2.00 per share; authorized, 18,000,000 shares;
     issued, 10,276,672 and 10,027,284 shares in 2004 and 2003, respectively            20,553            20,054
    Class B, par value $0.10 per share; authorized, 2,000,000 shares;
     issued, 1,939,490 and 1,909,742 shares in 2004 and 2003, respectively                 194               191
  Additional paid in capital                                                            92,037            85,448
  Retained earnings                                                                     26,558            24,990
  Accumulated other comprehensive income                                                 3,799             6,415
                                                                               ---------------   ---------------
                                                                                       143,141           137,098
  Treasury stock - at cost, 215,388 Class A shares in 2004 and 2003                     (2,265)           (2,265)
                                                                               ---------------   ---------------
     Total stockholders' equity                                                        140,876           134,833
                                                                               ---------------   ---------------
     Total liabilities and stockholders' equity                                $     1,205,274   $     1,154,410
                                                                               ===============   ===============
</TABLE>

The accompanying notes are an integral part of these statements.

                                       38
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

                        Consolidated Statements of Income

<TABLE>
<CAPTION>
                                                                          Years ended December 31,
                                                              ------------------------------------------------
                                                                   2004             2003             2002
                                                              --------------   --------------   --------------
                                                                    (In thousands, except per share data)
<S>                                                           <C>              <C>              <C>
Interest income
  Loans, including fees                                       $       40,044   $       46,609   $       53,314
  Investment securities held to maturity                               6,365            3,087            4,019
  Investment securities available for sale                            20,621           22,007           18,817
  Deposits in banks                                                      409              475              682
  Federal funds sold                                                     102              142              272
                                                              --------------   --------------   --------------
    TOTAL INTEREST INCOME                                             67,541           72,320           77,104
                                                              --------------   --------------   --------------
Interest expense
  Deposits                                                            16,918           22,193           28,916
  Borrowings                                                           8,744            7,748            7,575
  Obligations related to equity investments                            1,639                -                -
                                                              --------------   --------------   --------------
    TOTAL INTEREST EXPENSE                                            27,301           29,941           36,491
                                                              --------------   --------------   --------------
    NET INTEREST INCOME                                               40,240           42,379           40,613

Provision for loan losses                                                  6              674              250
                                                              --------------   --------------   --------------
    NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES               40,234           41,705           40,363
                                                              --------------   --------------   --------------
Other income
  Service charges and fees                                             1,496            1,125            1,124
  Gains on sale of investment securities available for sale              810              719              790
  Income related to equity investments                                 7,133                -                -
  Income from bank owned life insurance                                  966              248                -
  Gains on sale of other real estate                                   2,102              568              457
  Gains on sale of loans                                                 480              637              767
  Other income                                                           173              407               62
                                                              --------------   --------------   --------------
                                                                      13,160            3,704            3,200
                                                              --------------   --------------   --------------
Other expenses
  Salaries and employee benefits                                      10,767            9,958            9,440
  Occupancy and equipment                                              1,509            1,330            1,180
  Expenses related to equity investments                               4,780                -                -
  Other operating expenses                                             8,391            7,599            8,301
                                                              --------------   --------------   --------------
                                                                      25,447           18,887           18,921
                                                              --------------   --------------   --------------
    INCOME BEFORE INCOME TAXES                                        27,947           26,522           24,642

Income taxes                                                           7,914            7,996            7,237
                                                              --------------   --------------   --------------
             NET INCOME                                       $       20,033   $       18,526   $       17,405
                                                              ==============   ==============   ==============
Per share data
  Net income - basic                                          $         1.60   $         1.49   $         1.41
                                                              ==============   ==============   ==============
     Net income - diluted                                     $         1.59   $         1.49   $         1.38
                                                              ==============   ==============   ==============
</TABLE>

The accompanying notes are an integral part of these statements.

                                       39
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

            Consolidated Statement of Changes in Stockholders' Equity

                  Years ended December 31, 2004, 2003 and 2002

                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                            Class A common stock           Class B common stock            Additional
                                       -----------------------------   ------------------------------       paid in
                                           Shares          Amount         Shares            Amount          capital
                                       -------------   -------------   -------------    -------------    -------------
<S>                                           <C>      <C>                     <C>      <C>              <C>
Balance, December 31, 2001                     8,849   $      17,698           1,805    $         180    $      65,011
  Net income for the year ended
   December 31, 2002                               -               -               -                -                -
  Conversion of Class B common stock
   to Class A common stock                        60             120             (52)              (5)               -
  6% stock dividends declared                    518           1,036             108               11           11,285
  Cash in lieu of fractional shares                -               -               -                -                -
  Stock options exercised                        168             336               -                -              688
  Cash dividends on common stock
   (Class A $0.93, Class B $1.07)                  -               -               -                -                -
  Other comprehensive income, net of
   reclassifications and taxes                     -               -               -                -                -
                                       -------------   -------------   -------------    -------------    -------------
Comprehensive income

Balance, December 31, 2002                     9,595          19,190           1,861              186           76,984
  Net income for the year ended
   December 31, 2003                               -               -               -                -                -
  Conversion of Class B common stock
   to Class A common stock                         8              16              (7)              (1)               -
  3% stock dividends declared                    281             562              55                6            6,443
  Cash in lieu of fractional shares                -               -               -                -                -
  Stock options exercised                        143             286               -                -            2,021
  Cash dividends on common stock
   (Class A $0.96, Class B $1.11)                  -               -               -                -                -
  Other comprehensive income, net of
   reclassifications and taxes                     -               -               -                -                -
                                       -------------   -------------   -------------    -------------    -------------
  Comprehensive income

Balance, December 31, 2003                    10,027          20,054           1,909              191           85,448

<CAPTION>
                                                        Accumulated
                                                           other
                                         Retained      comprehensive      Treasury      Comprehensive
                                         earnings      income (loss)       stock           income
                                       -------------   -------------   -------------    -------------
<S>                                    <C>             <C>             <C>              <C>
Balance, December 31, 2001             $      30,457   $      (2,632)  $      (2,265)
  Net income for the year ended
   December 31, 2002                          17,405               -               -    $      17,405
  Conversion of Class B common stock
   to Class A common stock                      (115)              -               -                -
  6% stock dividends declared                (12,331)              -               -                -
  Cash in lieu of fractional shares               (7)              -               -                -
  Stock options exercised                          -               -               -                -
  Cash dividends on common stock
   (Class A $0.93, Class B $1.07)            (10,590)              -               -                -
  Other comprehensive income, net of
   reclassifications and taxes                     -           5,047               -            5,047
                                       -------------   -------------   -------------    -------------
Comprehensive income                                                                    $      22,452
                                                                                        =============

Balance, December 31, 2002                    24,819           2,415          (2,265)
  Net income for the year ended
   December 31, 2003                          18,526               -               -    $      18,526
  Conversion of Class B common stock
   to Class A common stock                       (15)              -               -                -
  3% stock dividends declared                 (7,011)              -               -                -
  Cash in lieu of fractional shares               (8)              -               -                -
  Stock options exercised                          -               -               -                -
  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               -            4,000
                                       -------------   -------------   -------------    -------------
  Comprehensive income                                                                  $      22,526
                                                                                        =============
Balance, December 31, 2003                    24,990           6,415          (2,265)
</TABLE>

                                   (Continued)

                                       40
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

      Consolidated Statement of Changes in Stockholders' Equity - Continued

                  Years ended December 31, 2004, 2003 and 2002

                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                            Class A common stock            Class B common stock          Additional
                                       -----------------------------   ------------------------------      paid in
                                           Shares          Amount         Shares            Amount         capital
                                       -------------   -------------   -------------    -------------   -------------
<S>                                           <C>      <C>                     <C>      <C>             <C>
Balance, December 31, 2003                    10,027   $      20,054           1,909    $         191   $      85,448
  Net income for the year ended
   December 31, 2004                               -               -               -                -               -
  Conversion of Class B common stock
   to Class A common stock                        10              20              (1)               -               -
  2% stock dividends declared                    196             392              31                3           5,842
  Cash in lieu of fractional shares                -               -               -                -               -
  Stock options exercised                         44              87               -                -             747
  Cash dividends on common stock
   (Class A $1.00, Class B $1.15)                  -               -               -                -               -
  Other comprehensive income, net of
   reclassifications and taxes                     -               -               -                -               -
                                       -------------   -------------   -------------    -------------   -------------
Comprehensive income

Balance, December 31, 2004                    10,277   $      20,553           1,939    $         194   $      92,037
                                       =============   =============   =============    =============   =============

<CAPTION>
                                                        Accumulated
                                                           other
                                         Retained      comprehensive      Treasury      Comprehensive
                                         earnings      income (loss)       stock           income
                                       -------------   -------------   -------------    -------------
<S>                                    <C>             <C>             <C>              <C>
Balance, December 31, 2003             $      24,990   $       6,415   $      (2,265)
  Net income for the year ended
   December 31, 2004                          20,033               -               -    $      20,033
  Conversion of Class B common stock
   to Class A common stock                       (19)              -               -                -
  2% stock dividends declared                 (6,236)              -               -                -
  Cash in lieu of fractional shares              (11)              -               -                -
  Stock options exercised                          -               -               -                -
  Cash dividends on common stock
   (Class A $1.00, Class B $1.15)            (12,199)              -               -                -
  Other comprehensive income, net of
   reclassifications and taxes                     -          (2,616)              -           (2,616)
                                       -------------   -------------   -------------    -------------
Comprehensive income                                                                    $      17,417
                                                                                        =============
Balance, December 31, 2004             $      26,558   $       3,799   $      (2,265)
                                       =============   =============   =============
</TABLE>

The accompanying notes are an integral part of this statement.

                                       41
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows

                             Year ended December 31,

<TABLE>
<CAPTION>
                                                                         2004              2003             2002
                                                                    --------------    --------------    --------------
                                                                                      (In thousands)
<S>                                                                 <C>               <C>               <C>
Cash flows from operating activities
  Net income                                                        $       20,033    $       18,526    $       17,405
  Adjustments to reconcile net income to net cash
   provided by (used in) operating activities
    Depreciation and amortization                                            2,633             1,035             1,297
    Provision for loan losses                                                    6               674               250
    Amortization of premiums and discounts on loans,
     mortgage-backed securities and investments                              7,577               289            (1,495)
    Income tax benefit on stock options                                        331                --                --
    Provision (benefit) for deferred income taxes                           (1,442)            2,078               (32)
    Gains on sale other real estate                                         (2,102)             (568)             (457)
    Gains on sale of loans                                                    (480)             (637)             (767)
    Gains on sales of investment securities available for sale                (810)             (719)             (790)
    (Increase) decrease in accrued interest receivable                         719            (2,575)           (2,082)
    Decrease (increase) in other assets                                     (9,191)          (26,021)              842
    Decrease in accrued interest payable                                    (2,131)           (3,673)             (228)
    Increase (decrease) in other liabilities                                 3,666             1,238            (1,452)
                                                                    --------------    --------------    --------------
             Net cash provided by (used in) operating activities            18,809           (10,353)           12,491
                                                                    --------------    --------------    --------------

Cash flows from investing activities
  Proceeds from calls and maturities of investment securities
   held to maturity                                                        153,714             9,982            60,563
  Purchases of investment securities held to maturity                     (255,150)          (89,310)                -
  Proceeds from calls and maturities of investment securities
   available for sale                                                       60,836           201,341           309,710
  Proceeds from sales of investment securities available for sale           27,860            91,339           115,250
  Redemption (purchase) of Federal Home Loan Bank stock                        307            (3,532)           (4,074)
  Purchases of investment securities available for sale                    (13,812)         (321,451)         (699,480)
  Net decrease in loans                                                     46,256            61,647            70,581
  Purchases of premises and equipment                                      (67,586)             (513)             (787)
                                                                    --------------    --------------    --------------
             Net cash used in investing activities                         (47,575)          (50,497)         (148,237)
                                                                    --------------    --------------    --------------
</TABLE>

                                   (Continued)

                                       42
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

                Consolidated Statements of Cash Flows - Continued

                             Year ended December 31,

<TABLE>
<CAPTION>
                                                                          2004              2003              2002
                                                                     --------------    --------------    --------------
                                                                           (In thousands, except per share data)
<S>                                                                  <C>               <C>               <C>
Cash flows from financing activities
  Increase (decrease) in non-interest bearing and interest bearing   $      (14,295)   $       63,511    $      253,560
   demand deposits and savings accounts
  Decrease in certificates of deposit                                       (34,382)          (93,292)         (134,579)
  Principal payments on mortgage                                                (60)              (62)              (49)
  Obligations through equity investments                                     56,249                 -                 -
  Proceeds from subordinated debentures, net                                 25,000                 -                 -
  Cash dividends in lieu of fractional shares                                   (11)               (8)               (7)
  Proceeds from borrowings, net of repayments                                10,000            84,500            27,275
  Issuance of common stock under stock option plans                             503             2,021               688
  Cash dividends paid                                                       (12,199)          (11,321)          (10,589)
                                                                     --------------    --------------    --------------
      Net cash provided by financing activities                              30,805            45,349           136,299
                                                                     --------------    --------------    --------------
      Net increase (decrease) in cash and cash equivalents                    2,039           (15,501)              553

Cash and cash equivalents at beginning of year                               25,070            40,571            40,018
                                                                     --------------    --------------    --------------
Cash and cash equivalents at end of year                             $       27,109    $       25,070    $       40,571
                                                                     ==============    ==============    ==============
Supplemental disclosure of cash flow information
  Cash paid during the year for
    Interest                                                         $       29,432    $       33,615    $       36,719
                                                                     ==============    ==============    ==============
    Income taxes                                                     $        8,705    $        7,000    $        5,650
                                                                     ==============    ==============    ==============
</TABLE>

The accompanying notes are an integral part of these statements.

                                       43
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

                   Notes To Consolidated Financial Statements


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

    1. Basis of Financial Statement Presentation

    The accompanying consolidated financial statements include the accounts of
    Royal Bancshares and its wholly-owned subsidiaries, Royal Investments of
    Delaware, Inc. and Royal Bank, including Royal Bank's subsidiaries, Royal
    Real Estate of Pennsylvania, Inc., Royal Investment America, LLC, and
    Crusader Servicing Corporation. Both Royal Bancshares' Trusts' are not
    consolidated as further discussed in Note A17. During 2004, Royal Bancshares
    through Royal Bank started a banking division called Royal Asian Bank which
    operates three branches in Pennsylvania and anticipates opening two branches
    in Northern New Jersey during the first quarter of 2005. All significant
    inter-company transactions and balances have been eliminated.

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

    The principal estimates that are particularly susceptible to significant
    change in the near term relate to the allowance for loan losses and the
    valuation of deferred tax assets. In connection with the allowance for loan
    losses estimate, when circumstances warrant, management obtains independent
    appraisals for significant properties. However, future changes in real
    estate market conditions and the economy could affect Royal Bancshares'
    allowance for loan losses.

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

                                   (Continued)

                                       44
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
    Variable Interest Entities" (FIN 46). In general, a variable interest entity
    is a corporation, partnership, trust or any other legal structures used for
    business purposes that either (a) does not have equity investors with voting
    rights or (b) has equity investors that do not provide sufficient financial
    resources for the entity to support its activities. FIN 46 requires certain
    variable interest entities to be consolidated by the primary beneficiary if
    the investors do not have the characteristics of a controlling financial
    interest or do not have sufficient equity at risk for the entity to finance
    its activities without additional subordinated financial support from other
    parties. The consolidation requirements of FIN 46 applied immediately to
    interest entities created after January 31, 2003. In December 2003, the FASB
    issued FIN 46(R) with respect to variable interest entities created before
    January 31, 2003, which among other things revised the implementation date
    to the first fiscal year or interim period ended after March 15, 2004, with
    the exception of Special Purpose Entities (SPE). Royal Bancshares currently
    has no SPEs. Royal Bancshares adopted the provisions of FIN 46 effective for
    the period ended March 31, 2004, which required Royal Bancshares to
    consolidate its investments in real estate partnerships. Prior to FIN 46 and
    46(R), Royal Bancshares accounted for its investments in the real estate
    partnerships under the equity method of accounting.

    Royal Bancshares' investments in real estate partnerships is further
    discussed in Note A -17.

    The SEC recently released Staff Accounting Bulletin No. 105, "Application of
    Accounting Principles to Loan Commitments." SAB 105 provides guidance about
    the measurements of loan commitments recognized at fair value under FASB
    Statement No. 133, "Accountings for Derivative Instruments and Hedging
    Activities." SAB 105 also requires companies to disclose their accounting
    policy for those loan commitments including methods and assumptions used to
    estimate fair value and associated hedging strategies. SAB 105 is effective
    for all loan commitments accounted for as derivatives that are entered into
    after March 31, 2004. The adoption of SAB 105 did not have a material effect
    on Royal Bancshares consolidated financial statements.

    In December 2004, the Financial Accounting Standards Board (FASB) issued
    Statement 123(R), "Share-Based Payment," an Amendment of SFAS No. 123 and
    APB No. 95. The Statement addresses the accounting for share-based payment
    transactions in which an enterprise receives employee services in exchange
    for (a) equity instruments of the enterprise or (b) liabilities that are
    based on the fair value of the enterprise's equity instruments or that may
    be settled by the issuance of such equity instruments. Statement 123(R)
    requires that all forms of share-based payments to employees, including
    employee stock options, would be treated the same as other forms of
    compensation by recognizing the related cost in the income statement. The
    expense of the award would generally be measured at fair value at the grant
    date. Current accounting guidance requires that the expense relating to
    fixed plan employee stock options only be disclosed in the footnotes to the
    financial statements. The Statement eliminates the ability to account for
    share-based compensation transactions using APB Opinion No. 25, "Accounting
    for Stock Issued to Employees." This statement is effective for all
    share-based payment transactions entered into after June 15, 2005 and to any
    awards modified, repurchased, or cancelled after that date. Royal Bancshares
    is currently evaluating this Statement and its effects on its results of
    operations.

                                   (Continued)

                                       45
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    2. Investment Securities

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

    Purchase premiums and discounts are recognized in interest income using the
    interest method over the terms of the securities. Declines in the fair value
    of held-to-maturity and available-for-sale securities below their cost that
    are deemed to be other than temporary are reflected in earnings as realized
    losses. In estimating other-than-temporary impairment losses, management
    considers (1) the length of time and the extent to which the fair value has
    been less than cost, (2) the financial condition and near- term prospects of
    the issuer, and (3) the intent and ability of Royal Bancshares to retain its
    investment in the issuer for a period of time sufficient to allow for any
    anticipated recovery in fair value.

    3. Loans held for sale

    Residential mortgage loans are only originated for sale to the secondary
    mortgage loans market. These loans have a prior sales commitment on a best
    efforts basis in place prior to the loan closing. These loans are classified
    as loans held for sale and are carried at the lower of cost or estimated
    fair value. Fair value is determined by the purchase price quoted in the
    sales agreement.

    Royal Bancshares accounts for the transfer of financial assets in accordance
    with SFAS No. 140 "Accounting for Transfers and Servicing of Assets and
    Extinguishments of Liabilities." The standard is based on consistent
    application of a financial-components approach that recognizes the financial
    and servicing assets it controls and the liabilities it has incurred,
    derecognizes financial assets when control has been surrendered and
    derecognizes liabilities when extinguished. The standard provides consistent
    guidelines for distinguishing transfers of financial assets from transfers
    that are secured borrowings.

    4. Loans and Allowance for Loan Losses

    Loans that management has the intent and ability to hold for the foreseeable
    future or until maturity or payoff are stated at the amount of unpaid
    principal, reduced by unearned income and an allowance for loan and lease
    losses. The allowance for loan losses is maintained at a level believed
    adequate by management to absorb potential losses in the loan portfolio.
    Management's determination of the adequacy of the allowance is based on an
    evaluation of the portfolio, past loan loss experience, current economic
    conditions, volume, growth, and composition of the loan portfolio, and other
    relevant factors. The allowance is increased by provisions for loan losses
    charged against income. Decreases in the allowance result from management's
    determination that the

                                   (Continued)

                                       46
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    allowance for loan losses exceeds their estimates of potential loan loss.
    This evaluation is inherently subjective as it requires estimates that are
    susceptible to significant revision as more information becomes available.

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

    Large groups of smaller balance homogeneous loans are collectively evaluated
    for impairment. Accordingly, Royal Bancshares does not separately identify
    individual consumer and residential loans for impairment disclosures, unless
    such loans are the subject of a restructuring agreement.

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

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

    In October 2003, the AICPA issued Statement of Position (SOP) 03-3,
    Accounting for Loans or Certain Debt Securities Acquired in a Transfer. This
    statement addresses accounting for differences between contractual cash
    flows and cash flows expected to be collected from an investor's initial
    investment in loans or debt securities (loans) acquired in a transfer as a
    result of credit quality deterioration. The statement requires recognition
    of the excess of all cash flows expected at acquisition over the investor's
    initial investment in the loan as interest income on a level-yield basis
    over the life of the loan as the accretable yield. The loan's contractual
    required payments receivable in excess of the amount of its cash flows
    expected at acquisition (nonaccretable difference) should not be recognized
    as an adjustment to yield, a loss accrual or a valuation allowance for
    credit risk. This statement is effective for loans acquired in fiscal years
    beginning after December 31, 2004. Early adoption is permitted. The
    adoptions of SOP 03-3 is not expected to have a material impact on the
    Company's financial position or results of operations.

                                   (Continued)

                                       47
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    Royal Bancshares adopted FIN 45 "Guarantor's Accounting and Disclosure
    Requirements for Guarantees, including Indirect Guarantees of Indebtedness
    of Others" on January 1, 2003 ("FIN 45"). FIN 45 requires a guarantor
    entity, at the inception of a guarantee covered by the measurement
    provisions of the interpretation, to record a liability for the fair value
    of the obligation undertaken in issuing the guarantee. Royal Bancshares has
    financial and performance letters of credit. Financial letters of credit
    require a company to make a payment if the customer's condition
    deteriorates, as defined in agreements. Performance letters of credits
    require Royal Bancshares to make payments if the customer fails to perform
    certain non-financial contractual obligation. Royal Bancshares previously
    did not record a liability when guaranteeing obligations unless it became
    probable that Royal Bancshares would have to perform under the guarantee.

    5. Other Real Estate

    The adjusted fair market value is determined by reducing the fair market
    value by estimated costs for the disposition of the property. Costs relating
    to holding the property are expensed when incurred. Other real estate owned
    of approximately $5,424,000 and $4,371,000 at December 31, 2004 and 2003,
    respectively, is included in other assets on the consolidated balance
    sheets.

    6. Premises and Equipment

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

    7. Bank-Owned Life Insurance

    Royal Bank has purchased life insurance policies on certain executives.
    These policies are recorded in other assets at their cash surrender value,
    or the amount that can be realized. Income from these policies and changes
    in the cash surrender value are recorded in other income.

    8. Income Taxes

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

                                   (Continued)

                                       48
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    9. Per Share Information

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

    10. Stock Option Plans

    Royal Bancshares currently accounts for stock options under SFAS No. 123,
    "Accounting for Stock-Based Compensation," as Amended by SFAS No.148, which
    contains a fair value-based method for valuing stock-based compensation that
    entities may use to measure compensation cost at the grant date based on the
    fair value of the award. Compensation is recognized over the service period,
    which is usually the vesting period. Alternatively, SFAS No. 123 permits
    entities to continue accounting for employee stock options and similar
    equity instruments under Accounting Principles Board (APB) Opinion 25,
    "Accounting for Stock Issued to Employees." Entities that continue to
    account for stock options using APB Opinion 25 are required to make a pro
    forma disclosure of net income and earnings per share, as if the fair
    value-based method of accounting defined in SFAS No. 123 had been applied.
    Effective June 15, 2005, Royal Bancshares will apply SFAS No. 123(R).

    At December 31, 2004, Royal Bancshares had both a director and employee
    stock-based compensation plan, which is more fully described in Note L.
    Royal Bancshares accounts for that plan under the recognition and
    measurement principles of APB Opinion No.25 and related interpretations.
    Stock-based employee compensation costs are not reflected in net income, as
    all options granted under the plan had an exercise price equal to the market
    value under the underlying common stock of the date of the grant. The
    following table illustrates the effect on net loss and loss per share if
    Royal Bancshares had applied the fair value recognition provisions of SFAS
    No. 123, "Accounting for Stock-Based Compensation," to stock-based employee
    compensation.

<TABLE>
<CAPTION>
                                                               2004          2003          2002
                                                            ----------    ----------    ----------
      <S>                                                   <C>           <C>           <C>
      Net income, as reported                               $   20,033    $   18,526    $   17,405
      Less: Stock-based compensation costs under
       fair value based method for all awards, net of tax         (490)         (425)         (435)
                                                            ----------    ----------    ----------
      Pro forma net income (loss)                           $   19,543        18,101        16,970

      Earnings per share -Basic    As Reported              $     1.60    $     1.49    $     1.41
                                   Pro forma                      1.56          1.46          1.37
      Earnings per share -Diluted  As Reported                    1.59          1.49          1.38
                                   Pro forma                      1.56          1.46          1.37
</TABLE>

                                   (Continued)

                                       49
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    11. Benefit Plans

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

    12. Cash and Cash Equivalents

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

    13. Financial Instruments

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

    14. Advertising Costs

    Royal Bancshares and Royal Bank expense advertising costs as incurred.

    15. Comprehensive Income

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

    The income tax effects allocated to comprehensive income is as follows (in
    thousands):

<TABLE>
<CAPTION>
                                                                      December 31, 2004
                                                            --------------------------------------
                                                                             Tax          Net of
                                                            Before tax    (benefit)        tax
                                                              amount       expense        amount
                                                            ----------    ----------    ----------
      <S>                                                   <C>           <C>           <C>
      Unrealized losses on securities
        Unrealized holding losses arising during period     $   (3,150)   $   (1,069)   $   (2,081)
        Less reclassification adjustment for gains
         realized in net income                                    810           275           535
                                                            ----------    ----------    ----------
        Other comprehensive income, net                     $   (3,960)   $   (1,344)   $   (2,616)
                                                            ==========    ==========    ==========
</TABLE>

                                   (Continued)

                                       50
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

<TABLE>
<CAPTION>
                                                                     December 31, 2003
                                                            ------------------------------------
                                                                             Tax        Net of
                                                            Before tax    (benefit)      tax
                                                              amount       expense      amount
                                                            ----------   ----------   ----------
      <S>                                                   <C>          <C>          <C>
      Unrealized gains on securities
        Unrealized holding gains arising during period      $    6,791   $    2,316   $    4,475
        Less reclassification adjustment for gains
         realized in net income                                    719          244          475
                                                            ----------   ----------   ----------
        Other comprehensive income, net                     $    6,072   $    2,072   $    4,000
                                                            ==========   ==========   ==========
</TABLE>

<TABLE>
<CAPTION>
                                                                  December 31, 2002
                                                         ------------------------------------
                                                                          Tax        Net of
                                                         Before tax    (benefit)      tax
                                                           amount       expense      amount
                                                         ----------   ----------   ----------
      <S>                                                <C>          <C>          <C>
      Unrealized gains on securities
        Unrealized holding gains arising during period   $    8,436   $    2,868   $    5,568
        Less reclassification adjustment for gains
         realized in net income                                 790          269          521
                                                         ----------   ----------   ----------
        Other comprehensive income, net                  $    7,646   $    2,599   $    5,047
                                                         ==========   ==========   ==========
</TABLE>

    16. Reclassifications

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

    17. Variable Interest Entities (VIE)

    Real estate owned via equity investments

    Royal Bancshares, together with a real estate development company, formed
    Brook View Investors, L.L.C. ("Brook View") in May 2001. Brook View was
    formed to construct 13 apartment buildings with a total of 116 units in a
    gated apartment community. The development company is the general partner of
    the project. Royal Bancshares invested 60% of initial capital contributions
    with the development company holding the remaining equity interest. Upon the
    repayment of the initial capital contributions and a preferred return,
    distributions will convert to 50% for Royal Bancshares and 50% for the
    development company. Brook View has total assets of $13.1 million and total
    borrowings of $12.8 million of which $-0- is guaranteed by Royal Bancshares.
    Royal Bancshares has determined that Brook View is a VIE and it is the
    primary beneficiary. Royal Bancshares' exposure to loss due to its
    investment in and receivables due from Brook View is $187,000.

    Royal Bancshares, together with a real estate development company, formed
    Burrough's Mill Apartment, L.L.C. ("Burrough's Mill") in December 2001.
    Burrough's Mill was formed to construct 32 apartment buildings with a

                                       51
<PAGE>

    total of 308 units in a gated apartment community. The development company
    is the general partner of the project. Royal Bancshares invested 60% of
    initial capital contributions with the development company holding the
    remaining equity interest. Upon the repayment of the initial capital
    contributions and a preferred return, distributions will convert to 50% for
    Royal Bancshares and 50% for the development company. Burrough's Mill has
    total assets of $36.1 million and total borrowings of $28.6 million of which
    $-0- is guaranteed by Royal Bancshares. Royal Bancshares has determined that
    Burrough's Mill is a VIE and it is the primary beneficiary. Royal
    Bancshares' exposure to loss due to its investment in and receivables due
    from Burrough's Mill is $4.2 million.

    Royal Bancshares, together with a real estate development company, formed
    Main Street West Associates, L.P. ("Main Street") in February 2002. Main
    Street was formed to acquire, maintain, improve, and operate office space
    located in Norristown, Pennsylvania. The development company is the general
    partner of the project. Royal Bancshares invested 93% of initial capital
    contributions with the development company holding the remaining equity
    interest. Upon the repayment of the initial capital contributions and a
    preferred return, distributions will convert to 50% for Royal Bancshares and
    50% for the development company. Main Street has total assets of $4.1
    million and total borrowings at $2.9 million of which $-0- is guaranteed by
    Royal Bancshares. Royal Bancshares has determined that Main Street is a VIE
    and it is the primary beneficiary. Royal Bancshares' exposure to loss due to
    its investment in and receivables due from Main Street is $729,000.

                                   (Continued)

                                       52
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    Royal Bancshares, together with a real estate investment company, formed 212
    C Associates, L.P. ("212 C") in May 2002. 212 C was formed to acquire, hold,
    improve, and operate office space located in Lansdale, Pennsylvania. The
    investment company is the general partner of the project. Royal Bancshares
    invested 90% of initial capital contributions with the investment company
    holding the remaining equity interest. Upon the repayment of the initial
    capital contributions and a preferred return, distributions will convert to
    50% for Royal Bancshares and 50% for the investment company. 212 C has total
    assets of $13.8 million and total borrowings of $11.9 million, of which $-0-
    is guaranteed by Royal Bancshares. Royal Bancshares has determined that 212
    C is a VIE and it is the primary beneficiary. Royal Bancshares' exposure to
    loss due to its investment in and receivables due from 212 C is $1.6
    million.

    Trust Preferred Securities

    Management has determined that Royal Capital Trust I/II (the Trusts) qualify
    as VIE's under FASB Interpretation 46 (FIN 46), "Consolidation of Variable
    Interest Entities," as revised. The Trusts issued mandatory redeemable
    preferred stock to investors and loaned the proceeds to Royal Bancshares.

    Royal Bancshares adopted the provision under the revised interpretation, FIN
    46(R), in the first quarter of 2004. Accordingly, Royal Bancshares does not
    consolidate the Trusts. FIN 46(R) precludes consideration of the call option
    embedded in the preferred stock when determining if Royal Bancshares has the
    right to a majority of the Trusts' expected residual returns. The
    deconsolidation resulted in the investment in the common stock of the Trusts
    to be included in other assets as of December 31, 2004 and the corresponding
    increase in outstanding debt of $774,000. In addition, the income received
    on Royal Bancshares' common stock investment is included in other income.

    18. Interest Rate Swaps

    For asset/liability management purposes, Royal Bancshares uses interest rate
    swap agreements to hedge various exposures or to modify interest rate
    characteristics of various balance sheet accounts. Such derivatives are used
    as part of the asset/liability management process and linked to specific
    liabilities and have a high correlation between the contract and the
    underlying item being hedged, both at inception and throughout the hedge
    period.

    Royal Bancshares currently utilizes interest rate swap agreements to convert
    a portion of its fixed rate time deposits to a variable rate (fair value
    hedge) to fund variable rate loans. Interest rate swaps are contracts in
    which a series of interest flows are exchanged over a prescribed period. The
    notional amount ($25 million) on which interest payments are based is not
    exchanged.

NOTE B - SEGMENT INFORMATION

    SFAS No. 131, "Segment Reporting," established standards for public business
    enterprises to report information about operating segments in their annual
    financial statements and requires that those enterprises report selected
    information about operating segments in subsequent interim financial reports
    issued to shareholders. It also established standards for related disclosure
    about products and services, geographic areas, and major customers.
    Operating segments are components of an enterprise, which are evaluated
    regularly by the chief operating decision maker in deciding how to allocate
    and assess resources and performance. Royal Bancshares' chief operating
    decision maker is the President and Chief Executive Officer. Royal
    Bancshares has identified its reportable operating segment as "Community
    Banking."

                                       53
<PAGE>

    Royal Bancshares' community banking segment consists of commercial and
    retail banking. The community banking business segment is managed as a
    single strategic unit which generates revenue from a variety of products and
    services provided by Royal Bank. For example, commercial lending is
    dependent upon the ability of Royal Bank to fund itself with retail deposits
    and other borrowings and to manage interest rate and credit risk. This
    situation is also similar for consumer and residential mortgage lending.

    Royal Bancshares' tax lien operation does not meet the quantitative
    thresholds for requiring disclosure, but has different characteristics than
    the community banking operation. Royal Bancshares' tax lien operation
    consists of purchasing delinquent tax certificates from local municipalities
    at auction. The tax lien segment is managed as a single strategic unit which
    generates revenue from a nominal interest rate achieved at the individual
    auctions along with periodic penalties imposed.

    As a result of the adoption of FIN 46(R), Royal Bancshares is reporting on a
    consolidated basis its interest in four equity investments as VIE's which
    have different characteristics than the community banking segment. Royal
    Bancshares has investments in two apartment complexes and two buildings
    leased as commercial office space.

    The accounting policies used in this disclosure of business segments are the
    same as those described in the summary of significant accounting policies.

                                   (Continued)

                                       54
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

NOTE B - SEGMENT INFORMATION - Continued

    Selected segment information and reconciliations to consolidated financial
    information is as follows:

<TABLE>
<CAPTION>
                                             Community       Tax Lien       Equity
        (in thousands)                          Bank        Operation     Investments     Consolidated
        ---------------------------------   ------------   ------------   ------------    ------------
        <S>                                 <C>            <C>            <C>             <C>
        DECEMBER 31, 2004
            Total assets                    $  1,088,031   $     50,196   $     67,047    $  1,205,274
                                            ============   ============   ============    ============
            Total deposits                       742,382              -              -         742,382
                                            ============   ============   ============    ============
            Net interest income  (losses)         38,846          3,024         (1,630)         40,240
            Provision for loan losses                  -              6              -               6
            Total non-interest income              4,800          1,227          7,133          13,160
            Total non-interest expense            17,295          3,372          4,780          25,447
            Income taxes                           7,525            389              -           7,914
                                            ------------   ------------   ------------    ------------
            Net Income                      $     18,826   $        484   $        723    $     20,033
                                            ============   ============   ============    ============

        DECEMBER 31, 2003
            Total assets                    $  1,103,619   $     50,791   $          -    $  1,154,410
                                            ============   ============   ============    ============
            Total deposits                       791,059              -              -         791,059
                                            ============   ============   ============    ============
            Net interest income                   38,773          3,606              -          42,379
            Provision for loan loss                  500            174              -             674
            Total non-interest income              3,196            508              -           3,704
            Total non-interest expense            16,023          2,864              -          18,887
            Income taxes                           7,528            468              -           7,996
                                            ------------   ------------   ------------    ------------
            Net Income                      $     17,918   $        608   $          -    $     18,526
                                            ============   ============   ============    ============
</TABLE>

    Interest paid to the Community Bank segment by the Tax Lien Operation was
    approximately $1,896,000 and $1,879,000 for the years ending December 31,
    2004 and 2003, respectively.

                                   (Continued)

                                       55
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

NOTE C - INVESTMENT SECURITIES

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

<TABLE>
<CAPTION>
                                                                              2004
                                                   ----------------------------------------------------------
                                                                      Gross           Gross
                                                     Amortized     unrealized      unrealized        Fair
                                                       cost           gains          losses          value
                                                   ------------   ------------    ------------   ------------
        <S>                                        <C>            <C>             <C>            <C>
        Investment securities held to maturity
             Corporate securities                  $     26,995   $        371    $          -   $     27,366
             U.S. government agencies                   185,000              9            (742)       184,267
             Mortgage backed securities                     232              -               -            232
                                                   ------------   ------------    ------------   ------------
                                                   $    212,227   $        380    $       (742)  $    211,865
                                                   ============   ============    ============   ============
</TABLE>

<TABLE>
<CAPTION>
                                                                              2004
                                                   ----------------------------------------------------------
                                                                      Gross           Gross
                                                     Amortized     unrealized      unrealized        Fair
                                                       cost           gains          losses          value
                                                   ------------   ------------    ------------   ------------
        <S>                                        <C>            <C>             <C>            <C>
        Investment securities available for sale
             Preferred and common stock            $      5,113   $        250    $          -   $      5,363
             Corporate bonds                            125,750          4,104             (48)       129,806
             U.S. government agencies                    94,977              -          (1,672)        93,305
             Trust preferred securities                  37,196          2,754            (388)        39,562
             Foreign bonds                                9,212            293               -          9,505
             Mortgage backed securities                  81,303            496            (130)        81,669
             Other securities                             1,624            100               -          1,724
                                                   ------------   ------------    ------------   ------------
                                                   $    355,175   $      7,997    $     (2,238)  $    360,934
                                                   ============   ============    ============   ============
</TABLE>

                                   (Continued)

                                       56
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

NOTE C - INVESTMENT SECURITIES - Continued

<TABLE>
<CAPTION>
                                                                              2003
                                                   ----------------------------------------------------------
                                                                      Gross           Gross
                                                     Amortized     unrealized      unrealized        Fair
                                                       cost           gains          losses          value
                                                   ------------   ------------    ------------   ------------
        <S>                                        <C>            <C>             <C>            <C>
        Investment securities held to maturity
             Corporate securities                  $     21,121   $      1,481    $          -   $     22,602
             U.S. government agencies                    91,630            168            (465)        91,333
             Mortgage backed securities                     340              -               -            340
                                                   ------------   ------------    ------------   ------------
                                                   $    113,091   $      1,649    $       (465)  $    114,275
                                                   ============   ============    ============   ============
</TABLE>

<TABLE>
<CAPTION>
                                                                      2003
                                           ----------------------------------------------------------
                                                              Gross           Gross
                                             Amortized     unrealized      unrealized        Fair
                                               cost           gains          losses          value
                                           ------------   ------------    ------------   ------------
        <S>                                        <C>            <C>             <C>            <C>
        Investment securities available for sale
             Preferred and common stock            $         40   $         15    $          -   $         55
             Corporate bonds                            148,487          8,474             (12)       156,949
             U.S. government agencies                   122,785            139          (1,812)       121,112
             Trust preferred securities                  36,251          3,049          (2,161)        37,139
             Foreign bonds                               11,363            803               -         12,166
             Mortgage backed securities                 110,596          1,345             (66)       111,875
             Other securities                             1,598              -             (55)         1,543
                                                   ------------   ------------    ------------   ------------
                                                   $    431,120   $     13,825    $     (4,106)  $    440,839
                                                   ============   ============    ============   ============
</TABLE>

                                   (Continued)

                                       57
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

NOTE C - INVESTMENT SECURITIES - Continued

    The amortized cost and estimated fair value of investment securities at
    December 31, 2004, by contractual maturity, are shown below (in thousands).
    Expected maturities will differ from contractual maturities because
    borrowers may have the right to call or prepay obligations with or without
    call or prepayment penalties.

<TABLE>
<CAPTION>
                                                                              2004
                                                   ----------------------------------------------------------
                                                         Held to maturity              Available for sale
                                                   ---------------------------    ---------------------------
                                                     Amortized        Fair          Amortized        Fair
                                                       cost           value           cost           value
                                                   ------------   ------------    ------------   ------------
        <S>                                        <C>            <C>             <C>            <C>
        Within 1 year                              $     16,695   $     17,066    $     21,944   $     22,217
        After 1 but within 5 years                      135,352        134,710         113,630        117,728
        After 5 but within 10 years                      60,000         59,909          69,800         68,664
        After 10 years                                      180            180         144,661        146,935
        Preferred and common stock                            -              -           5,140          5,390
                                                   ------------   ------------    ------------   ------------
                                                   $    212,227   $    211,865    $    355,175   $    360,934
                                                   ============   ============    ============   ============
</TABLE>

    Proceeds from the sale of investment securities available for sale during
    2004, 2003 and 2002 were $68,576,000, $91,339,000 and $115,250,000,
    respectively, resulting in gross realized gain (loss) of $900,000 ($90,000),
    $1,016,000 ($297,000), and $881,000 ($91,000) and during 2004, 2003 and
    2002, respectively.

    As of December 31, 2004 and 2003, investment securities with a book value of
    $130,184,000 and $11,185,000, respectively, were pledged as collateral to
    secure public deposits and for other purposes required or permitted by law.

    The table below indicates the length of time individual securities have been
    in a continuous unrealized loss position at December 31, 2004:

<TABLE>
<CAPTION>
                                LESS THAN 12 MONTHS       12 MONTHS OR LONGER              TOTAL
                              -----------------------   ------------------------  -----------------------
                                 Fair      Unrealized      Fair      Unrealized      Fair      Unrealized
DESCRIPTION OF SECURITIES        value       losses        value       losses        value       losses
---------------------------   ----------   ----------   ----------   ----------   ----------   ----------
<S>                           <C>          <C>          <C>          <C>          <C>          <C>
US government agencies        $   99,199   $     (778)  $   78,364   $   (1,636)  $  177,563   $   (2,414)
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 temporarily
 impaired securities          $  115,749   $   (1,213)  $  105,911   $   (1,767)  $  221,660   $   (2,980)
                              ==========   ==========   ==========   ==========   ==========   ==========
</TABLE>

                                   (Continued)

                                       58
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

NOTE C - INVESTMENT SECURITIES - Continued

    In management's opinion the unrealized losses reflect changes in interest
    rates subsequent to the purchase of specific securities. There were 22
    securities in the less than twelve month category and 7 in the twelve or
    more month category and of the $222 million fair value of investments, $201
    million consisted of government bonds and government secured mortgage backed
    securities. Royal Bancshares has the ability to hold these securities until
    maturity or market price recovery. Management believes that the unrealized
    losses represent temporary impairments of the securities.

NOTE D - LOANS

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

                                                         2004         2003
                                                      ----------   ----------
        Commercial and Industrial                     $  208,204   $  225,268
        Commercial mortgages                             193,611      204,396
        Residential                                       28,513       41,590
        Tax liens                                         34,419       37,855
        Other                                              4,090        4,941
                                                      ----------   ----------
                                                         468,834      514,050
        Less
            Unearned income                               (1,540)      (1,203)
            Unamortized discount on purchased loans            -         (290)
                                                      ----------   ----------
                      Total loans                     $  467,294   $  512,557
                                                      ==========   ==========

    Loans on which the accrual of interest has been discontinued or reduced
    amounted to approximately $4,526,000 and $11,328,000 at December 31, 2004
    and 2003, respectively. If interest had been accrued, such income would have
    been approximately $209,000, $401,000 and $473,000 for the years ended
    December 31, 2004, 2003 and 2002, respectively. Management believes it has
    adequate collateral to limit its credit risk with these loans.

    Royal Bancshares granted loans to the officers and directors of Royal
    Bancshares and to their associates. Related party loans are made on
    substantially the same terms, including interest rates and collateral, as
    those prevailing at the time for comparable transactions with unrelated
    persons and do not involve more than normal risk of collectibility. The
    aggregate dollar amount of these loans was $4,723,000 and $4,667,000 at
    December 31, 2004 and 2003, respectively. During 2004, one new loan in the
    amount of $85,000 was made and repayments totaled $179,000.

                                   (Continued)

                                       59
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

NOTE D - LOANS - Continued

    Impaired loans, which include the loans on which the accrual of interest has
    been discontinued, was approximately $4,526,000 and $11,328,000 at December
    31, 2004 and 2003, respectively. Royal Bancshares has identified a loan as
    impaired when it is probable that interest and principal will not be
    collected according to the contractual terms of the loan agreements. The
    income recognized on impaired loans during 2004 and 2003 was $-0- and
    $1,000, respectively.

    Total cash collected on impaired loans during 2004 was $919,000 of which
    $919,000 was credited to the principal balance outstanding on such loans.
    Royal Bancshares' policy for interest income recognition on impaired loans
    is to recognize income on currently performing restructured loans under the
    accrual method. Royal Bancshares recognizes income on non-accrual loans
    under the cash basis when the principal payments on the loans become current
    and the collateral on the loan is sufficient to cover the outstanding
    obligation to Royal Bancshares. If these factors do not exist, Royal
    Bancshares does not recognize income.

    Royal Bancshares primarily grants commercial and real estate loans in the
    greater Philadelphia metropolitan area. Royal Bancshares has concentrations
    of credit risk in real estate development loans at December 31, 2004. A
    substantial portion of its debtors' ability to honor these contracts is
    dependent upon the economic sector.

    Changes in the allowance for loan losses were as follows (in thousands):

<TABLE>
<CAPTION>
                                                                   2004         2003         2002
                                                                ----------   ----------   ----------
        <S>                                                     <C>          <C>          <C>
        Balance at beginning of year                            $   12,426   $   12,470   $   11,888
             Charge-offs                                              (204)        (811)        (925)
             Recoveries                                                291           93        1,257
                                                                ----------   ----------   ----------
             Net (charge-offs) recoveries                               87         (718)         332
             Provision for loan losses                                   6          674          250
                                                                ----------   ----------   ----------
        Balance at end of year                                  $   12,519   $   12,426   $   12,470
                                                                ==========   ==========   ==========
</TABLE>

NOTE E - PREMISES AND EQUIPMENT

Premises and equipment are summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                              Estimated
                                                               Useful
                                                                Lives           2004         2003
                                                            --------------   ----------   ----------
        <S>                                                 <C>              <C>          <C>
        Land                                                      -          $    2,396   $    2,396
        Buildings and leasehold improvements                7 - 31.5 years        8,178        6,989
        Furniture and fixtures                               3 - 7 years          6,812        5,605
                                                                             ----------   ----------
                                                                                 17,386       14,990
        Less accumulated depreciation and amortization                            8,606        7,510
                                                                             ----------   ----------
                                                                             $    8,780   $    7,480
                                                                             ==========   ==========
</TABLE>

    Depreciation and amortization in expense, related to premises and equipment,
    was approximately $977,000, $944,000 and $1,297,000 for the years ended
    2004, 2003 and 2002, respectively.

                                   (Continued)

                                       60
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

NOTE F - DEPOSITS

    Deposits are summarized as follows (in thousands):

                                                  2004            2003
                                             -------------   -------------
        Demand                               $      64,371   $      58,942
        NOW and money market                       451,671         471,140
        Savings                                     23,820          24,075
        Time, $100,000 and over                     90,596         104,123
        Other time                                 111,924         132,779
                                             -------------   -------------
                                             $     742,382   $     791,059
                                             =============   =============

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

        2005                                                 $      86,566
        2006                                                        40,053
        2007                                                        18,202
        2008                                                        41,282
        2009                                                        11,848
        Thereafter                                                   4,569
                                                             -------------
                                                             $     202,520
                                                             =============

NOTE G - BORROWINGS

    1.  Advances from the Federal Home Loan Bank

    At December 31, 2004, advances from the Federal Home Loan Bank (FHLB)
    totaling $222,000,000 will mature within one to ten years. The advances are
    collateralized by FHLB stock and certain first mortgage loans, and
    mortgage-backed securities. These advances had a weighted average interest
    rate of 3.88%.

    Outstanding borrowings mature as follows (in thousands):

        2005                                                 $      17,500
        2006                                                        30,000
        2007                                                             -
        2008                                                             -
        2009                                                        15,000
        Thereafter                                                 159,500
                                                             -------------
                                                             $     222,000
                                                             =============

                                   (Continued)

                                       61
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

NOTE G - BORROWINGS - Continued

    2. Subordinated Debentures

    On October 27, 2004, Royal Bancshares completed a private placement of an
    aggregate of $25.0 million of Trust Preferred Securities through two
    newly-formed Delaware trust affiliates, Royal Bancshares Capital Trust I
    ("Trust I") and Royal Bancshares Capital Trust II ("Trust II")
    (collectively, the "Trusts"). As part of this transaction, Royal Bancshares
    issued an aggregate principal amount of $12,887,000 of floating rate junior
    subordinate debt securities to Trust I, which debt securities bear an
    initial interest rate of 4.26% until December 2004, and after that which
    will be reset quarterly at 3-month LIBOR plus 2.15%, and an aggregate
    principal amount of $12,887,000 of fixed/floating rate junior subordinated
    deferrable interest to Trust II, which debt securities bear an initial
    interest rate of 5.80% until December 2009 and then which will reset
    quarterly at 3-month LIBOR plus 2.15%.

    Each of Trust I and Trust II issued an aggregate principal amount of
    $12,500,000 of capital securities bearing fixed and/or fixed/floating
    interest rates corresponding to the debt securities held by each trust to an
    unaffiliated investment vehicle and an aggregate principal amount of
    $387,000 of common securities bearing fixed and/or fixed/floating interest
    rates corresponding to the debt securities held by each trust to Royal
    Bancshares. Royal Bancshares has fully and unconditionally guaranteed all of
    the obligations of the Trusts, including any distributions and payments on
    liquidation or redemption of the capital securities.

    The Federal Reserve has issued final guidance on the regulatory capital
    treatment for trust preferred securities issued by Trust as a result of the
    adoption of FIN 46(R). The proposed rule would retain current maximum
    percentage of total capital permitted for Trust Preferred Securities at 25%,
    but would enact other changes to the rules governing Trust Preferred
    Securities that affect their use as a part of the collection of entities
    known as "restricted core capital elements." The rule would take effect
    March 31, 2009; however, a five year transition period starting March 31,
    2004 and leading up to that date would allow bank holding companies to
    continue to count Trust Preferred Securities as Tier 1 Capital after
    applying FIN 46(R). Management has evaluated the effects of the proposed
    rule and does not anticipate a material impact on its capital ratios when
    the proposed rule is finalized.

                                   (Continued)

                                       62
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

NOTE H - LEASE COMMITMENTS

    Royal Bancshares leases various premises under non-cancelable agreements,
    which expire through 2012 and require minimum annual rentals. The
    approximate minimum rental commitments under the leases are as follows for
    the year ended December 31, (in thousands):

        2005                                                 $     648,000
        2006                                                       481,000
        2007                                                       456,000
        2008                                                       442,000
        2009                                                       260,000
        Thereafter                                                 254,000
                                                             -------------
                                                             $   2,541,000
                                                             =============

    Rental expense for all leases was approximately $664,000, $612,000 and
    $614,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

NOTE I - COMMON STOCK

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

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

    Per share information and weighted average shares outstanding have been
    restated to reflect the 2% stock dividend of December 2004, the 2% stock
    dividend of January 2004, the 3% stock dividend of January 2003, and the 6%
    stock dividend of January 2002.

NOTE J - INCOME TAXES

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

                                          2004         2003         2002
                                       ----------   ----------   ----------
        Income tax expense (benefit)
            Current                    $    9,356   $    9,221   $    7,269
            Deferred federal tax           (1,442)      (1,225)         (32)
                                       ----------   ----------   ----------
                                       $    7,914   $    7,996   $    7,237
                                       ==========   ==========   ==========

    The difference between the applicable income tax expense and the amount
    computed by applying the statutory federal income tax rate of 35% in 2004,
    and 34% in 2003 and 2002 is as follows (in thousands):

                                       63
<PAGE>

<TABLE>
<CAPTION>
                                                    2004         2003         2002
                                                 ----------   ----------   ----------
        <S>                                      <C>          <C>          <C>
        Computed tax expense at statutory rate   $    9,781   $    9,286   $    8,620
        Tax-exempt income                              (466)        (263)        (101)
        Low-income housing tax credit                  (545)        (545)        (545)
        Other, net                                     (619)        (482)        (737)
        Effect of 35% rate bracket                     (237)           -            -
                                                 ----------   ----------   ----------
        Applicable income tax expense            $    7,914   $    7,996   $    7,237
                                                 ==========   ==========   ==========
</TABLE>

                                   (Continued)

                                       64
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

NOTE J - INCOME TAXES - Continued

    Deferred tax assets and liabilities consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                              2004         2003
                                                                           ----------   ----------
        <S>                                                                <C>          <C>
        Deferred tax assets
            Allowance for loan losses                                      $    5,366   $    4,153
            Asset valuation reserves                                              836          812
            Goodwill from Knoblauch State Bank                                    808          785
            Accrued pension liability                                           1,156          886
            Net operating loss carryovers from Knoblauch State Bank             7,140        7,449
              Other                                                                46          149
                                                                           ----------   ----------
                                                                               15,352       14,234
            Less valuation allowance                                           (7,140)      (7,449)
                                                                           ----------   ----------
                                                                                8,212        6,785
                                                                           ----------   ----------
        Deferred tax liabilities
            Unrealized gains on investment securities available for sale        1,957        3,304
            Penalties on delinquent tax certificates                              243          283
            Other                                                                 720          692
                                                                           ----------   ----------
                                                                                2,920        4,279
                                                                           ----------   ----------
                   Net deferred tax asset, included in other assets        $    5,292   $    2,506
                                                                           ==========   ==========
</TABLE>

    Royal Bancshares has approximately $21,000,000 of net operating loss
    carryovers from the acquisition of Knoblauch State Bank (KSB). These losses
    will fully expire in 2009. The utilization of these losses is subject to
    limitation under Section 382 of the Internal Revenue Code. As a result, a
    valuation allowance has been established to eliminate the deferred tax asset
    attributable to these net operating losses.

    During 2004, 2003 and 2002, Royal Bancshares realized a tax benefit related
    to the net operating loss carryovers from the acquisition of KSB. The
    deferred tax asset associated with those loss carryovers is fully offset by
    a valuation allowance. Accordingly, the realized tax benefit is reflected as
    a reduction of the goodwill associated with the acquisition and a
    corresponding reduction of deferred income tax benefit for the year.

    In addition, Royal Bancshares has approximately $15,700,000 of tax goodwill
    from the acquisition of KSB. The ability to deduct this goodwill for tax
    purposes will expire in 2015. The utilization of this goodwill for tax
    purposes was subject to the limitations under Section 382 of the Internal
    Revenue Code. For 2004, 2003 and 2002 approximately $1,353,000 has been
    utilized for tax purposes.

                                   (Continued)

                                       65
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

NOTE J - INCOME TAXES - Continued

    During 2004, the Internal Revenue Service ("IRS") commenced an examination
    of Royal Bancshares's tax treatment relating to tax goodwill acquired in
    Royal's 1995 purchase of Knoblauch State Bank. A final determination has not
    been made. Upon completion of the examination, management will address the
    financial statement implications of the IRS examination findings, if any.

NOTE K - EARNINGS PER SHARE

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

<TABLE>
<CAPTION>
                                                                               2004
                                                            ----------------------------------------
                                                                             Average
                                                              Income         shares        Per share
                                                            (numerator)   (denominator)     amount
                                                            -----------   -------------    ---------
        <S>                                                 <C>                 <C>       <C>
        Basic EPS
            Income available to common shareholders         $    20,033          12,505    $    1.60

        Effect of dilutive securities
            Stock options                                             -             102        (0.01)
                                                            -----------   -------------    ---------

        Diluted EPS
            Income available to common shareholders plus
             assumed exercise of options                    $    20,033          12,607    $    1.59
                                                            ===========   =============    =========
</TABLE>

    All options to purchase shares of common stock were included in the
    computation of 2004 diluted EPS because the exercise price was less than the
    average market price of the common stock.

<TABLE>
<CAPTION>
                                                                               2003
                                                            ----------------------------------------
                                                                             Average
                                                              Income         shares        Per share
                                                            (numerator)   (denominator)     amount
                                                            -----------   -------------    ---------
        <S>                                                 <C>                  <C>       <C>
        Basic EPS
            Income available to common shareholders         $    18,526          12,392    $    1.49

        Effect of dilutive securities
            Stock options                                             -              53            -
                                                            -----------   -------------    ---------
        Diluted EPS
            Income available to common shareholders plus
             assumed exercise of options                    $    18,526          12,445    $    1.49
                                                            ===========   =============    =========
</TABLE>

                                   (Continued)

                                       66
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

NOTE K - EARNINGS PER SHARE - Continued

    All options to purchase shares of common stock were included in the
    computation of 2003 diluted EPS because the exercise price was less than the
    average market price of the common stock.

<TABLE>
<CAPTION>
                                                                              2002
                                                            ----------------------------------------
                                                                             Average
                                                               Income        shares        Per share
                                                            (numerator)   (denominator)     amount
                                                            -----------   -------------    ---------
        <S>                                                 <C>                  <C>       <C>
        Basic EPS
            Income available to common shareholders         $    17,405          12,324    $    1.41

        Effect of dilutive securities
            Stock options                                             -             258        (0.03)
                                                            -----------   -------------    ---------
        Diluted EPS
            Income available to common shareholders plus
             assumed exercise of options                    $    17,405          12,582    $    1.38
                                                            ===========   =============    =========
</TABLE>

    All options to purchase shares of common stock were included in the
    computation of 2002 diluted EPS because the exercise price was less than the
    average market price of the common stock.

NOTE L - STOCK OPTION PLANS

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

    1.  Outside Directors' Stock Option Plan

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

                                   (Continued)

                                       67
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

NOTE L - STOCK OPTION PLANS - Continued

    Stock option transactions consist of the following:

<TABLE>
<CAPTION>
                                          2004                      2003                      2002
                                 -----------------------   -----------------------   -----------------------
                                               Weighted                  Weighted                  Weighted
                                               average                   average                   average
                                               exercise                  exercise                  exercise
                                   Shares       price        Shares       price        Shares       price
                                 ----------   ----------   ----------   ----------   ----------   ----------
    <S>                              <C>      <C>             <C>       <C>             <C>       <C>
    Outstanding at beginning
     of year                         71,462   $    14.91       80,291   $    14.12       75,296   $    11.47
      Granted                        16,830        23.97       16,683        19.96       16,037        19.56
      Exercised                      (9,248)       11.54      (25,512)       12.03      (11,043)        9.66
      Cancelled                           -            -            -            -            -            -
                                 ----------                ----------                ----------
    Outstanding at end of year       79,044   $    17.29       71,462   $    14.91       80,290   $    14.12
                                 ==========                ==========                ==========

    Weighted average fair
     value of options
     granted during the
     year                                     $     5.25                $     3.62                $     8.70
</TABLE>

    The following table summarizes information about options outstanding and
    exercisable at December 31, 2004:

<TABLE>
<CAPTION>
                                           Options outstanding                   Options exercisable
                                 -----------------------------------------   ---------------------------
                                                Weighted
                                                 average        Weighted                      Weighted
                                                remaining       average                       average
            Range of               Number      contractual      exercise        Number        exercise
         exercise prices         outstanding   life (years)      price       exercisable       price
    --------------------------   -----------   ------------   ------------   ------------   ------------
    <S>                               <C>               <C>   <C>                  <C>      <C>
    $7.11 - 9.78                       6,327            1.8   $       8.89          6,327   $       8.89
    $11.34 - 14.75                    27,439            4.9          12.93         27,439          12.93
    $19.19 - 23.97                    45,278            8.3          21.10         28,448          19.40
                                 -----------                                 ------------
                                      79,044                                       62,214
                                 ===========                                 ============
</TABLE>

                                   (Continued)

                                       68
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

NOTE L - STOCK OPTION PLANS - Continued

    2. Employee Stock Option and Appreciation Right Plan

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

    Stock option transactions consist of the following:

<TABLE>
<CAPTION>
                                          2004                      2003                      2002
                                 -----------------------   -----------------------   -----------------------
                                               Weighted                  Weighted                  Weighted
                                               average                   average                   average
                                               exercise                  exercise                  exercise
                                   Shares       price        Shares       price        Shares       price
                                 ----------   ----------   ----------   ----------   ----------   ----------
    <S>                             <C>       <C>             <C>       <C>             <C>       <C>
    Outstanding at beginning
     of year                        428,433   $    15.76      498,803   $    14.12      512,410   $    10.24
      Granted                       255,385        23.97      157,421        19.96      163,543        19.56
      Exercised                     (34,643)       11.54     (120,511)       11.43     (160,775)        5.72
      Cancelled                     (55,636)       20.51     (107,280)       17.16      (16,374)       17.27
                                 ----------                ----------                ----------
    Outstanding at end of year      593,539        19.18      428,433   $    15.76      498,803   $    14.12
                                 ==========                ==========                ==========

    Weighted average fair
     value of options
     granted during the
     year                                     $     5.25                $     3.62                $     8.70
</TABLE>

    The following table summarizes information about options outstanding and
    exercisable at December 31, 2004:

<TABLE>
<CAPTION>
                                            Options outstanding                   Options exercisable
                                 ------------------------------------------   ---------------------------
                                                 Weighted
                                                  average        Weighted                      Weighted
                                                 remaining       average                       average
             Range of               Number      contractual      exercise        Number        exercise
         exercise prices          outstanding   life (years)       price       exercisable      price
    -------------------------    ------------   ------------   ------------   ------------   ------------
    <S>                               <C>                <C>   <C>                 <C>       <C>
    $9.80 - 12.76                     157,853            5.3   $      12.22        116,102   $      12.03
    $14.78 - 19.57                    200,427            7.3          19.04         70,010          18.35
    $23.97                            235,259            9.2          23.97             --             --
                                 ------------                                 ------------
                                      593,539                                      186,112
                                 ============                                 ============
</TABLE>

                                       69
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

NOTE M - PENSION PLAN

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

                                                        2004            2003
                                                   -------------   -------------
     Change in benefit obligation
         Benefit obligation at beginning of year   $       3,591   $       3,048
         Service cost                                        722             317
         Interest cost                                       205             214
         Other changes                                      (215)             12
                                                   -------------   -------------
     Benefits obligation at end of year            $       4,303   $       3,591
                                                   =============   =============

    Weighted-average assumptions used to determine benefit obligations, end of
    year

                                                  December 31
                                              -------------------
                                                2004       2003
                                              --------   --------
            Discount rate                         6.00%      7.00%
            Rate of compensation increase         4.00%      4.00%

    The asset allocation for Royal Bancshares's pension plans and the end of
    2004 and 2003 consists of insurance policies under Royal Bancshares Owned
    Life Insurance program. The cash surrender value for these policies was
    approximately $1,203,000 and $993,000 for the years ended December 31, 2004
    and 2003, respectively.

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

                                            2004         2003         2002
                                         ----------   ----------   ----------
     Service cost                        $      570   $      410   $      208
     Interest cost                              205          214          191
                                         ----------   ----------   ----------
     Net periodic benefit cost           $      775   $      624   $      399
                                         ==========   ==========   ==========

                                   (Continued)

                                       70
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

NOTE M - PENSION PLAN-Continued

    Royal Bancshares has a capital accumulation and salary reduction plan under
    Section 401(k) of the Internal Revenue Code of 1986, as amended. Under the
    plan, all employees are eligible to contribute from 1% to a maximum of 15%
    of their annual salary, with Royal Bancshares matching 100% of any
    contribution between 1% and 5% subject to a $2,500 per employee annual
    limit. Matching contributions to the plan were approximately $162,000,
    $199,000 and $187,000 for the years ended December 31, 2004, 2003 and 2002,
    respectively.

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

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

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

    The contract amounts are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                              December 31,
                                                                                      -----------------------------
                                                                                           2004           2003
                                                                                      -------------   -------------
        <S>                                                                           <C>             <C>
        Financial instruments whose contract amounts represent credit risk
            Commitments to extend credit                                              $     119,458   $      59,829
            Standby letters of credit and financial guarantees written                        1,797           5,099
        Financial Instruments whose notional amount exceed the amount the amount
         of credit risk.

            Interest rate swap agreements                                             $      25,000   $      20,000
</TABLE>

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

                                   (Continued)

                                       71
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

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

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

    Standby letters of credit are conditional commitments issued by Royal
    Bancshares to guarantee the performance of a customer to a third party.
    Those guarantees are primarily issued to support public and private
    borrowing arrangements, including commercial paper, bond financing and
    similar transactions. Most guarantees extend for one year and expire in
    decreasing amounts through 2005. The credit risk involved in issuing letters
    of credit is essentially the same as that involved in extending loan
    facilities to customers. Royal Bancshares holds personal or commercial real
    estate, accounts receivable, inventory and equipment as collateral
    supporting those commitments for which collateral is deemed necessary. The
    extent of collateral held for those commitments is approximately 80%.

NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

    Fair values have been estimated using data which management considered the
    best available and estimation methodologies deemed suitable for the
    pertinent category of financial instrument. The estimation methodologies,
    resulting fair values and recorded carrying amounts at December 31, 2004 and
    2003 were as follows:

                                   (Continued)

                                       72
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued

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

<TABLE>
<CAPTION>
                                                            2004                      2003
                                                   -----------------------   -----------------------
                                                   Estimated     Carrying    Estimated     Carrying
                                                   fair value     amount     fair value     amount
                                                   ----------   ----------   ----------   ----------
        <S>                                        <C>          <C>          <C>          <C>
        Cash and cash equivalents                  $   27,109   $   27,109   $   25,070   $   25,070
        Investment securities held to maturity        211,865      212,227      114,275      113,091
        Investment securities available for sale      360,934      360,934      452,246      452,246
</TABLE>

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

<TABLE>
<CAPTION>
                                                            2004                      2003
                                                   -----------------------   -----------------------
                                                   Estimated     Carrying    Estimated     Carrying
                                                   fair value     amount     fair value     amount
                                                   ----------   ----------   ----------   ----------
        <S>                                        <C>          <C>          <C>          <C>
        Deposits with stated maturities            $  208,198   $  202,520   $  245,409   $  236,902
        Borrowings                                    224,437      222,000      217,319      212,000
        Subordinated debt                              25,774       25,774           --           --
        Obligations from equity investments            56,249       56,249           --           --
</TABLE>

    Fair value of financial instrument liabilities with no stated maturities has
    been estimated to equal the carrying amount (the amount payable on demand),
    totaling approximately $539,862,000 and $554,157,000 at December 31, 2004
    and 2003, respectively.

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

<TABLE>
<CAPTION>
                                                            2004                      2003
                                                   -----------------------   -----------------------
                                                   Estimated     Carrying    Estimated     Carrying
                                                   fair value     amount     fair value     amount
                                                   ----------   ----------   ----------   ----------
        <S>                                        <C>          <C>          <C>          <C>
        Loans held for sale                        $    2,221   $    2,204   $    3,181   $    3,157
        Net loans                                     467,401      467,294      513,479      512,557
</TABLE>

    The fair value of accrued interest receivable and payable approximates
    carrying amounts.

                                   (Continued)

                                       73
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued

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

    The fair value of interest rate swaps are based on upon the estimated amount
    Royal Bank would receive or pay to terminate the contract or agreements,
    taking into account current interest rates and, when appropriate, the
    current creditworthiness of the counterparties. The fair value of the
    interest rate swaps agreements are considered immaterial.

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

NOTE P - REGULATORY MATTERS

    1. Payment of Dividends

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

    In addition, dividends paid by Royal Bank to Royal Bancshares would be
    prohibited if the effect thereof would cause Royal Bank's capital to be
    reduced below applicable minimum capital requirements.

    2. Capital Ratios

    Royal Bancshares and Royal Bank are subject to various regulatory capital
    requirements administered by the federal banking agencies. Failure to meet
    minimum capital requirements can initiate certain mandatory--and possible
    additional discretionary--actions by regulators that, if undertaken, could
    have a direct material effect on Royal Bancshares' financial statements.
    Under capital adequacy guidelines and the regulatory framework for prompt
    corrective action, Royal Bancshares must meet specific capital guidelines
    that involve quantitative measures of Royal Bancshares' assets, liabilities
    and certain off-balance-sheet items as calculated under regulatory
    accounting practices. Royal Bancshares and Royal Bank's capital amounts and
    classification are also subject to qualitative judgments by the regulators
    about components, risk weightings and other factors.

    Quantitative measures established by regulations to ensure capital adequacy
    require Royal Bancshares and Royal Bank to maintain minimum amounts and
    ratios (set forth in the table below) of total and Tier I capital (as
    defined in the regulations) to risk-weighted assets (as defined), and of
    Tier I capital (as defined) to average assets (as defined). As of
    December 31, 2004, management believes that Royal Bank meets all capital
    adequacy requirements to which it is subject.

                                   (Continued)

                                       74
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

NOTE P - REGULATORY MATTERS - Continued

    As of December 31, 2004, Royal Bank met all regulatory requirements for
    classification as well capitalized under the regulatory framework for prompt
    corrective action. To be categorized as well capitalized, Royal Bank must
    maintain minimum total risk-based, Tier I risk-based and Tier I leverage
    ratios as set forth in the table. There are no conditions or events since
    that notification that management believes have changed Royal Bank's
    category.

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

<TABLE>
<CAPTION>
                                                                    2004
                                 ---------------------------------------------------------------------------
                                                                                           To be well
                                                                                        capitalized under
                                                                 For capital            prompt corrective
                                         Actual               adequacy purposes         action provisions
                                 -----------------------   -----------------------   -----------------------
                                   Amount        Ratio       Amount        Ratio       Amount        Ratio
                                 ----------   ----------   ----------   ----------   ----------   ----------
    <S>                          <C>               <C>     <C>                <C>    <C>               <C>
    Total capital (to risk-
     weighted assets)
      Company (consolidated)     $  176,557        20.43%  $   69,149         8.00%         N/A          N/A
      Bank                          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/A
      Bank                          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/A
      Bank                          114,096         9.59%      35,692         3.00%      59,487         5.00%
</TABLE>

                                   (Continued)

                                       75
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

NOTE P - REGULATORY MATTERS - Continued

<TABLE>
<CAPTION>
                                                                    2003
                                 ---------------------------------------------------------------------------
                                                                                           To be well
                                                                                        capitalized under
                                                                 For capital            prompt corrective
                                         Actual               adequacy purposes         action provisions
                                 -----------------------   -----------------------   -----------------------
                                   Amount        Ratio       Amount        Ratio       Amount        Ratio
                                 ----------   ----------   ----------   ----------   ----------   ----------
    <S>                          <C>               <C>     <C>                <C>    <C>               <C>
    Total capital (to risk-
     weighted assets)
      Company (consolidated)     $  139,876        16.50%  $   67,792         8.00%         N/A          N/A
      Bank                          113,922        13.73%      66,371         8.00%  $   82,964        10.00%

    Tier I capital (to risk-
     weighted assets)
      Company (consolidated)        129,283        15.30%      33,896         4.00%         N/A          N/A
      Bank                          103,523        12.47%      33,186         4.00%      49,778         6.00%

    Tier I capital(to average
     assets, leverage)
      Company (consolidated)        129,283        11.10%      34,811         3.00%         N/A          N/A
      Bank                          103,523         8.99%      34,556         3.00%      57,593         5.00%
</TABLE>

NOTE Q - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY

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

                            CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                   December 31,
                                                                           -----------------------------
                                                                               2004            2003
                                                                           -------------   -------------
    <S>                                                                    <C>             <C>
    Assets
        Cash                                                               $      30,326   $       4,775
        Investment in Royal Investments of Delaware, Inc. - at equity             21,178          20,995
        Investment in Royal Bank America - at equity                             114,109         109,063
        Other assets                                                               1,037               -
                                                                           -------------   -------------
                                                                           $     166,650   $     134,833
                                                                           =============   =============
    Subordinated debentures                                                $      25,774   $           -
    Stockholders' equity                                                         140,876         134,833
                                                                           -------------   -------------
                                                                           $     166,650   $     134,833
                                                                           =============   =============
</TABLE>

                                   (Continued)

                                       76
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

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

                         CONDENSED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                       Year ended December 31,
                                                                --------------------------------------
                                                                   2004          2003          2002
                                                                ----------    ----------    ----------
    <S>                                                         <C>           <C>           <C>
    Income
         Equity in undistributed net earnings of subsidiaries   $    7,888    $    7,241    $    6,840
         Dividends from subsidiary bank                             12,199        11,321        10,589
         Other income                                                    -            25            49
                                                                ----------    ----------    ----------
                  Total income                                      20,087        18,587        17,478
                                                                ----------    ----------    ----------
    Expenses
         Other expenses                                                 83            81            85
         Income tax benefit                                            (29)          (20)          (12)
                                                                ----------    ----------    ----------
    Total expenses                                                      54            61            73
                                                                ----------    ----------    ----------
    Net income                                                  $   20,033    $   18,526    $   17,405
                                                                ==========    ==========    ==========
</TABLE>

                       CONDENSED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                       Year ended December 31,
                                                                --------------------------------------
                                                                   2004          2003          2002
                                                                ----------    ----------    ----------
    <S>                                                         <C>           <C>           <C>
    Cash flows from operating activities
         Net income                                             $   20,033    $   18,526    $   17,405
           Adjustments to reconcile net income to net cash
            provided by operating activities
             Undistributed earnings from subsidiaries               (7,888)       (7,241)       (6,840)
             Operating expenses                                         83            81            85
             Rental income                                               -           (25)          (49)
             Non-cash income tax benefit                               (29)          (20)          (12)
                                                                ----------    ----------    ----------
                Net cash provided by operating activities           12,199        11,321        10,589
                                                                ----------    ----------    ----------

    Cash flows from financing activities
         Cash dividends paid                                       (12,199)      (11,321)      (10,589)
         Proceeds from subordinated debentures                      25,000             -             -
         Other, net                                                    551         2,248         1,083
                                                                ----------    ----------    ----------
                Net cash provided by (used in) financing
                 activities                                         13,352        (9,073)       (9,506)
                                                                ----------    ----------    ----------
                Net increase in cash                                25,551         2,248         1,083
                                                                ----------    ----------    ----------
    Cash at beginning of year                                        4,775         2,527         1,444
                                                                ----------    ----------    ----------
    Cash at end of year                                         $   30,326    $    4,775    $    2,527
                                                                ==========    ==========    ==========
</TABLE>

                                   (Continued)

                                       77
<PAGE>

             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

NOTE R - SUMMARY OF QUARTERLY RESULTS (UNAUDITED)

    The following summarizes the consolidated results of operations during 2004
    and 2003, on a quarterly basis, for Royal Bancshares (in thousands except
    per share data):

<TABLE>
<CAPTION>
                                                             2004
                                     -----------------------------------------------------
                                       Fourth         Third        Second         First
                                       Quarter       Quarter       Quarter       Quarter
                                     -----------   -----------   -----------   -----------
    <S>                              <C>           <C>           <C>           <C>
    Interest income                  $    16,990   $    16,515   $    16,508   $    17,528
    Net interest income                   10,181         9,722         9,539        10,798
    Provision for loan losses                  -             1             4             1
    Income before income taxes             7,008         7,318         6,217         7,404
    Net income                             5,363         5,112         4,394         5,164

    Net income per share
        Basic                        $      0.43   $      0.41   $      0.35   $      0.41
        Diluted                      $      0.42   $      0.41   $      0.35   $      0.41
</TABLE>

<TABLE>
<CAPTION>
                                                             2003
                                     -----------------------------------------------------
                                       Fourth         Third        Second         First
                                       Quarter       Quarter       Quarter       Quarter
                                     -----------   -----------   -----------   -----------
    <S>                              <C>           <C>           <C>           <C>
    Interest income                  $    17,939   $    18,197   $    17,753   $    18,431
    Net interest income                   10,885        10,967        10,123        10,404
    Provision for loan losses                160           197           167           150
    Income before income taxes             7,325         6,984         5,879         6,334
    Net income                             5,383         4,763         3,980         4,400

    Net income per share
        Basic                        $      0.43   $      0.39   $      0.32   $      0.35
        Diluted                      $      0.43   $      0.39   $      0.32   $      0.35
</TABLE>

                                       78
<PAGE>

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

        As reported on its Report on Form 8-K filed with the SEC on October 21,
2004, on October 18, 2004, Royal Bancshares dismissed its then independent
accountants, Grant Thornton, LLP and appointed Beard Miller Company LLP as its
new independent accountants, each effective immediately. The decisions to
dismiss Grant Thornton and to engage Beard Miller were approved by Royal
Bancshares' Audit Committee. The Audit Committee's decision was based upon a
response to a competitive bid requested by Royal Bancshares. The reports on
Royal Bancshares' financial statements from Grant Thornton for the past two
fiscal years, or any period prior to that period, have not contained an adverse
opinion or disclaimer of opinion, nor were qualified or modified as to any
uncertainty, audit scope, or accounting principles. There have been no
disagreements with Grant Thornton on any matter of accounting principles or
practices, financial statement disclosures, or auditing scope of procedure
during the two most recent fiscal years, or any subsequent interim period
through the date of dismissal or in any of the years prior to that period,
which, if not resolved to the satisfaction of Grant Thornton, would have caused
Grant Thornton to make reference to the subject matter of the disagreement in
connection with its report.

        During the two most recent fiscal years, or any subsequent interim
period through the date of dismissal of Grant Thornton, there were no
disagreements with Grant Thornton on any of the kinds of events listed in Item
304 (a)(1)(v)(A) through (D) of Regulation S-K.

        During the years ended December 31, 2003 and 2002 and the subsequent
interim period through the date of engaging Beard Miller, neither Royal
Bancshares nor anyone on its behalf consulted Beard Miller on any of the matters
or reportable events listed in Item 304 (a) (2) (i) and (ii) of Regulation S-K.

ITEM 9A. CONTROLS AND PROCEDURES

EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES

We maintain a system of controls and procedures designed to provide reasonable
assurance to the reliability of the financial statements and other disclosures
included in this report, as well as to safeguard assets from unauthorized use or
disposition. We evaluated the effectiveness of the design and operation of our
disclosure controls and procedures under the supervision and with the
participation of management, including our Chief Executive Officer and Chief
Financial Officer, within 90 days prior to the filing date of this report. Based
upon that evaluation, we discovered a weakness within our residential mortgage
originations department regarding procedures and policy manuals. This weakness
has been corrected as of December 31, 2004.

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of Royal Bancshares is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal control over
financial reporting is defined in Rule 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934, as amended, as a process designed by, or under
the supervision of, Royal Bancshares' principal executives and principal
financial officers and effected by the Royal Bancshares' Board of Directors,
management and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles and includes those policies and procedures that:

o   Pertain to the maintenance of records that in reasonable detail accurately
    and fairly reflect the transactions and dispositions of the assets of Royal
    Bancshares;

o   Provide reasonable assurance that transactions are recorded as necessary to
    permit preparation of financial statements in accordance with generally
    accepted accounting principles, and that receipts and expenditures of

                                       79
<PAGE>

    Royal Bancshares are being made only in accordance with authorizations of
    management and directors of Royal Bancshares; and

o   Provide reasonable assurance regarding prevention or timely detection of
    unauthorized acquisition, use or disposition of Royal Bancshares' assets
    that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risks that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.

A material weakness is a significant deficiency (as defined in Public Company
Accounting Oversight Board Auditing Standard No. 2), or a combination of
significant deficiencies, that results in there being more than a remote
likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected on a timely basis by management or
employees in the normal course of performing their assigned functions.

Management assessed the effectiveness of Royal Bancshares' internal control over
financial reporting as of December 31, 2004. Management's assessment identified
the following material weakness in Royal Bancshares' internal control over
financial reporting.

o   Royal Bancshares' analysis of the allowance for loan losses for impaired
    loans is based on classifications of loans into various categories and loss
    percentages that are commonly used for regulatory purposes. For
    non-classified loans, the estimated reserve is based on what Royal
    Bancshares deems to be appropriate. This estimate is not supported by
    documentation discussed in the FFIEC's July 2001 policy statement and SAB
    No. 102, which include trends in loan categories, such as delinquencies,
    restructurings, concentrations and volume, and actual charge-off and
    recovery histories to the net charge-off estimates.

In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework. Management is required by the Securities
and Exchange Commission to report, as of December 31, 2004, that Royal
Bancshares' internal control over financial reporting was not effective based on
its maintaining the allowance for loan loss according to regulatory
requirements, but not putting in place the documentation required under SAB No.
102.

POST YEAR-END REMEDIATION TO ADDRESS THE MATERIAL WEAKNESS IS AS FOLLOWS:

    o   Management is in the process of developing procedures and analytical
        worksheets to ensure compliance and which will be reviewed by senior
        management on a quarterly basis.

Royal Bancshares Independent Registered Public Accounting Firm has issued an
audit report on management's assessment of the Corporation's internal control
over financial reporting.

            Report of Independent Registered Public Accounting Firm

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

        We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that Royal
Bancshares of Pennsylvania, Inc. (the Company) did not maintain effective
internal control over financial reporting as of December 31, 2004, because of
the effect of a material weakness identified in management's assessment, based
on criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).

                                       80
<PAGE>

The Company's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of the
Company's internal control over financial reporting based on our audit.

        We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.

        A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of consolidation financial statements for external
purposes in accordance with generally accepted accounting principles. A
company's internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of consolidated financial statements
in accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the consolidated financial statements.

        Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.

        A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim consolidated financial statements will not
be prevented or detected. The following material weakness has been identified
and included in management's assessment. Management has identified, as a
material weakness, its documentation for the allowance for loan losses as
required under Staff Accounting Bulletin (SAB) No. 102 not being in place. The
Company's analysis of the allowance for loan losses for impaired loans is based
on classifications of loans into various categories and loss percentages that
are commonly used for regulatory purposes. For non-classified loans, the
estimated reserve is based on what the Company deems to be appropriate. This
estimate is not supported by documentation discussed in the Federal Financial
Institutions Examination Council July 2001 policy statement and SAB No. 102,
which include trends in loan categories, such as delinquencies, restructurings,
concentrations and volume, and actual charge-off and recovery histories to the
net charge-off estimates. This material weakness was considered in determining
the nature, timing, and extent of audit tests applied in our audit of the 2004
consolidated financial statements, and this report does not affect our report
dated March 14, 2005 on those consolidated financial statements.

        In our opinion, management's assessment that Royal Bancshares of
Pennsylvania, Inc. did not maintain effective internal control over financial
reporting as of December 31, 2004, because of the effect of the material
weakness described above on the achievement of the objectives of the control
criteria, is fairly stated, in all material respects, based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Also, in our
opinion, because of the effect of the material weakness described above on the
achievement of the objectives of the control criteria, Royal Bancshares of
Pennsylvania, Inc. has not maintained effective internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).

        We do not express an opinion or any other form of assurance on
management's statement referring to post year-end remediation to address the
material weakness.

                                       81
<PAGE>

Reading, Pennsylvania
March 14, 2005


                                    PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

        The information required in this Item, relating to directors, executive
officers, and control persons is set forth in Royal Bancshares' Proxy Statement
to be used in connection with the 2005 Annual Meeting of Shareholders under the
heading "Remuneration of Directors and Officers and Other Transactions", which
pages are incorporated herein by reference.

        AUDIT COMMITTEE. Royal Bancshares has a separately-designated standing
Audit Committee established in accordance with Section 3(a)(58)(A) of the
Exchange Act. The members of the Audit Committee are Gregory T. Reardon
(Chairman), Jack R. Loew, Anthony J. Micale and Edward B. Tepper as an advisor
each of whom is independent as that term is used in Item 7(d)(3)(iv) of Schedule
14A under the Exchange Act.

        AUDIT COMMITTEE FINANCIAL EXPERT. Royal Bancshares' Board of Directors
has determined that Gregory T. Reardon, the Audit Committee Chairman, is an
audit committee financial expert as defined in Item 401(h) of Regulation S-K of
the Exchange Act and is independent as that term is used in Item 7(d)(3)(iv) of
Schedule 14A under the Exchange Act.

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

        Based solely on its review of forms that were received from certain
reporting persons, Royal Bancshares believes that during the period January 1,
2004 through December 31, 2004, its officers and directors were in compliance
with all filing requirements applicable to them.

                                       82
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION

        The information required by this Item, relating to executive
compensation, is set forth in the Royal Bancshares' Proxy Statement to be used
in connection with the 2005 Annual Meeting of Shareholders, under the heading
"Renumeration of Directors and Officers and Other Transactions", which pages are
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The information required by this Item, relating to beneficial ownership
of the Registrant's Common Stock, is set forth in Royal Bancshares' Proxy
Statement to be used in connection with the 2005 Annual Meeting of Shareholders,
under the heading "Information About Nominees, Continuing Directors and
Executive Officers", which pages are incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The information required by this Item, relating to transactions with
management and others, certain business relationships and indebtedness of
management, is set forth in Royal Bancshares' Proxy Statement to be used in
connection with the 2005 Annual Meeting of Shareholders, under the heading
"Interest of Management and Others in Certain Transactions", which pages are
incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

        The information required by this item appears under the heading "AUDIT
FEES" of the Proxy Statement to be used in connection with the 2005 Annual
Meeting of Shareholders, which pages are incorporated herein by reference.

                                     PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

a.      1.  Financial Statements

            The following financial statements are included by reference in
            Part II, Item 8 hereof.
                Report of Independent 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 Schedules

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

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

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

                                       83
<PAGE>

                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 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 8-K (included as Exhibit A
                        to Exhibit 10.2) filed with the Commission on
                        November 1, 2004.))

                4.3     Indenture by and between Royal Bancshares of
                        Pennsylvania, Inc. and JPMorgan Chase Bank, as Trustee,
                        dated October 27, 2004. (Incorporated by reference to
                        Exhibit 10.1 to Registrant's Current Report on Form 8-K
                        filed with the Commission on November 1, 2004.)

                4.4     Indenture by and between Royal Bancshares of
                        Pennsylvania, Inc. and JPMorgan Chase Bank, as Trustee,
                        dated October 27, 2004. (Incorporated by reference to
                        Exhibit 10.2 to Registrant's Current Report on Form 8-K
                        filed with the Commission on November 1, 2004.)

                4.5     Guarantee Agreement by and between Royal Bancshares of
                        Pennsylvania, Inc. and JPMorgan Chase Bank, as Guarantee
                        Trustee, dated October 27, 2004. (Incorporated by
                        reference to Exhibit 10.3 to Registrant's Current Report
                        on Form 8-K filed with the Commission on November 1,
                        2004.)

                4.6     Guarantee Agreement by and between Royal Bancshares of
                        Pennsylvania, Inc. and JPMorgan Chase Bank, as Guarantee
                        Trustee, October 27, 2004. (Incorporated by reference to
                        Exhibit 10.4 to Registrant's Current Report on Form 8-K
                        filed with the Commission on November 1, 2004.)

                10.1    Stock Option and Appreciation Right Plan. (Incorporated
                        by reference to the Registrant's Registration Statement
                        No. 333-25855, on form S-8 filed with the Commission on
                        April 5, 1997).

                10.2    Outside Directors' Stock Option Plan. (Incorporated by
                        reference to the Registrant's Registration Statement
                        No. 333-25855, on form S-8 filed with the Commission on
                        April 5, 1997).

                10.3    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

                                       84
<PAGE>

                        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.

                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 Officer
                31.2    Rule 13a-14(a)/15-d-14(a) Certification of Chief
                        Financial Officer

                32.1    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.

(b)     Reports on Form 8-K filed by the Registrant during the fourth quarter
        and through this Form 10K filing are as follows:

        Royal Bancshares filed a report on Form 8-K with the Securities and
        Exchange Commission as of October 18, 2004 announcing the dismissal of
        independent accounts from Grant Thornton LLP and appointed Beard Miller
        Company LLP.

        Royal Bancshares filed a report on Form 8-K with the Securities and
        Exchange Commission as of October 25, 2004, reporting its third quarter
        earnings and the declaration of its 38th consecutive cash dividend.

        Royal Bancshares filed a report on Form 8-K with the Securities and
        Exchange Commission as of October 27, 2004, reporting the completion of
        private placement of an aggregate $25 million of trust preferred
        securities and the formations of two Delaware Trust affiliates.

                                       85
<PAGE>

        Royal Bancshares filed a report on Form 8-K with the Securities and
        Exchange Commission as of December 16, 2004, announcing the declaration
        of 2% stock dividend on both Class A and Class B shares.

        Royal Bancshares filed a report on Form 8-K with the Securities and
        Exchange Commission as of January 20, 2005, reporting its forth quarter
        earnings and the declaration of its 39th consecutive cash dividend.

        Royal Bancshares filed a report on Form 8-K with the Securities and
        Exchange Commission as of January 25, 2005, announcing the promotions of
        senior management.

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

(d)     Not applicable.

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

                                       86
<PAGE>

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.


ROYAL BANCSHARES OF PENNSYLVANIA, INC.

/s/ Joseph P. Campbell
-----------------------
Joseph P. Campbell
Chief Executive Officer
March 14, 2005.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.


          SIGNATURES

By: /s/ Joseph P. Campbell                               March 14, 2005.
----------------------------------
Joseph P. Campbell
CEO/President/Director

By: /s/ Jeffrey T. Hanuscin                              March 14, 2005.
----------------------------------
Jeffrey T. Hanuscin
Chief Financial Officer

By:/s/ James J. McSwiggan                                March 14, 2005.
----------------------------------
James J. McSwiggan
Director/Chief Operating Officer

By:/s/Robert R. Tabas                                    March 14, 2005.
----------------------------------
Robert R. Tabas
Chairman of the Board

By:/s/ Albert Ominsky                                    March 14, 2005.
----------------------------------
Albert Ominsky
Director

By:/s/ Anthony J. Micale                                 March 14, 2005.
----------------------------------
Anthony J. Micale
Director

By:/s/ Gregory T. Reardon                                March 14, 2005.
----------------------------------
Gregory T. Reardon
Director

By:/s/ Murray Stempel,III                                March 14, 2005.
----------------------------------
Murray Stempel, III
Director/ Senior Vice President

By:/s/ John M. Decker                                    March 14, 2005.
----------------------------------
John M. Decker
Director/ Senior Vice President

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<PAGE>

By:/s/ Carl M. Cousins                                   March 14, 2005.
----------------------------------
Carl M. Cousins
Director

By:/s/ Lee E. Tabas                                      March 14, 2005.
----------------------------------
Lee E. Tabas
Director

By:/s/ Jack R. Loew                                      March 14, 2005.
----------------------------------
Jack R. Loew
Director

By:/s/ Howard Wurzak                                     March 14, 2005.
----------------------------------
Howard Wurzak
Director

By:/s/ Evelyn Rome Tabas                                 March 14, 2005.
----------------------------------
Evelyn Rome Tabas
Director

By:/s/ Mitchell L. Morgan                                March 14, 2005.
----------------------------------
Mitchell L. Morgan
Director

By:/s/ Edward B. Tepper                                  March 14, 2005.
----------------------------------
Edward B. Tepper
Director

By:/s/ Linda Tabas Stempel                               March 14, 2005.
----------------------------------
Linda Tabas Stempel
Director

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<PAGE>

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

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

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

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

4.1     Junior Subordinated Debt Security Due 2034 issued by Royal Bancshares of
        Pennsylvania, Inc. to JPMorgan Chase Bank, as Institutional Trustee,
        dated October 27, 2004. (Incorporated by reference to Exhibit 4.1 to
        Registrant's Current Report on Form 8-K (included as Exhibit A to
        Exhibit 10.1) filed with the Commission on November 1, 2004.))

4.2     Junior Subordinated Debt Security Due 2034 issued by Royal Bancshares of
        Pennsylvania, Inc. to JPMorgan Chase Bank, as Institutional Trustee,
        dated October 27, 2004. (Incorporated by reference to Exhibit 4.2 to
        Registrant's Current Report on Form 8-K (included as Exhibit A to
        Exhibit 10.2) filed with the Commission on November 1, 2004.))

4.3     Indenture by and between Royal Bancshares of Pennsylvania, Inc. and
        JPMorgan Chase Bank, as Trustee, dated October 27, 2004. (Incorporated
        by reference to Exhibit 10.1 to Registrant's Current Report on Form 8-K
        filed with the Commission on November 1, 2004.)

4.4     Indenture by and between Royal Bancshares of Pennsylvania, Inc. and
        JPMorgan Chase Bank, as Trustee, dated October 27, 2004. (Incorporated
        by reference to Exhibit 10.2 to Registrant's Current Report on Form 8-K
        filed with the Commission on November 1, 2004.)

4.5     Guarantee Agreement by and between Royal Bancshares of Pennsylvania,
        Inc. and JPMorgan Chase Bank, as Guarantee Trustee, dated October 27,
        2004. (Incorporated by reference to Exhibit 10.3 to Registrant's Current
        Report on Form 8-K filed with the Commission on November 1, 2004.)

4.6     Guarantee Agreement by and between Royal Bancshares of Pennsylvania,
        Inc. and JPMorgan Chase Bank, as Guarantee Trustee, October 27, 2004.
        (Incorporated by reference to Exhibit 10.4 to Registrant's Current
        Report on Form 8-K filed with the Commission on November 1, 2004.)

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

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

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.)

                                       89
<PAGE>

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

14.     Royal Bancshares of Pennsylvania, Inc. Code of Ethics.

21.     Subsidiaries of Registrant.

23.1    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 Officer
31.2    Rule 13a-14(a)/15-d-14(a) Certification of Chief Financial Officer

32.1    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.

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