Royal Bancshares of Pennsylvania 10Q/A 2007 Q1 Quarterly report (amended)

FORM 10-Q/A

Amendment No. 1

WASHINGTON, DC 20549

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the quarterly period ended:March 31, 2007


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

For the transition period from: to

Commission file number: 0-26366

ROYAL BANCSHARES OF PENNSYLVANIA, INC.

(Exact name of the registrant as specified in its charter)


PENNSYLVANIA		23-2812193

(State or other jurisdiction of incorporated or organization)		(IRS Employer identification No.)

732 Montgomery Avenue, Narberth, PA 19072

(Address of principal Executive Offices)

(610) 668-4700

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 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. Yesþ Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer:o	Accelerated filer:þ	Non-accelerated filer:o	Smaller reporting company:o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso No.þ

Applicable only to corporate issuers:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class A Common Stock		Outstanding at April 30, 2007

$2.00 par value		11,300,595

Class B Common Stock		Outstanding at April 30, 2007

$.10 par value		2,108,538

Explanatory Note

As discussed in Note 1, Note 13 and Note 15 to the notes to consolidated financial statements included herein, Royal Bancshares of Pennsylvania, Inc. (the “Company”) is amending its financial statements, notes to consolidated financial statements and management’s discussion and analysis of financial condition and results of operations included in the Company’s Form 10-Q for the quarter end March 31, 2007. As further described in a current report on Form 8-K filed on January 29, 2008, the restatement is the result of accounting errors related to investments in real estate joint ventures, the consolidation of an investment in real estate owned via an equity investment and the accounting for deferred loan costs (see notes 1, 13 and 15).

The Form 10-Q as amended hereby continues to speak as of the date of the originally filed Form 10-Q, and the disclosures have not been updated to speak as of any later date. Information not affected by the restatement of financial statements or information as of and for the three months ended March 31, 2007 is unchanged and reflects the disclosures made at the time of the filing of the original Form 10-Q.

For convenience, the entire Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 has been refiled in this Form 10-Q/A. Pursuant to SEC Rule 12b-15, in connection with this filing, the Company is filing updated Exhibits 3.1, 3.2, 32.1 and 32.2.

TABLE OF CONTENTS


PART I — FINANCIAL INFORMATION
	ITEM I — FINANCIAL STATEMENTS
	ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS
	ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4 — CONTROLS AND PROCEDURES
PART II — OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 1A. Risk Factors
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
	Item 3. Default Upon Senior Securities
	Item 4. Submission of Matters to Vote Security Holders
	Item 5. Other Information
	Item 6. Exhibits
SIGNATURES
Section 302 Certification Pursuant to Section 13(a) or 15(d), signed by Joseph P. Campbell
Section 302 Certification Pursuant to Section 13(a) or 15(d), signed by Gregg J. Wagner
Certification Pursuant to 18 U.S.C. Section 1350, signed by Joseph P. Campbell
Certification Pursuant to 18 U.S.C. Section 1350, signed by Gregg J. Wagner

PART I — FINANCIAL INFORMATION

ITEM I — FINANCIAL STATEMENTS

Royal Bancshares of Pennsyvania Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
(unaudited)


	March 31, 2007			December 31, 2006

Assets
Cash and due from banks	$	18,880		$	13,426
Interest bearing deposits		20,240			66,810
Federal funds sold		3,600			2,200

Total cash and cash equivalents		42,720			82,436
Investment securities held to maturity (fair value of $256,941 at March 31, 2007 and $254,249 at December 31, 2006		257,423			255,429
Investment securities available for sale (“AFS”) at fair value		297,062			302,036
FHLB Stock, at cost		8,719			11,276

Total investments securities and FHLB stock		563,204			568,741

Loans		619,160			592,214
Less allowance for loan losses		11,648			11,455

Net Loans		607,512			580,759

Premises and equipment, net		7,873			7,766
Accrued interest receivable		15,957			16,494
Real estate owned via equity investments		38,522			42,514
Investment in real estate joint ventures		10,636			10,744
Bank owned life insurance		23,121			22,906
Other assets		26,405			23,951

Total Assets	$	1,335,950		$	1,356,311

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits
Non-interest bearing	$	69,567		$	61,002
Interest bearing		825,432			798,455

Total deposits		894,999			859,457

Accrued interest payable		13,594			10,654
Other liabilities		17,153			18,593
Borrowings		193,034			246,087
Obligations related to equity investments in real estate		24,995			29,342
Subordinated debentures		25,774			25,774

Total liabilities		1,169,549			1,189,907

Minority interests		3,502			3,150

Stockholders’ equity
Common stock
Class A, par value $2 per share, authorized 18,000,000 shares; issued, 11,291,362 at March 31, 2007 and 11,287,462 at December 31, 2006		22,583			22,575
Class B, par value $0.10 per share; authorized, 3,000,000 shares; issued, 2,108,744 at March 31, 2007 and 2,108,827 at December 31, 2006		211			211
Additional paid in capital		121,758			121,542
Retained earnings		21,896			23,464
Accumulated other comprehensive loss		(1,284	)		(2,273	)

		165,164			165,519

Treasury stock — at cost, shares of Class A, 288,588 at March 31, 2007 and 215,388 at December 31, 2006		(2,265	)		(2,265	)

Total stockholders’ equity		162,899			163,254

Total liabilities and stockholders’ equity	$	1,335,950		$	1,356,311

The accompanying notes are an integral part of these statements.

Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)


	Three Months Ended
	March 31,
(in thousands, except per share data)	2007		2006

Interest income
Loans and leases, including fees	$	11,892	$	14,096
Investment securities held to maturity		2,953		2,856
Investment securities available for sale:
Taxable interest		4,012		4,411
Tax exempt interest		18		18
Deposits in banks		541		12
Federal funds sold		44		20

TOTAL INTEREST INCOME		19,460		21,413

Interest expense
Deposits		9,098		5,464
Borrowings		2,676		4,004
Obligations related to real estate owned via equity investsments		184		611

TOTAL INTEREST EXPENSE		11,958		10,079

NET INTEREST INCOME		7,502		11,334
Provision for loan losses		212		335

NET INTEREST INCOME AFTER PROVISION
FOR LOAN AND LEASE LOSSES		7,290		10,999


Other income
Service charges and fees		300		354
Net gains on investment securities available for sale		—		83
Income related to real estate owned via equity investments		1,275		778
Gains on sales related to real estate joint ventures		350		—
Gains on sales of other real estate		236		1,493
Gains on sales of loans and leases		167		43
Income from bank owned life insurance		215		210
Other income		10		37

TOTAL OTHER INCOME		2,553		2,998

Other expenses
Salaries and wages		2,180		2,445
Employee benefits		718		635
Stock Option Expense		162		178
Occupancy and equipment		447		404
Expenses related to real estate owned via equity investments		432		276
Other operating expenses		2,151		2,329

TOTAL OTHER EXPENSE		6,090		6,267


Minority interest		485		(81	)


INCOME BEFORE INCOME TAXES		3,268		7,811
Income taxes		941		2,465

NET INCOME	$	2,327	$	5,346

Per share data
Net income — basic	$	0.17	$	0.40

Net income — diluted	$	0.17	$	0.40

Cash dividends— Class A shares	$	0.287500	$	0.261900

Cash dividends— Class B shares	$	0.330625	$	0.301190

The accompanying notes are an integral part of these statements.

Royal Bancshares of Pennsylvania,Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
Three Months ended March 31, 2007
(UNAUDITED)


														Accumulated
									Additional					Other
	Class A common stock				Class B common stock				Paid in		Retained			comprehensive			Treasury			Comprehensive
(in thousands, except per share data)	Shares		Amount		Shares		Amount		Capital		earnings			(loss)			stock			Income

Balance, January 1, 2007		11,287	$	22,575		2,108	$	211	$	121,542	$	23,464		$	(2,273	)	$	(2,265	)
Net income		—		—		—		—		—		2,327			—			—		$	2,327
Cash in lieu of fractional shares		—		—		—		—		—		(14	)		—			—			—
Stock dividend adjustment		—		—		—		—		—		—			—			—			—
Cash dividends on common stock (Class A $0.28750 Class B $0.330625)		—		—		—		—		—		(3,881	)		—			—			—
Purchase of treasury stock																		—
Adjustment to net periodic pension cost		—		—		—		—		—		—			41			—			41
Stock options exercised		4		8		—		—		41
Stock option expense		—		—		—		—		162		—			—			—			—
Tax benefit stock options		—		—		—		—		13		—			—			—			—
Other comprehensive income, net of reclassifications and taxes		—		—		—		—		—		—			948			—			948


Comprehensive income																				$	3,316


Balance, March 31, 2007		11,291	$	22,583		2,108	$	211	$	121,758	$	21,896		$	(1,284	)	$	(2,265	)

Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
Three Months ended March 31, 2006
(UNAUDITED)


																	Accumulated
										Un-		Additional					other
	Class A common stock				Class B common stock					Distributed		Paid in		Retained			comprehens			Treasury			Comprehensive
(in thousands, except per share data)	Shares		Amount		Shares			Amount		B-Shares		Capital		earnings			(loss)			stock			Income

Balance, January 1, 2006		10,700	$	21,400		1,993		$	199	$	2	$	104,285	$	32,827		$	(940	)	$	(2,265	)
Net income		—		—		—			—		—				5,346			—			—		$	5,346
5% Stock dividend		527		1,054		100			11		—		15,588		(16,653	)		—			—			—
Conversion of Class B common stock to Class A Class A Common stock		1		1		(1	)		—		—		—		(1	)		—			—			—
Cash in lieu of fractional shares		—		—		—			—		—		—		(12	)		—			—			—
Cash dividends on common stock (Class A $0.2619 Class B $0.30119)		—		—		—			—		—		—		(3,511	)		—			—			—
Other comprehensive loss, net of reclassifications and taxes		—		—		—			—		—		—		—			(1,510	)		—			(1,510	)


Comprehensive income																							$	3,836


Balance, March 31, 2006		11,228	$	22,455		2,092		$	210	$	2	$	119,873	$	17,996		$	(2,450	)	$	(2,265	)

The accompanying notes are an integral part of the financial statement.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Three months ended March 31,
(in thousands)


	2007			2006
Cash flows from operating activities
Net income	$	2,327		$	5,346
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		291			291
Stock compensation expense		162			178
Provision for loan losses		212			335
Net accretion of discounts and premiums on loans, mortage-backed securities and investments		(799	)		1,494
Benefit for deferred income taxes		(117	)		(1,998	)
Gains on sales of other real estate		(236	)		(1,493	)
Gains on sales of real estate joint ventures		(350	)		—
Gains on sales of loans		(167	)		(43	)
Net gains on sales of investment securities		—			(83	)
Gains from sale of premise of real estate owned via equity investment		(779	)		—
Income from equity investments		(86	)		(47	)
Income from bank owned life insurance		(215	)		(210	)
Changes in assets and liabilities:
Decrease (increase) in accrued interest receivable		537			(1,007	)
(Increase) decrease in other assets		(2,194	)		(408	)
Increase in accrued interest payable		2,940			761
Increase in minority interest		352			—
Decrease in other liabilities		(1,322	)		(1,950	)

Net cash provided by operating activities		556			1,166


Cash flows from investing activities
Proceeds from calls/maturities of HTM investment securities		6			—
Proceeds from calls/maturities of AFS investment securities		6,857			13,951
Proceeds from sales of AFS investment securities		—			1,595
Purchase of AFS investment securities		(328	)		(185	)
Purchase of HTM investment securities		(2,000	)		—
Redemption of FHLB Stock		2,557			1,011
Net increase in loans		(26,534	)		(40,570	)
Purchase of premises and equipment		(332	)		(77	)
Net investment in real estate		458			—
Proceeds from sale of premises and equipment related to real estate owned via equtiy investment		6,814			—
Distributions from equity investments		86			47
Net increase in premises and equipment related to real estate owned via equity investment		(2,109	)		(550	)

Net cash used in in investing activities		(14,525	)		(24,778	)


Cash flows from financing activities:
Decrease in non-interest bearing and interest bearing demand deposits and savings accounts		(16,706	)		(5,417	)
Increase in certificates of deposit		52,248			26,898
Mortgage payments		(56	)		(21	)
Repayments from short term borrowings		(53,000	)		(5,000	)
Repayments from long term borrowings		(53	)		—
Repayment of mortgage debt related to real estate owned via equity investment		(4,347	)		—
Mortgage debt incurred related to real estate owned via equity investment		—			59
Income tax benefit on stock options		13			—
Cash dividends		(3,881	)		(3,511	)
Cash in lieu of fractional shares		(14	)		(12	)
Issuance of common stock under stock option plans		49			—

Net cash (used in) provided by financing activities		(25,747	)		12,996
Net decrease in cash and cash equivalents		(39,716	)		(10,616	)
Cash and cash equivalents at beginning of period		82,436			30,895

Cash and cash equivalents at end of period	$	42,720		$	20,279

Supplemental Disclosure
Taxes paid	$	100		$	4,500

Interest paid	$	8,835		$	6,031

The accompanying notes are an integral part of these statements.

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The accompanying unaudited consolidated financial statements include the accounts of Royal Bancshares of Pennsylvania, Inc. (“Company”) and its wholly-owned subsidiaries, Royal Investments of Delaware, Inc., Royal Asian Bank (effective July 17, 2006, prior thereto, a division of Royal Bank America) and Royal Bank America (“Royal Bank”), including Royal Bank’s subsidiaries, Royal Real Estate of Pennsylvania, Inc., Royal Investments America, LLC, and its five 60% ownership interests in Crusader Servicing Corporation, Royal Tax Lien Services, LLC, Royal Bank America Leasing, LP, RBA ABL Group, LP and RBA Capital, LP. The two Delaware trusts, Royal Bancshares Capital Trust I and Royal Bancshares Capital Trust II are not consolidated per requirements under FASB Interpretation (“FIN”) No. 46(R). These financial statements reflect the historical information of the Company. All significant inter-company transactions and balances have been eliminated.

1.		The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) for interim financial information. The interim financial information included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments) that are, in the opinion of management, necessary to present a fair statement of the results for the interim periods. These interim financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2006. The results of operations for the three-month period ended March 31, 2007, are not necessarily indicative of the results to be expected for the full year.

		The accounting and reporting policies of the Company conform with accounting principles generally accepted in the United States of America and general practices within the financial services industry. Applications of the principles in the Company’s preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. These estimates and assumptions are based on information available as of the date of the financial statements; therefore, actual results could differ from those estimates.

Included in the operating results for the three months ended March 31, 2007 is a $1.3 million reduction to net income related to the following accounting errors: a $800,000 reduction in net income resulting from an accounting error related to investments in real estate joint ventures (see note 13 for a discussion of the investment in real estate joint ventures), a $900,000 reduction in net income associated with an accounting error related to the consolidation of an investment in real estate owned via an equity investment and an increase in net income of $400,000 related to an error in the accounting for deferred loan costs per Statement of Financial Accounting Standards (SFAS ) No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases.” Of the $1.3 million total adjustment to net income relating to these accounting errors, approximately $1.0 million relates to 2006 and prior periods. In our opinion, the adjustments to 2006 and prior years operating results are immaterial, and no restatements for 2006 and prior years were made. Reported net income for the first quarter of 2007 of $3.6 million has been reduced by $1.3 million for a restated first quarter 2007 net income of $2.3 million.

2.		Segment Information

		Community Banking

		The Company’s Community Banking segment which includes Royal Bank and Royal Asian Bank (“the Banks”) 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 the Banks. For example, commercial lending is dependent upon the ability of the Banks to fund them with retail deposits and other borrowings and to manage interest rate and credit risk. This situation is also similar for consumer lending.

		Tax lien operation

		The Company’s Tax Lien Operation does not meet the quantitative thresholds for requiring disclosure, but has different characteristics than the Community Banking segment. The Company’s Tax Lien Operation consists of purchasing delinquent tax certificates from local municipalities at auction. The tax lien segment is in the business of purchasing delinquent tax liens from municipalities and then processing those liens to either encourage the property holder to payoff the lien, or to foreclose and sell the property. The tax lien operation earns income based on interest rates (determined at auction) and penalties assigned by the municipality along with gains on sale of foreclosed properties.

		Equity investments

As of March 31, 2007 and 2006, the Company is reporting on a consolidated basis its interest in one equity investment in real estate as a Variable Interest Entity (“VIE”) which has different characteristics than the Community Banking segment. Royal Scully Associates, L.P. (“the Partnership”) met the requirements for consolidation under FIN 46(R) based on Royal Investments America being the primary financial beneficiary. This was determined based on the amount invested by Royal Investments America compared to our partners. The Company’s investment in this entity is further discussed in Note 10.

(The remainder of the page was intentionally left)

The following table presents selected financial information for reportable business segments for the three month periods ended March 31, 2007 and 2006.


	Three months ended March 31, 2007
	Community			Tax Lien		Equity
(in thousands)	Banking			Operation		Investments			Consolidated
Total assets	$	1,247,191		$	47,377	$	41,382		$	1,335,950

Total deposits		894,999			—		—			894,999


Interest income	$	18,162		$	1,298	$	—		$	19,460
Interest expense		10,875			900		183			11,958

Net interest income (loss)		7,287			398		(183	)		7,502
Provision for loan losses		212			—		—			212
Total non-interest income		1,261			214		1,078			2,553
Total non-interest expense		5,151			506		433			6,090
Minority interest		(25	)		25		485			485
Income tax expense		262			37		642			941

Net income (loss)	$	2,948		$	44	$	(665	)	$	2,327


	Three months ended March 31, 2006
	Community			Tax Lien		Equity
(in thousands)	Banking			Operation		Investments			Consolidated
Total assets	$	1,208,009		$	48,340	$	60,424		$	1,316,773

Total deposits		718,890			—		—			718,890


Interest income	$	20,195		$	1,218	$	—		$	21,413
Interest expense		8,630			838		611			10,079

Net interest income		11,565			380		(611	)		11,334
Provision for loan losses		333			2		—			335
Total non-interest income		1,686			582		730			2,998
Total non-interest expense		5,232			759		276			6,267
Minority interest		(3	)		—		(78	)		(81	)
Income tax expense		2,425			95		(55	)		2,465

Net income (loss)	$	5,264		$	106	$	(24	)	$	5,346

Interest paid to the Community Banking segment by the Tax Lien Operation was approximately $900,000 and $838,000 for the three-month periods ended March 31, 2007 and 2006. Interest paid to the Community Banking segment by the Equity Investment segment was approximately $230,000 for each of the three month periods ended March 31, 2007 and 2006.

3.		Per Share Information

		The Company follows the provisions of Statement of Financial Accounting Standards (SFAS) No. 128, “Earnings Per Share”. The Company has two classes of common stock currently outstanding. The classes are A and B, of which a share of Class B is convertible into 1.15 shares of Class A. Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. Diluted EPS 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. On December 20, 2006 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, 2007. On December 22, 2005, 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 17, 2006. All share and per share information has been restated to reflect this dividend. Basic and diluted EPS are calculated as follows (in thousands, except per share data):


	Three months ended March 31, 2007
	Income		Average shares		Per share
(dollars in thousands, except for per share data)	(numerator)		(denominator)		Amount

Basic EPS
Income available to common shareholders	$	2,327		13,499	$	0.17
Effect of dilutive securities:
Stock options		—		94		—

Diluted EPS
Income available to common shareholders plus assumed exercise of options	$	2,327		13,593	$	0.17


	Three months ended March 31, 2006
	Income		Average shares		Per share
(dollars in thousands, except for per share data)	(numerator)		(denominator)		Amount

Basic EPS
Income available to common shareholders	$	5,346		13,426	$	0.40
Effect of dilutive securities:
Stock options		—		108		—

Diluted EPS
Income available to common shareholders plus assumed exercise of options	$	5,346		13,534	$	0.40

No options were anti-dilutive for the three-month periods ended March 31, 2007 and March 31, 2006.

Note: The stock dividend declared on December 20, 2006 and payable on January 17, 2007 resulted in the issuance of 526,825 additional shares of Class A common stock and 100,345 additional shares of Class B common stock.

4.		Comprehensive Income

		SFAS No. 130, Reporting Comprehensive Income, requires the reporting of other comprehensive income, which includes net income as well as certain other items, which results in changes to equity during the period.


(in thousands)	Before		Tax		Net of
	Tax		(expense)		Tax
March 31, 2007	Amount		Benefit		Amount
Unrealized gains on securities:
Unrealized holding gains arising during period	$	1,460	$	512	$	948
Less reclassification adjustment for gains realized in net income		—		—		—

Unrealized gains on investment securities	$	1,460	$	512	$	948
Adjustment to net periodic pension cost		63		22		41

Other comprehensive income	$	1,523	$	534	$	989



(in thousands)	Before			Tax			Net of
	Tax			(expense)			Tax
March 31, 2006	Amount			Benefit			Amount
Unrealized gains on securities:
Unrealized holding losses arising during period	$	(2,406	)	$	(842	)	$	(1,564	)
Less reclassification adjustment for gains realized in net income		83			29			54

Other comprehensive income	$	(2,323	)	$	(813	)	$	(1,510	)

Investment Securities:

The carrying value and approximate market value of investment securities at March 31, 2007 are as follows:


	Amortized		Gross		Gross			Approximate
	Purchased		Unrealized		Unrealized			Fair		Carrying
(in thousands)	Cost		Gains		Losses			Value		Value

Held to maturity:
Mortgage Backed	$	123	$	—	$	—		$	123	$	118
US Agencies		195,000		—		(2,044	)		192,956		195,000
Other Securities		62,300		1,987		(425	)		63,862		62,300

Total Held to Maturity	$	257,423	$	1,987	$	(2,469	)	$	256,941	$	257,423


Available for sale:
Mortgage Backed	$	26,548	$	—	$	(579	)	$	25,969	$	25,969
CMO’s		19,397		23		(280	)		19,140		19,140
US Agencies		104,981		—		(2,767	)		102,214		102,214
Other securities		144,318		5,716		(295	)		149,739		149,739

Total Available for Sale	$	295,244	$	5,739	$	(3,921	)	$	297,062	$	297,062

Allowance for Loan Losses:

Changes in the allowance for loan losses were as follows:


	Three months ended March 31,
(in thousands)	2007			2006
Balance at beginning period	$	11,455		$	10,276


Charge-offs
Single family residential		(1	)		(122	)
Non-residential		—			—
Tax certificates		—			(2	)
Commercial and Industrial		(25	)		—
Other loans		—			—

Total charge-offs		(26	)		(124	)


Recoveries
Single family residential		4			55
Non-residential		3			3
Tax certificates		—			—
Commercial and Industrial		—			—
Other loans		—			5

Total recoveries		7			63


Net Loan (charge offs) recoveries		(19	)		(61	)

Provision for loan losses		212			335


Balance at the end of period	$	11,648		$	10,550

7.		Pension Plan

		The Company has a noncontributory nonqualified defined benefit pension plan (“Pension Plan”) covering certain eligible employees. The Company’s 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 three consecutive years during the last 10 years of employment.

		Net periodic defined benefit pension expense for the three-months ended March 31, 2007 and 2006 included the following components:


	Three months ended
	March 31,
(in thousands)	2007		2006

Service cost	$	115	$	70
Interest cost		95		85
Amortization of prior service cost		24		23

Net periodic benefit cost	$	234	$	178

		The total accumulated benefit obligation under the plan including adjustments is estimated to be $11.0 million at March 31, 2007. This accumulated obligation is the present value of the amounts potentially payable under the plan as computed by actuary calculations made by our third party plan administrator.

8.		Stock Option Plans

		Outside Directors’ Stock option Plan

		The Company has 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.

		The following table presents the activity related to the Director’s Plan for the three months ended March 31, 2007.

(The remainder of the page was intentionally left blank)

The following table presents the activity related to the Director Plan for the three months ended March 31, 2007.


			Weighted		Weighted
			Average		Average		Average
			Exercise		Remaining		Intrinsic
	Options		Price		Term (yrs)		Value

Options outstanding at December 31, 2006		102,552	$	18.41
Granted		—		—
Exercised		—		—
Forfeited		—		—

Options outstanding at March 31, 2007		102,552	$	18.41		5.9	$	547,628

Options exercisable at March 31, 2007		85,227	$	17.72		5.2	$	513,919

As of March 31, 2007, the vested shares under the Director’s Plan are as follows:


			Weighted
			Average
			Exercise
	Options		Price

Non-vested options — December 31, 2006		17,325	$	21.78
Granted		—		—
Vested		—		—
Forfeited/expired		—		—

Non-vested options — March 31, 2007		17,325	$	21.78

		Employee Stock Option Plan and Appreciation Right Plan

		The Company has adopted a Stock Option and Appreciation Right Plan (the “Plan”). The Plan is an incentive program under which Company officers and other key employees may be awarded additional compensation in the form of options to purchase up to 1,800,000 shares of Royal Bancshares’ Class A common stock (but not in excess of 19% of outstanding shares). At the time a stock option is granted, a stock appreciation right for an identical number of shares may also be granted. The option price is equal to the fair market value at the date of the grant. The options are exercisable at 20% per year beginning one year after the date of grant and must be exercised within ten years of the grant.

The following table presents the activity related to the Employee Plan for the three months ended March 31, 2007.


				Weighted		Weighted
				Average		Average		Average
				Exercise		Remaining		Intrinsic
	Options			Price		Term (yrs)		Value

Options outstanding at December 31, 2006		853,804		$	19.48
Granted		—			—
Exercised		(6,772	)		9.15
Forfeited		—			—

Options outstanding at March 31, 2007		847,032		$	19.56		6.5	$	3,555,410

Options exercisable at March 31, 2007		384,047		$	17.18		5.9	$	2,523,524

The following table provides detail for non-vested shares under the Employee Plan at March 31, 2007.


			Weighted
			Average
			Exercise
	Options		Price

Non-vested options — December 31, 2006		462,985	$	21.35
Granted		—		—
Vested		—		—
Forfeited/expired		—		—

Non-vested options — March 31, 2007		462,985	$	21.35

As of March 31, 2007, there was approximately $1.6 million of total unrecognized compensation cost related to non-vested options under the Director Plan and the Employee Plan.

9. Interest Rate Swaps

For asset/liability management purposes, the Company uses interest rate swaps which are agreements between the Company and another party (known as a counterparty) where one stream of future interest payments is exchanged for another based on a specified principal amount (known as notional amount). The Company will use interest rate swaps 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, are 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.

The Company 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 and investments as well as convert a portion of variable rate borrowings (cash flow hedge) to fund fixed rate loans. Interest rate swap contracts in which a series of interest flows are exchanged over a prescribed period. Effective October 1, 2005, the Company has completed documentation determining the effectiveness of each hedge using the Volatility Reduction Measure (“VRM”) on a quarterly basis.

At March 31, 2007 and December 31, 2006, the information pertaining to outstanding interest rate swap agreements used to hedge fixed rate loans and investments is as follows:


	March 31,			Dec. 31,
(in thousands)	2007			2006

Notional Amount	$	60,559		$	60,588
Weighted average pay rate		5.58	%		5.52	%
Weighted average receive rate		4.76	%		4.58	%
Weighted average maturity (years)		4.6			4.6
Fair value relating to interest rate swaps	$	(570	)	$	(1,074	)

The fair value on the interest rate swaps included above is estimated by a third party using characteristics such as the current interest environment in conjunction with the remaining term.

10.Real Estate Owned via Equity Investments

In July 2003, Royal Bank (through its wholly owned subsidiary Royal Investments America, LLC) received regulatory approval to acquire ownership interest in real estate projects. With the adoption of FIN 46(R) the Company is required to perform an analysis to determine whether such investments meet the criteria for consolidation into the Company’s financial statements. As of March 31, 2007, the company has one VIE which is consolidated into the Company’s financial statements. Royal Scully Associates, L.P. (“the Partnership”) met the requirements for consolidation under FIN 46(R) based on Royal Investments America being the primary financial beneficiary. This was determined based on the amount invested by Royal Investments America compared to our partners.

In September 2005, the Company, together with a real estate development company, formed the Partnership. The Partnership was formed to convert an apartment complex into condominiums. The development company is the general partner of the Partnership. The Company invested 66% of the initial capital contribution, or $2.5 million, with the development company investing the remaining equity of $1.3 million. The Company is entitled to earn a preferred return on the $2.5 million capital contribution. In addition, the Company made two mezzanine loans totaling $9.2 million at market terms and interest rates. As of March 31, 2007, the Partnership also had $25.0 million outstanding of senior debt with another bank. Upon the repayment of the mezzanine loan interest and principal and the initial capital contributions and preferred return, the Company and the development company will both receive 50% of the remaining distributions, if any. The Company utilizes the period of December 2006 to February 2007 in consolidating the financial statements of the Partnership for the three month period ending March 31, 2007.

At March 31, 2007, Royal Scully had total assets of $41.4 million of which $38.5 is real estate as reflected on the consolidated balanced sheet and total borrowings of $34.2 million, of which $9.2 million relates to the Company’s notes discussed above. None of the third party borrowings are guaranteed by the Company. The Company has made an investment of $11.7 million in Royal Scully.

11.Trust Preferred Securities

Management previously determined that Royal Bancshares Trust I/II (“Trusts”) utilized for the Royal Bancshares $25.8 million of pooled trust preferred securities issuance, qualifies as a variable interest entities under FIN 46. The Trusts issued mandatory redeemable preferred stock to investors and loaned the proceeds to Royal Bancshares. The Trusts hold, as their sole asset, subordinated debentures issued by Royal Bancshares in 2006.

Royal Bancshares does not consolidate the Trusts as 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 returns. The non-consolidation results in the investment in common stock of the Trusts to be included in other assets with a corresponding increase in outstanding debt of $774,000. In addition, the income received on the Royal Bancshares’ common stock investments is included in other income. The adoption of FIN 46(R) did not have a material impact on Royal Bancshares’ financial position or results of operations. The Federal Reserve Bank has issued final guidance on the regulatory treatment for the trust-preferred securities issued by the Trusts as a result of the adoption of FIN 46(R). The final rule would retain the 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 final rule and does not anticipate a material impact on its capital ratios.

12.Change in Accounting Principle

The Company adopted the provisions of the Financial Accounting Standards Board (FASB) Interpretation No. 48 (FIN48), Accounting for Uncertainty in Income Taxes — an interpretation of FASB No. 109, on January 1, 2007. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As a result of the implementation of FIN 48, the Company did not identify any uncertain tax positions that it believes should be recognized in the financial statements.

13.Investment in Real Estate Joint Ventures

As discussed in Note 1, the restatement of the Company’s Form 10-Q for the quarter end March 31, 2007 includes amending its financial statements for an accounting error related to investments in real estate joint ventures. The Company determined two (ADC) loans should have been accounted for as investments in real estate joint ventures in accordance with AICPA Practice Bulletin 1 and Statement of Financial Accounting Standards No. 66, Accounting for Sales of Real Estate. The Company has reclassified these ADC loans in the amount of $10.7 million to investments in real estate joint ventures as of December 31, 2006. As of December 31, 2006, one investment in the amount of $4.7 million was to fund the purchase of property for construction of an office and residential building and the other investment for $6.0 million was to fund the construction of a 55 unit condominium building. As of March 31, 2007 the investment in the construction of an office and residential building was $4.8 million. The balance of the investment in the construction of a 55 unit condominium building was $5.8 million.

14.Commitments, Contingencies and Concentrations

The Company’s 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. The Company 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):


	March 31, 2007		Dec. 31, 2006

Financial instruments whose contract amounts represent credit risk:
Open-end lines of credit	$	134,394	$	103,169
Commitment to extend credit		27,315		28,543
Standby letters of credit and financial guarantees written		9,567		4,862
Financial instruments whose notional amount exceed the amount of credit risk:
Interest rate swap agreements		60,559		60,588

15.Reclassifications and Restatement for 5% Stock Dividend

Certain items in the consolidated financial statements and accompanying notes have been reclassified to conform with the current year’s presentation format. There was no effect on net income for the periods presented herein as a result of reclassification. All applicable amounts in these consolidated financial statements (including stock options and earnings per share information) have been restated for a 5% stock dividend paid January 17, 2007.

As discussed in Note 1 and Note 13 to consolidated financial statements included herein, the Company is amending its financial statements, notes to consolidated financial statements and management’s discussion and analysis of financial condition and results of operations included in the Company’s Form 10-Q for the quarter end March 31, 2007. The following information describes the changes made to the Company’s financial statements:

CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)


	As		As		As		As
	Reported		Restated		Reported		Restated
	In March 31,		For March 31,		In March 31,		For March 31,
	2007		2007		2007		2007
	Form 10-Q		Form 10-Q		Form 10-Q		Form 10-Q
	March 31, 2007		March 31, 2007		December 31, 2006		December 31, 2006

Assets
Loans	$	629,384	$	619,160	$	602,958	$	592,214
Net Loans		617,736		607,512		591,503		680,759

Accrued interest receivable		17,533		15,957		16,494		16,494
Investment in real estate joint ventures		—		10,636		—		10,744
Total Assets	$	1,338,235	$	1,335,950	$	1,356,311	$	1,356,311

Liabilities
Other liabilities		18,429		17,153		18,593		18,593
Total liabilities		1,170,825		1,169,549		1,189,907		1,189,907

Minority interests		3,213		3,502		3,150		3,150

Stockholders’ equity
Retained earnings		23,194		21,896		23,464		23,464
Total stockholders’ equity		164,197		162,899		163,254		163,254
Total liabilities and stockholders’ equity	$	1,338,235	$	1,335,950	$	1,356,311	$	1,356,311

Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)


	Three Months Ended
	March 31,
	As		As
	Reported		Restated
	In March 31,		For March 31,
	2007		2007
(in thousands, except per share data)	Form 10-Q		Form 10-Q

Interest income
Loans and leases, including fees	$	14,397	$	11,892
TOTAL INTEREST INCOME		21,965		19,460

Interest expense
Obligations related to real estate owned via equity investsments		255		184
TOTAL INTEREST EXPENSE		12,029		11,958

NET INTEREST INCOME		9,936		7,502
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES		9,724		7,290

Other income
Revenue related to real estate owned via equity investments		1,308		1,275
Gains on sales related to real estate joint ventures		—		350
Other income		97		10
TOTAL OTHER INCOME		2,323		2,553

Other expenses
Salaries and wages		2,676		2,180
TOTAL OTHER EXPENSE		6,586		6,090

Minority interest		196		485

INCOME BEFORE INCOME TAXES		5,265		3,268
Income taxes		1,640		941
NET INCOME	$	3,625	$	2,327

Per share data
Net income — basic	$	0.27	$	0.17
Net income — diluted	$	0.27	$	0.17

Royal Bancshares of Pennsylvania,Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
Three Months ended March 31, 2007
(UNAUDITED)


	Three Months Ended
	March 31, (in thousands)
	As		As
	Reported		Restated
	In March 31,		For March 31,
	2007		2007
	Form 10-Q		Form 10-Q

Retained Earnings	$	23,194	$	21,896
Net Income	$	3,625	$	2,327

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three months ended March 31,
(in thousands)


	As			As
	Reported			Restated
	In March 31,			For March 31,
	2007			2007
	Form 10-Q			Form 10-Q
	March 31, 2007			March 31, 2007

Cash flows from operating activities:
Net income	$	3,625		$	2,327
Adjustments to reconcile net income to net cash provided by operating activities:
Gains on sales of real estates joint ventures		—			(350	)
Gains form sale of premise of real estate owned via equity investment		—			(779	)
Income from equity investments		—			(86	)
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable		(1,059	)		537
Increase in other assets		(382	)		(2,194	)
Increase in minority interest		—			352
Decrease in other liabilities		(18	)		(1,322	)
Net cash provided by operating activities		4,385			556

Cash flows from investing activities:
Net increase in loans		(26,014	)		(26,534	)
Net investment in real estate		—			458
Proceeds from sale of premises and equipment of real estate owned via equity investment		779			6,814
Net increase in premises and equipment relating to real estate owned via equity investment		—			(2,109	)
Distributions from equity investments		—			86
Net cash provided (used) in investing activities		(18,388	)		(14,525	)

Cash flows from financing activities:
Mortgage payments		(22	)		(56	)
Net cash provided by financing activities		(25,713	)		(25,747	)
Supplemental Disclosure:
Interest paid	$	9,089		$	8,835

16.Recent accounting pronouncements

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments. This statement amends FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, and No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This statement resolves issues addressed in Statement 133 Implementation Issue No. D1, Application of Statement 133 to Beneficial Interest in Securitized Financial Assets. This Statement is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company adopted this guidance on January 1, 2007. The adoption did not have any effect on Royal Bancshares’ financial position or results of operations.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Asset- An Amendment of FASB Statement No. 140. This statement amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities. This statement requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. It also permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. The Company adopted this statement effective January 1, 2007. The adoption did not have a material effect on the Company’s financial position or results of operations.

In September 2006, the FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) in Issue 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life insurance Arrangements. EITF 06-4 applies to life insurance arrangements that provide an employee with a specific benefit that is not limited to the employee’s active service period, including certain bank-owned life insurance (“BOLI”) policies. EITF 06-4 requires an employer to recognize a liability and related compensation costs for future benefits that extend to postretirement periods. EITF 06-4 is effective for fiscal years beginning after December 15, 2007, with earlier application permitted. The Company is continuing to evaluate the impact of this consensus, which may require the Company to recognize an additional liability and compensation expense related to its BOLI policies.

In September 2006, the FASB ratified the consensus reached by the EITF in Issue 06-5, Accounting for Purchases of Life Insurance — Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance. Technical Bulletin No. 85-4 states that an entity should report as an asset in the statement of financial position the amount that could be realized under insurance contract. EITF 06-5 clarifies certain factors that should be considered in the determination of the amount that could be realized. EITF 06-5 is effective for fiscal years beginning after December 15, 2006, with earlier application permitted under certain circumstances. The Company is continuing to evaluate the impact of this consensus, but does not expect that the guidance will have material effect on the Company’s consolidated financial position or results of operations.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a frame work for measuring fair value under GAAP, and expands disclosures about fair value measurements. FASB Statement No. 157 applies to other accounting pronouncements that require or permit fair value measurements. The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007 and for interim periods within those fiscal years. The Company is currently evaluating the potential impact, if any, of the adoption of FASB Statement No. 157 on our consolidated financial position or results of operations.

In September 2006, the SEC issued SAB No. 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements. SAB No. 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a potential current year misstatement. Prior to SAB 108, companies might evaluate the materiality of financial-statement misstatements using either the income statement or the balance sheet approach, with the income statement approach focusing on new misstatements added in the current year, and the balance sheet approach focusing on the cumulative amount of misstatement present in a company’s balance sheet. Misstatements that

would be material under one approach could be viewed as immaterial under another approach, and not be corrected. SAB No. 108 now requires that companies view financial statement misstatements as material if they are material according to either the income statement or balance sheet approach. The Company has analyzed SAB No. 108 and determined that adoption of it did not impact on the reported financial position or results of operations.

In February 2007, the FASB issued SFAS No. 159, The Fair Value of Option for Financial Assets and Financial Liabilities. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. An entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. This statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS No. 157. The Company did not elect to early adopt SFAS No. 157. We are currently evaluating the potential impact, if any, of the adoption of FASB Statement No. 159 on our consolidated financial position or results of operations.

In March 2007, the FASB ratified EITF Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards.” EITF 06-11 requires companies to recognize the income tax benefit realized from dividends or dividend equivalents that are charged to retained earnings and paid to employees for nonvested equity-classified employee share-based payment awards as an increase to additional paid-in capital. EITF 06-11 is effective for fiscal years beginning after September 15, 2007. The Company does not expect EITF 06-11 will have a material impact on its financial position, results of operations or cash flows.

In March 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-10 “Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements” (EITF 06-10). EITF 06-10 provides guidance for determining a liability for the postretirement benefit obligation as well as recognition and measurement of the associated asset on the basis of the terms of the collateral assignment agreement. EITF 06-10 is effective for fiscal years beginning after December 15, 2007. The Company is currently assessing the impact of EITF 06-10 on its consolidated financial position and results of operations.

ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS

The following discussion and analysis is intended to assist in understanding and evaluating the changes in the financial condition and earnings performance of the Company and its subsidiaries for the three-month periods ended March 31, 2007 and March 31, 2006. This discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2006 included in the Company’s 2006 Form 10-K.

FORWARD-LOOKING STATEMENTS

From time to time, the Company 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 a safe harbor for forward-looking statements. When we use words such as “believes”, “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 the Company’s 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 the Company’s business include the following: general economic conditions, including their impact on capital expenditures; interest rate fluctuations: business conditions in the 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.

All forward-looking statements contained in this report are based on information available as of the date of this report. The Company expressly disclaims any obligation to update any forward-looking statement to reflect future statements to reflect future events or developments.

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

The accounting and reporting policies of the Company conform with accounting principles generally accepted in the United States of America and general practices within the financial services industry. Applications of the principles in the Company’s preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. These estimates and assumptions are based on information available as of the date of the financial statements; therefore, actual results could differ from those estimates.

Note A to the Company’s consolidated financial statements (included in Item 8 of the Form 10-K for the year ended December 31, 2006) lists significant accounting policies used in the development and presentation of the Company’s financial statements. The following discussion and analysis, the significant accounting policies, and other financial statement disclosures identify and address key variables and other quantitative and qualitative factors that are necessary for an understanding and evaluation of the Company and its results of operations. The Company is an investor in a variable interest entity and is required to report its investment in the variable interest entity on a consolidated basis under FIN 46(R). The variable interest entity is responsible for providing its financial information to the Company. We complete an internal review of this financial information. This review requires substantive judgment and estimation. The Company has identified accounting for allowance for loan losses, deferred tax assets and derivative securities as among the most critical accounting policies and estimates in that they are important to the presentation of the Company’s financial condition and results of operations, and they require difficult, subjective or complex judgments as a result of the need to make estimates.

RESULTS OF OPERATIONS

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 and borrowings. Interest income is recognized according to the effective interest yield method. 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.

Consolidated Net Income

Net income for the first quarter of 2007 of $2.3 million was $3.0 million, or 56.6% lower than the first quarter of 2006 net income of $5.3 million. The lower net income earned during the first quarter of 2007 was the result of a $1.0 million reduction to net income related to accounting errors in 2006 and prior years, a $780,000 reduction in interest income related to transferring two loans to non-accrual status during the first quarter of 2007 and the continued pressures on funding costs. Gains on sales of other real estate were $1.3 million lower during the first quarter of 2007, compared to the same quarter of 2006. These reductions were partially offset by higher net income recognized by our equity investment in real estate. Basic earnings per share and diluted earnings per share were both $.17 for the first quarter of 2007. Basic earnings per share and diluted earnings per share were both $.40 for the first quarter of 2006.

Interest Income

The first quarter of 2007 interest income decreased $2.0 million, or 9.1%, compared to the first quarter of 2006. Included in the first quarter interest income were $1.9 million of reductions related to the following accounting errors in 2006: a $1.2 accounting error related to investments in real estate joint ventures (see footnote 13 for a discussion of the investment in real estate joint ventures), a $781,000 reduction in interest income associated with an accounting error related to the consolidation of an investment in real estate owned via an equity investment and an increase in interest income of $92,000 related to an error in the accounting for deferred loan cost per statement of Financial Accounting Standards (SFAS no. 91), “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases.” Also contributing to the lower interest income was a $780,000 reduction related to transferring two loans to non-accrual status during the quarter. Investment interest income decreased $302,000 as a result of lower average balances, which reflects management’s strategy to fund higher yielding loans with maturing investment securities. Partially offsetting these reductions in interest income was a $553,000 increase in income earned on cash balances and loan interest income related to the $23.2 million increase in average loans in the first quarter of 2007, compared to the same period in 2006.

Interest Expense

Interest expense increased $2.0 million to $12.0 million for the quarter ended March 31, 2007 compared to the same period in 2006. The increase in interest expense was the result of an increase in average deposits along with higher interest rates paid on deposits and borrowings. The increase was partially offset by a $427,000 reduction in interest expense related to real estate owned via equity investments. Excluding interest expense related to the real estate owned via equity investments, interest expense grew $2.3 million or 24.4%. Average deposits grew 25.9% during the first quarter of 2007, compared to the first quarter of 2006. This increase was primarily a result of the growth in average certificates of deposits through promotions offering attractive rates. Higher rates in NOW and money market accounts also contributed to the higher interest expense in the first quarter of 2007. The increase in deposits was used to fund the growth in loans and offset maturing Federal Home Loan Bank borrowings.

Net Interest Margin

The following table represents the average daily balances of assets, liabilities and shareholders’ equity and the respective on interest bearing assets and interest bearing liabilities, as well as average rates for the periods indicated, exclusive of interest on obligations related to the variable interest entity:

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	For the three months ended							For the three months ended
	March 31, 2007							March 31, 2006
	Average							Average
(in thousands)	Balance		Interest		Yield			Balance		Interest		Yield

Cash equivalents	$	43,264	$	585		5.48	%	$	2,727	$	32		4.79	%
Investments securities		566,721		6,983		5.00	%		585,740		7,285		5.04	%
Loans		597,218		11,892		8.08	%		574,045		14,096		9.96	%

Earning assets		1,207,203		19,460		6.54	%		1,162,512		21,413		7.47	%

Non earning assets		96,251							83,862


Total average assets	$	1,303,454						$	1,246,374


Deposits	$	888,249		9,098		4.15	%	$	705,293		5,464		3.14	%
Borrowings		225,247		2,676		4.82	%		363,545		4,004		4.47	%

Total interest bearing liabilities		1,113,496		11,774		4.29	%		1,068,838		9,468		3.59	%

Non-interest bearing liabilities and equity		189,958							177,536


Total average liabilities and equity	$	1,303,454						$	1,246,374


Net interest margin			$	7,686		2.58	%			$	11,945		4.17	%

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Rate Volume Analysis

The following table sets forth a rate/volume analysis, which segregates in detail the major factors contributing to the change in net interest income exclusive of interest on obligation through VIE, for the three month period ended March 31, 2007, as compared to the respective period in 2006, into amounts attributable to both rates and volume variances.


	For the three months ended
	March 31,
	2007 vs. 2006
	Increase (decrease)
(in thousands)	Volume			Rate			Total

INTEREST INCOME
Interest-bearing deposits	$	526		$	3		$	529
Federal funds sold		24			—			24
Investments securities
Held to maturity		9			88			97
Available for sale		(366	)		(33	)		(399	)

Total Investments securities		193			58			251
Loans
Commercial demand loans		432			(3,182	)		(2,750	)
Commercial mortgages		(88	)		109			21
Residential and home equity		(129	)		12			(117	)
Leases receivables		320			(13	)		307
Tax certificates		(3	)		84			81
Other loans		(15	)		7			(8	)
Loan fees		262			—			262

Total loans		779			(2,983	)		(2,204	)

Total increase (decrease) in interest income		972			(2,925	)		(1,953	)


INTEREST EXPENSE
Deposits
NOW and money market		(97	)		553			456
Savings		(3	)		(1	)		(4	)
Time deposits		2,391			791			3,182

Total deposits		2,291			1,343			3,634
Trust preferred		—			22			22
Borrowings		(1,550	)		200			(1,350	)

Total increase in interest expense		741			1,565			2,306

Total increase (decrease) in net interest income	$	231		$	(4,490	)	$	(4,259	)

Provision for Loan Losses

The provision for loan losses was $212,000 during the first quarter of 2007, compared to $335,000 during the same period in 2006. The amount of the allowance for loan losses represents 1.88% of total loans at March 31, 2007 versus 1.93% at December 31, 2006. During the first quarter of 2007, the bank reduced the specific reserve allocation for an impaired loan by $1.0 million. It was determined the principal and interest for this loan would be collected in full, as a result of a planned settlement during April of 2007. The customer was making regular interest payments on this loan. The $1.0 million reduction in the specific reserve allocation for the impaired loan and the $212,000 allowance for loan losses funded the formula allowance reflecting historical losses, as adjusted by credit category for the $26.9 million increase in loans during the first quarter of 2007.

Non-interest Income

First quarter 2007 non-interest income of $2.6 million decreased $445,000 over the $3.0 million earned during the first quarter of 2006. This decrease was due to lower gains on sales of other real estate owned of $1.3 million, partially offset by a $497,000 increase in income related to real estate owed via equity investments and an increase of $350,000 in gains on sales related to real estate joint ventures. The growth in income related to real estate owned via equity investments is directly associated to the increased activity in the Royal Scully VIE described in notes 2 and 10. The decrease in gains on sales of other real estate was primarily related to a $949,000 gain from the sale of one property during the first quarter of 2006.

Non-interest Expense

The first quarter of 2007 non-interest expense of $6.1 million decreased $200,000 from the first quarter of 2006 other expense of $6.3 million. Contributing to this decrease was lower salary expenses of $265,000 related to the $496,000 correction of an error in the accounting for deferred loan costs per Statement of Financial Accounting Standards No. 91 in 2006 and prior years. This reduction in salary expenses was partially offset by an increase in salary expenses related to both planned staffing and merit increases. Various reductions in other operating expenses resulted in a $178,000 decrease in the first quarter of 2007, compared to the same period in 2006. Partially offsetting these decreases was a $156,000 increase in real estate owned via equity investments as a result of increased activity in the equity investment.

Income tax expense

Total income tax expense for the three-months ended March 31, 2007 was $941,000 as compared to $2.5 million for the same period in 2006. The lower tax expense recorded during the first quarter of 2007 is due to the lower level of income before income taxes. The effective tax rate for the three months ended March 31, 2007, was 28.7% compared to the 31.6% for the same period in 2006.

FINANCIAL CONDITION

Consolidated Assets

Total consolidated assets as of March 31, 2007 decreased $20.4 million from December 31, 2006. This decrease is the result of a reduction in both lower yielding interest bearing deposits and investment securities. Partially offsetting these reductions was an increase in loans during this period. The overall reduction in assets was related to the planned decrease in Federal Home Loan Bank borrowings used to fund earning assets, during the first quarter of 2007.

Loans

Total loans increased $27.0 million from the $592.2 million level at December 31, 2006 to $619.2 million at March 31, 2007. This increase is primarily due to an increase in non-residential real estate loans and commercial and industrial loans, partially offset by a decrease in construction and land development loans.

The following table represents loan balances by type:


(amounts in thousands)	March 31, 2007			Dec. 31, 2006

Commercial and industrial loans	$	53,493		$	43,019
Construction and land development		168,771			177,922
Single family residential		44,247			43,338
Real estate non-residential		337,749			314,762
Lease financing		15,000			13,404
Other loans		1,431			1,333

Total gross loans		620,691			593,778
Deferred fees		(1,531	)		(1,564	)

Total loans	$	619,160		$	592,214

Non-performing loans


(in thousands)	31-Mar-07			Dec. 31, 2006

Non-accruing loans (1)	$	22,173		$	6,748
Other real estate owned		1,082			924

Total nonperforming assets	$	23,255		$	7,672


Nonperforming assets to total assets		1.74	%		0.57	%

Nonperforming loans to total loans		3.58	%		1.14	%

Allowance for loan loss to non-accruing loans		52.53	%		169.75	%


(1)		Generally, a loan is placed on non-accruing status when it has been delinquent for a period of 90 days or more unless the loan is both well secured and in the process of collection.

Loans on which the accrual of interest has been discontinued was $22.2 million at March 31, 2007, as compared to $6.7 million at December 31, 2006, an increase of $15.5 million. This increase is primarily the result of transferring two construction loans and two construction mezzanine loans to non-accrual status during the first quarter of 2007:

First Quarter 2007 new non-accruing loans:

•

Two loans (one construction and one construction mezzanine loan) representing $8.2 million were related to one customer for a condominium building. These loans became 90 days past due during the first quarter of 2007 and were classified as impaired during the first quarter of 2007. An appraisal received during the first quarter of 2007 provided a gross retail sellout value of this property which supported its value, therefore the loan did not require a specific reserve allocation.

•

Two loans (one construction and one construction mezzanine loan) in the amount of $6.9 million were added to non-accruing status during the first quarter of 2007. These loans are secured by a 36 unit condominium building. These loans became 90 days past due during the first quarter of 2007 and were classified as impaired during the first quarter of 2007. The Company measured the fair value of this loan based on the observable market price of the condominium building based on the fact there were agreements of sale on 19% of the 36 condominium units, therefore the loan did not require a specific reserve allocation. The customer was waiting for a Certificate of Occupancy and had seven agreements of sale on the condominiums as of March 31, 2007.

The Company identifies a loan as impaired when it is probable that interest and principal will not be collected according to the contractual term of the loan agreement. The total of impaired loans was $28.6 million and $13.5 million at March 31, 2007 and December 31, 2006, respectively. The $15.1 million increase in impaired loans was the result of the addition of two construction loans and two construction mezzanine non-accruing loans mentioned above totaling $15.5 million, partially offset by principal payments on other impaired loans. The income recognized on impaired loans was $178,000 during the first quarter of 2007. The Company’s policy for interest income recognition on impaired loans is to recognize income on currently performing restructured loans under the accrual method. The company recognizes income on non-accrual loans under the accrual basis when the principal payments on the loans become current and the collateral on the loan is sufficient to cover the outstanding obligation to the Company. If these factors do not exist, the Company does not recognize income. The average balance of impaired loans was $28.6 million during the first quarter of 2007 and the allowance for possible loan loss reserved specifically for impaired loans was $698,000 at March 31, 2007.

As part of a review of the reported impaired loans at December 31, 2006, the Company discovered $1.1 million of loans were included in the reported impaired loans in error. The adjusted impaired loans at December 31, 2006 were $13.5 million. Also as part of the review, the Company discovered $180,000 of loans should have been included in non-accrual loans. The adjusted non-accrual loans at December 31, 2006 were $6.7 million.

Allowance for Loan Losses

The Company considers that the determination of the allowance for loan losses involves a higher degree of judgment and complexity than its other significant accounting policies. Management determines the allowance for loan losses with the objective of maintaining a reserve level sufficient to absorb estimated probable credit losses. Management has determined the Company’s balance in the allowance for loan losses based on management’s detailed analysis and review of loan portfolio. Management considers all known relevant internal and external factors that may affect loan collectability. The periodic analysis and review includes an evaluation of the loan portfolio in relation to historical loss experience, the size and composition of the portfolio, current economic events and conditions, and other pertinent factors, including Management’s assumptions as to future delinquencies, recoveries and losses. Management’s evaluation is inherently subjective and all of these factors may be susceptible to significant change. To the extent actual outcomes differ from management’s assessments, the Company may be required to make additional provisions for loan losses that could adversely impact earnings in future periods.

The allowance for loan losses increased $193,000 to $11.6 million at March 31, 2007 from $11.5 million at December 31, 2006. The $193,000 increase was attributed to recording a provision of $212,000 offset by net charge offs of $19,000. The amount of the allowance for loan losses represents 1.88% of total loans at March 31, 2007 versus 1.93% at December 31, 2006. During the first quarter of 2007, the Company reduced the specific reserve allocation for an impaired loan by $1.0 million. It was determined the principal and interest for this loan would be collected in full, as a result of a planned settlement during April of 2007. The customer was making regular interest payments on this loan. As described above, there were four loans which contributed to the $15.1 million increase in non-accruing loans at March 31, 2007, compared to December 31, 2006. These loans did not require specific reserve allocations. The $1.0 million reduction in a specific reserve allocation for an impaired loan and the $212,000 allowance for loan losses funded the formula allowance reflecting historical losses, as adjusted by credit category for the $26.9 million increase in loans during the first quarter of 2007.

Management believes that, based on information currently available, the allowance for loan loss is sufficient to cover losses inherent in the Company’s loan portfolio at this time. No assurances can be given that the level of allowance will be sufficient

to cover future loan losses or that future adjustments to the allowance will be sufficient to cover future loan losses or that future adjustments to the allowance will not be necessary if economic and/or other conditions differ substantially from the economic and other conditions considered by management in evaluating the adequacy of the current level of the allowance.

An analysis of the Allowance for Loan losses by loan type is set forth below:


	March 31, 2007					December 31, 2006
			Percent of					Percent of
			loans					loans
	Amount		in each			Amount		in each
	in		category to			in		category to
	thousands		total loans			thousands		total loans

Commercial and industrial loans	$	809		8.62	%	$	559		6.70	%
Construction and land development		3,238		27.19	%		4,526		29.93	%
Single family residential		1,298		7.13	%		845		6.71	%
Real estate -non residential		5,668		47.40	%		5,165		48.14	%
Real estate -multi-family		247		1.57	%		56		0.99	%
Tax certificates		—		5.44	%		—		5.18	%
Lease financing		374		2.42	%		293		2.17	%
Other loans		14		0.23	%		11		0.18	%

Total	$	11,648		100.00	%	$	11,455		100.00	%

Investment Securities

Total investment securities decreased $3.0 million to $554.5 million at March 31, 2007, from $557.5 million at December 31, 2006. This decrease is primarily due to maturities and calls of investments along with principal repayments from mortgage backed securities during the first three months of 2007 that were not replaced due to the funds being utilized to fund loan growth.

Cash and Cash Equivalents

Total cash and cash equivalents decreased $39.7 million from the $82.4 million level at December 31, 2006 to $42.7 million at March 31, 2007 due to a reduction in interest bearing deposits. This decrease was the result of the planned decline in Federal Home Loan Bank advances.

Investment in Real Estate Joint Ventures

Deposits

Total deposits, the primary source of funds, increased $35.5 million to $895.0 million at March 31, 2007, from $859.5 million at December 31, 2006. This growth was primarily related the planned increase in time deposits through attractive promotions. Time deposits under $100,000 grew $33.0 million, time deposits over $100,000 increased $19.3 million and non-interest bearing demand deposits grew $8.5 million. Savings deposits grew $300,000 during the first quarter of 2007. Partially offsetting these increases was a decrease to NOW and money market accounts of $25.6 million.

The following table represents ending deposit balances by type.


(in thousands)	March 31, 2007		Dec. 31, 2006
Demand (non-interest bearing)	$	69,567	$	61,002
NOW and Money Markets		250,604		276,190
Savings		17,501		17,185
Time deposits (over $100)		304,754		285,485
Time deposits (under $100)		252,573		219,595

Total deposits	$	894,999	$	859,457

Borrowings

Total borrowings decreased $53.1 million to $193.0 million at March 31, 2007, from $246.1 million at December 31, 2006. This reduction is attributed to a $53.0 million decrease in overnight borrowings with the Federal Home Loan Bank resulting from increased deposits which have a lower cost.

Obligations Related to Equity Investments in Real Estate

As a result of the adoption of FIN 46(R) the Company consolidated into its statement of condition $25.0 million of debt at March 31, 2007 and $29.3 million of debt at December 31, 2006 related to real estate equity investment of which none is guaranteed by the Company.

Stockholders’ Equity

Consolidated stockholders’ equity decreased $355,000 to $162.9 million at March 31, 2007 from $163.3 million at December 31, 2006. This decrease is primarily the result of a decrease in retained earnings, partially offset by an increase in accumulated other comprehensive income related to a decrease in losses in the available for sale portfolio of approximately $948,000. The decrease in retained earnings is the result of the net income for the first quarter of 2007 of $2.3 million was lower than the dividend paid during the first quarter of 2007 of $3.9 million.

CAPITAL ADEQUACY

The Company and its banking subsidiaries are subject to various regulatory capital requirements administered by state and federal banking agencies. Capital adequacy guidelines involve quantitative measure of assets and liabilities calculated under regulatory accounting practices. Quantitative measures established by banking regulations, designed to ensure capital adequacy, required the maintenance of minimum amounts of capital to total “risk weighted” assets and a minimum Tier 1 leverage ratio, as defined by the banking regulations. At March 31, 2007, the Company was required to have a minimum Tier 1 and total capital ratios of 4% and 8%, respectively, and a minimum Tier 1 leverage ratio of 3% plus an additional 100 to 200 basis points.

The table below provides a comparison of The Company and Royal Bank’s risk-based capital ratios and leverage ratios for March 31, 2007 and the year ended December 31, 2006:


											To be well
											capitalized under
						For capital					prompt corrective
	Actual		Actual			adequacy purposes					action provision
March 31, 2007	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital (to risk- weighted assets)
Company (consolidated)	$	203,221		19.96	%	$	81,454		8.00	%		N/A		N/A
Royal Bank		150,281		16.03	%		74,992		8.00	%	$	93,740		10.00	%
Royal Asian		15,673		21.86	%		5,735		8.00	%		7,168		10.00	%

Tier I Capital (to risk- weighted assets)
Company (consolidated)	$	191,573		18.82	%	$	40,727		4.00	%		N/A		N/A
Royal Bank		139,413		14.87	%		37,496		4.00	%	$	56,244		6.00	%
Royal Asian		14,936		20.84	%		2,867		4.00	%		4,301		6.00	%

Tier I Capital (to average assets, leverage)
Company (consolidated)	$	191,573		14.35	%	$	40,040		3.00	%		N/A		N/A
Royal Bank		139,413		11.04	%		37,887		3.00	%	$	63,145		5.00	%
Royal Asian		14,936		14.05	%		3,189		3.00	%		5,315		5.00	%


											To be well
											capitalized under
						For capital					prompt corrective
	Actual		Actual			adequacy purposes					action provision
December 31, 2006	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital (to risk- weighted assets)
Company (consolidated)	$	203,190		20.38	%	$	79,757		8.00	%		N/A		N/A
Royal Bank		150,274		16.44	%		73,112		8.00	%	$	91,390		10.00	%
Royal Asian		15,493		25.29	%		4,901		8.00	%		6,126		10.00	%

Tier I Capital (to risk- weighted assets)
Company (consolidated)	$	191,735		19.23	%	$	39,879		4.00	%		N/A		N/A
Royal Bank		139,599		15.28	%		36,556		4.00	%	$	54,834		6.00	%
Royal Asian		14,727		24.04	%		2,450		4.00	%		3,676		6.00	%

Tier I Capital (to average assets, leverage)
Company (consolidated)	$	191,735		14.92	%	$	38,547		3.00	%		N/A		N/A
Royal Bank		139,599		11.23	%		37,286		3.00	%	$	62,143		5.00	%
Royal Asian		14,727		23.03	%		1,918		3.00	%		3,197		5.00	%

The Company’s ratios 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 banking regulations. The Company currently meets the criteria for a well-capitalized institution, and management believes that the Company will continue to meet its minimum capital requirements. At present, the Company has no commitments for significant capital expenditures.

The Company is not under any agreement with regulatory authorities nor is the Company aware of any current recommendations by the regulatory authorities that, if such recommendations were implemented, would have a material effect on liquidity, capital resources or operations of the Company.

LIQUIDITY & INTEREST RATE SENSITIVITY

Liquidity is the ability to ensure that adequate funds will be available to meet the Company’s financial commitments as they become due. In managing its liquidity position, all sources of funds are evaluated, the largest of which is deposits. Also taken into consideration are securities maturing in one year or less, other short-term investment and the repayment of loans. These sources provide alternatives to meet its short-term liquidity needs. In addition, the FHLB is available to provide short-term liquidity when other sources are unavailable. Longer liquidity needs may be met by issuing longer-term deposits and by raising additional capital. The liquidity ratio is calculated by adding total cash and investments less reserve requirements divided by deposits and short-term liabilities which is generally maintained at a level equal to or greater than 25%.

The liquidity ratio of the Company remains adequate at approximately 36% and exceeds the Company’s target ratio set forth in the Asset/Liability Policy. The Company’s level of liquidity is provided by funds invested primarily in corporate bonds, capital trust securities, US Treasuries and agencies, and to a lesser extent, federal funds sold. The overall liquidity position is monitored on a monthly basis.

In managing its interest rate sensitivity positions, the Company seeks to develop and implement strategies to control exposure of net interest income to risks associated with interest rate movements Interest rate sensitivity is a function of the repricing characteristics of the Company’s assets and liabilities. These include the volume of assets and liabilities repricing, the timing of the repricing, and the interest rate sensitivity gaps is a continual challenge in a changing rate environment. The following table shows separately the interest sensitivity of each category of interest earning assets and interest bearing liabilities as of March 31, 2007:

Interest Rate Sensitivity


	Days						1 to 5		Over 5			Non-rate
(in millions)	0 - 90			91 - 365			Years		Years			Sensitive			Total

Assets
Interest-bearing deposits in banks	$	22.4		$	—		$	—	$	—		$	16.7		$	39.1
Federal funds sold		3.6			—			—		—			—			3.6
Investment securities:
Available for sale		41.6			53.7			122.7		76.8			2.3			297.1
Held to maturity		60.0			105.1			92.3		—			—			257.4

Total investment securities		101.6			158.8			215.0		76.8			2.3			554.5
Loans:
Fixed rate		24.1			42.2			156.9		40.6			—			263.8
Variable rate		304.3			50.6			1.8		0.1			(13.1	)		343.7

Total loans		328.4			92.8			158.7		40.7			(13.1	)		607.5
Other assets		8.7			23.1			—		—			99.5			131.3

Total Assets	$	464.7		$	274.7		$	373.7	$	117.5		$	105.4		$	1,336.0


Liabilities & Capital
Deposits:
Non interest bearing deposits	$	—		$	—		$	—	$	—		$	69.6		$	69.6
Interest bearing deposits		31.2			93.6			143.3		—			—			268.1
Certificate of deposits		71.4			261.8			221.2		2.9			—			557.3

Total deposits		102.6			355.4			364.5		2.9			69.6			895.0
Borrowings (1)		48.9			50.0			—		119.9			25.0			243.8
Other liabilities		0.1			—			—		—			34.2			34.3
Capital		—			—			—		—			162.9			162.9

Total liabilities & capital	$	151.6		$	405.4		$	364.5	$	122.8		$	291.7		$	1,336.0


Net interest rate GAP	$	313.1		$	(130.7	)	$	9.2	$	(5.3	)	$	(186.3	)


Cumulative interest rate GAP	$	313.1		$	182.4		$	191.6	$	186.3

GAP to total assets		23	%		-10	%

GAP to total equity		192	%		-80	%

Cumulative GAP to total assets		23	%		14	%

Cumulative GAP to total equity		192	%		112	%


(1)		The $25.0 in borrowings classified as non-rate sensitive are related to variable interest entities and are not obligations of the Company.

The Company’s exposure to interest rate risk is mitigated somewhat by a portion of the Company’s loan portfolio consisting of floating rate loans, which are tied to the prime lending rate but which have interest rate floors and no interest rate ceilings. Although the Company is originating fixed rate loans, a portion of the loan portfolio continues to be comprised of floating rate loans with interest rate floors.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The information presented in the Liquidity and Interest Rate Sensitivity section of the Management’s Discussion and Analysis of Financial Condition and Results Operations of this Report is incorporated herein by reference.

ITEM 4 – CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.

The Company maintains a set of disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities

Exchange Commission’s rules and forms. As of the end of the period covered by this report, the Company evaluated, under the supervision and with the participation of our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based on that evaluation, our CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as March 31, 2007, in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s Exchange Act filings.

There are inherent limitations to the effectiveness of any controls system. A controls system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that its objectives are met. Further, the design of a control system must reflect the fact that there are limits on resources, and the benefits of controls must be considered relative to their costs and their impact on the business model. We intend to continue to improve and refine our internal control over financial reporting.

(b) Changes in internal controls.

There has not been any change in the Company’s internal control over financial reporting during the quarter ended March 31, 2007 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

None

Item 1A. Risk Factors

There have been no material changes from risk factors as previously disclosed in our Form 10-K for the year ended December 31, 2006.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Default Upon Senior Securities

None

Item 4. Submission of Matters to Vote Security Holders

None

Item 5. Other Information

On September 8, 2006 the Company’s wholly owned subsidiary Royal Bank America formed a subsidiary called RBA ABL Group LP to originate asset based loans. The Bank owns 60% of the subsidiary.

On October 2, 2006 the Company’s wholly owned subsidiary Royal Bank America formed a subsidiary called RBA Capital LP to originate structured financing. The Bank owns 60% of the subsidiary.

On October 20, 2006 the Company changed The Transfer and Dividend and Paying Agent from Registrar and Transfer Company to StockTrans Inc. located in Ardmore, Pennsylvania.

Item 6. Exhibits

(a)

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

	3.2		Bylaws of the Company (Incorporated by reference to Exhibit 99 to the Company’s current report on Form 8-K filed with the Commission on March 13, 2001, amended April 19, 2006.

	10.1		Employment Agreement dated September 11, 2006 by an among Royal Bancshares of Pennsylvania, Inc. (“Corporation”), Royal Bank America (“Bank”) and Joseph P. Campbell, President and Chief Executive Officer of the Corporation and the Bank.

	10.2		Employment Agreement dated September 22, 2006 by an among Royal Bancshares of Pennsylvania, Inc. (“Corporation”), Royal Bank America (“Bank”) and James J. McSwiggan, Jr, Chief Operating Officer of the Corporation and the Bank.

	10.3		Employment Agreement dated February 22, 2007 by an among Royal Bancshares of Pennsylvania, Inc. (“Corporation”), Royal Bank America (“Bank”) and Murray Stempel, III, Executive Vice President and Chief Lending Officer of the Corporation and the Bank.

	10.4		Employment Agreement dated February 23, 2007 by an among Royal Bancshares of Pennsylvania, Inc. (“Corporation”), Royal Bank America (“Bank”) and John Decker, Executive Vice President Mezzanine/Equity Lending of the Corporation and the Bank.

	10.5		Employment Agreement dated February 23, 2007 by an among Royal Bancshares of Pennsylvania, Inc. (“Corporation”), Royal Bank America (“Bank”) and Robert R. Tabas, Executive Vice President the Corporation and the Bank.

	10.6		Employment Agreement dated February 22, 2007 by an among Royal Bancshares of Pennsylvania, Inc. (“Corporation”), Royal Asian Bank (“Bank”) and Edward Shin, President of Royal Asian Bank.

	31.1		Section 302 Certification Pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 signed by Joseph P. Campbell, Chief Executive Officer of Royal Bancshares of Pennsylvania on March 17, 2008.

	31.2		Section 302 Certification Pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 signed by James J. McSwiggan, Chief Financial Officer of Royal Bancshares of Pennsylvania on March 17, 2008.

	32.1		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Joseph P. Campbell, Chief Executive Officer of Royal Bancshares of Pennsylvania on March 17, 2008.

32.2

Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by James J. McSwiggan, Chief Financial Officer of Royal Bancshares of Pennsylvania on March 17, 2008.

SIGNATURES

Pursuant to the requirements 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. (Registrant)

Dated: March 17, 2008	/s/ James McSwiggan
	James McSwiggan
	Principal Financial Officer

Royal Bancshares of Pennsylvania (RBPAA) Inactive 10-Q/A2007 Q1 Quarterly report (amended)

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