Royal Bancshares of Pennsylvania (RBPAA) 10-Q/A 2007 Q2 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:June 30, 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	(IRS Employer
incorporated or organization)	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 July 31, 2007
$2.00 par value	11,000,067
Class B Common Stock	Outstanding at July 31, 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 June 30, 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 and six months ended June 30, 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 June 30, 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.

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

	June 30, 2007			December 31, 2006
Assets
Cash and due from banks	$	13,844		$	13,426
Interest bearing deposits		67,130			66,810
Federal funds sold		1,000			2,200
Total cash and cash equivalents		81,974			82,436
Investment securities held to maturity (fair value of $197,621 at June 30, 2007 and $254,249 at December 31, 2006		197,418			255,429
Investment securities available for sale (“AFS”) at fair value		316,224			302,036
FHLB Stock, at cost		8,718			11,276
Total investments securities and FHLB stock		522,360			568,741
Loans		618,725			592,214
Less allowance for loan losses		11,739			11,455
Net Loans		606,986			580,759
Premises and equipment, net		7,709			7,766
Accrued interest receivable		14,968			16,494
Real estate owned via equity investments		35,542			42,514
Investment in real estate joint ventures		10,889			10,744
Bank owned life insurance		23,354			22,906
Other assets		24,376			23,951
Total Assets	$	1,328,158		$	1,356,311
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits
Non-interest bearing	$	71,482		$	61,002
Interest bearing		820,133			798,455
Total deposits		891,615			859,457
Accrued interest payable		14,714			10,654
Other liabilities		14,386			18,593
Borrowings		192,996			246,087
Obligations related to equity investments in real estate		22,809			29,342
Subordinated debentures		25,774			25,774
Total liabilities		1,162,294			1,189,907
Minority interests		3,767			3,150
Stockholders’ equity
Common stock
Class A, par value $2 per share, authorized 18,000,000 shares; issued, 11,305,372 at June 30, 2007 and 11,287,462 at December 31, 2006		22,611			22,575
Class B, par value $0.10 per share; authorized, 3,000,000 shares; issued, 2,108,827 at June 30, 2007 and 2,108,827 at December 31, 2006		211			211
Additional paid in capital		121,908			121,542
Retained earnings		21,969			23,464
Accumulated other comprehensive loss		(790	)		(2,273	)
		165,909			165,519
Treasury stock — at cost, shares of Class A, 288,588 at June 30, 2007 and 215,388 at December 31, 2006		(3,812	)		(2,265	)
Total stockholders’ equity		162,097			163,254
Total liabilities and stockholders’ equity	$	1,328,158		$	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				Six Months Ended
	June 30,				June 30,
(in thousands, except per share data)
	2007		2006		2007		2006
Interest income
Loans and leases, including fees	$	14,892	$	15,494	$	26,784	$	29,590
Investment securities held to maturity		2,882		2,944		5,835		5,800
Investment securities available for sale:
Taxable interest		3,940		4,215		7,952		8,626
Tax exempt interest		19		19		37		37
Deposits in banks		824		11		1,365		23
Federal funds sold		44		5		88		25
TOTAL INTEREST INCOME		22,601		22,688		42,061		44,101
Interest expense
Deposits		9,816		6,385		18,914		11,848
Borrowings		2,615		4,355		5,291		8,358
Obligations related to real estate owned via equity investsments		151		889		335		1,501
TOTAL INTEREST EXPENSE		12,582		11,629		24,540		21,707
NET INTEREST INCOME		10,019		11,059		17,521		22,394
Provision for loan losses		159		963		371		1,299
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES		9,860		10,096		17,150		21,095
Other income
Service charges and fees		386		354		686		708
Net gains on investment securities available for sale		733		161		733		244
Income related to real estate owned via equity investments		860		1,331		2,135		2,109
Gains on sales related to real estate joint ventures		—		—		350		—
Gains on sales of other real estate		450		81		686		1,574
Gains on sales of loans and leases		22		174		189		217
Income from bank owned life insurance		233		214		448		425
Other income		30		585		40		621
TOTAL OTHER INCOME		2,714		2,900		5,267		5,898
Other expenses			��
Salaries and wages		2,695		2,541		4,875		4,986
Employee benefits		850		641		1,568		1,276
Stock Option Expense		15		178		177		357
Occupancy and equipment		449		400		896		804
Expenses related to real estate owned via equity investments		393		490		825		609
Other operating expenses		2,203		2,144		4,354		4,632
TOTAL OTHER EXPENSE		6,605		6,394		12,695		12,664
Minority interest		224		14		709		(68	)
INCOME BEFORE INCOME TAXES		5,745		6,588		9,013		14,397
Income taxes		1,787		2,002		2,728		4,465
NET INCOME	$	3,958	$	4,586	$	6,285	$	9,932
Per share data
Net income – basic	$	0.29	$	0.34	$	0.47	$	0.74
Net income – diluted	$	0.29	$	0.34	$	0.46	$	0.73
Cash dividends– Class A shares	$	0.287500	$	0.261900	$	0.575000	$	0.523800
Cash dividends– Class B shares	$	0.330625	$	0.301190	$	0.661250	$	0.602380

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
Six Months ended June 30, 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	)
Adjustment related to adoption of FASB No. 158, net of taxes		—		—		—		—		—			—			1,006			—
Net income		—		—		—		—		—			6,285			—			—		$	6,285
Cash in lieu of fractional shares		—		—		—		—		—			(14	)		—			—			—
Stock dividend adjustment		—		—		—		—		(13	)		13			—			—			—
Cash dividends on common stock (Class A $0.5750 Class B $0.66125)		—		—		—		—		—			(7,779	)		—			—			—
Purchase of treasury stock																			(1,547	)
Adjustment to net periodic pension cost		—		—		—		—		—			—			57			—			57
Stock options exercised		18		36		—		—		140
Stock option expense		—		—		—		—		177			—			—			—			—
Tax benefit stock options		—		—		—		—		62			—			—			—			—
Other comprehensive income, net of reclassifications and taxes		—		—		—		—		—			—			420			—			420
Comprehensive income																					$	7,768
Balance, March 31, 2007		11,305	$	22,611		2,108	$	211	$	121,908		$	21,969		$	(790	)	$	(3,812	)

Royal Bancshares of Pennsylvania,Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
Six Months ended June 30, 2006
(UNAUDITED)

																		Accumulated
										Un-			Additional					other
	Class A common stock				Class B common stock					Distributed			Paid in		Retained			comprehensive			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		—		—		—			—		—					9,932			—			—		$	9,932
5% Stock dividend		527		1,054		100			11		—			15,575		(16,640	)		—			—			—
Conversion of Class B common stock to Class A Common stock Class A Common stock		4		7		(3	)		—		—			—		(8	)		—			—			—
Cash in lieu of fractional shares		—		—		—					—			—		(11	)		—			—			—
Issuance of undistributed shares		—		—		20			2		(2	)		—		—			—			—			—
Cash dividends on common stock (Class A $0.52380 Class B $0.60238)		—		—		—			—		—			—		(7,037	)		—			—			—
Stock options exercised		4		8		—			—		—			51		—			—			—			—
Other comprehensive loss, net of reclassifications and taxes		—		—		—			—		—			—		—			(2,532	)		—			(2,532	)
Comprehensive income																								$	7,400
Balance, June 30, 2006		11,235	$	22,469		2,110		$	212	$	—		$	119,911	$	19,063		$	(3,472	)	$	(2,265	)

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

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended June 30,
(in thousands)

	2007			2006
Cash flows from operating activities
Net income	$	6,285		$	9,932
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		572			749
Stock compensation expense		177			357
Provision for loan losses		371			1,299
Net accretion of discounts and premiums on loans, mortage-backed securities and investments		(1,190	)		6,359
Benefit for deferred income taxes		(106	)		(3,451	)
Gains on sales of other real estate		(686	)		(1,574	)
Gains on sales of real estates joint ventures		(350	)		—
Gains on sales of loans		(189	)		(217	)
Net gains on sales of investment securities		(733	)		(244	)
Gains form sale of premise of real estate owned via equity investment		(1,339	)		—
Income from equity investments		(86	)		—
Income from bank owned life insurance		(448	)		—
Changes in assets and liabilities:
Decrease (increase) in accrued interest receivable		1,526			(668	)
Decrease in other assets		126			1,788
Increase in accrued interest payable		4,060			973
Increase in minority interest		617			—
Decrease in other liabilities		(2,496	)		(1,203	)
Net cash provided by operating activities		6,111			14,100
Cash flows from investing activities
Proceeds from calls/maturities of HTM investment securities		60,011			—
Proceeds from calls/maturities of AFS investment securities		37,577			25,552
Proceeds from sales of AFS investment securities		1,050			4,230
Purchase of AFS investment securities		(51,652	)		(18,375	)
Purchase of HTM investment securities		(2,000	)		—
Redemption of FHLB Stock		2,558			658
Net increase in loans		(25,558	)		(87,885	)
Purchase of premises and equipment		(405	)		(299	)
Net investment in real estate		205			—
Proceeds from sale of premises and equipment relateing to real estated owned via equity investment		11,510			—
Distributions from equity investments		86			—
Net (increase)decrease in premises and equipment relateing to real estate owned via equity investment		(3,308	)		3,586
Net cash provided by (used in) investing activities		30,074			(72,533	)
Cash flows from financing activities:
Decrease in non-interset bearing and interest bearing demand deposits and savings accounts		(16,516	)		(15,172	)
Increase in certificates of deposit		48,674			76,208
Mortgage payments		(79	)		(37	)
Repayments from short term borrowings		(53,000	)		—
Repayments from long term borrowings		(91	)		(1,500	)
Repayment of mortgage debt related to real estate owned via equity investment		(6,533	)		(1,703	)
Income tax benefit on stock options		62			—
Cash dividends		(7,779	)		(7,037	)
Cash in lieu of fractional shares		(14	)		(11	)
Purchase of treasury stock		(1,547	)		—
Issuance of common stock under stock option plans		176			59
Net cash (used in) provided by financing activities		(36,647	)		50,807
Net decrease in cash and cash equivalents		(462	)		(7,626	)
Cash and cash equivalents at beginning of period		82,436			30,895
Cash and cash equivalents at end of period	$	81,974		$	23,269
Supplemental Disclosure
Taxes paid	$	2,736		$	1,500
Interest paid	$	20,145		$	20,734

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 and six-month periods ended June 30, 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 June 30, 2007 is a $1.6 million reduction to net income related to the following accounting errors: a $1.1 million 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 $1.6 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. The first quarter of 2007 adjustment includes the $1.0 million related to 2006 and prior years. Reported net income for the second quarter of 2007 of $4.3 million has been reduced by $300,000 for a restated second quarter 2007 net income of $4.0 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, which includes Crusader Servicing Corporation and Royal Tax Lien Services, LLC 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 pay off 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 June 30, 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. The Company has an equity investment in an apartment complex that is being converted into condominiums.

The Company’s investments in VIE’s is further discussed in Note 10.

The following table presents selected financial information for reportable business segments for the three month periods ended June 30, 2007 and 2006.

	Three months ended June 30, 2007
	Community		Tax Lien		Equity
(in thousands)	Banking		Operation		Investments			Consolidated
Total assets	$	1,231,708	$	57,048	$	39,402		$	1,328,158
Total deposits		891,615		—		—			891,615
Interest income	$	21,375	$	1,226	$	—		$	22,601
Interest expense		11,528		902		152			12,582
Net interest income (loss)		9,847		324		(152	)		10,019
Provision for loan losses		159		—		—			159
Total non-interest income		1,463		431		820			2,714
Total non-interest expense		6,196		17		392			6,605
Minority interest		65		43		116			224
Income tax expense		1,244		187		356			1,787
Net income (loss)	$	3,646	$	508	$	(196	)	$	3,958

	Three months ended June 30, 2006
	Community			Tax Lien		Equity
(in thousands)	Banking			Operation		Investments			Consolidated
Total assets	$	1,266,871		$	44,886	$	47,452		$	1,359,209
Total deposits		758,445			—		—			758,445
Interest income	$	21,601		$	1,087	$	—		$	22,688
Interest expense		9,907			832		890			11,629
Net interest income		11,694			255		(890	)		11,059
Provision for loan losses		962			1		—			963
Total non-interest income		1,356			213		1,331			2,900
Total non-interest expense		5,714			247		433			6,394
Minority interest		(29	)		15		28			14
Income tax expense		1,970			29		3			2,002
Net income (loss)	$	4,433		$	176	$	(23	)	$	4,586

     Interest paid to the Community Banking segment by the Tax Lien Operation was approximately $902,000 and $832,000 for the three-month periods ended June 30, 2007 and 2006.

     The following table presents selected financial information for reportable business segments for the six month periods ended June 30, 2007 and 2006.

	Six months ended June 30, 2007
	Community		Tax Lien		Equity
(in thousands)	Banking		Operation		Investments			Consolidated
Total assets	$	1,231,708	$	57,048	$	39,402		$	1,328,158
Total deposits		891,615		—		—			891,615
Interest income	$	39,537	$	2,524	$	—		$	42,061
Interest expense		22,403		1,802		335			24,540
Net interest income		17,134		722		(335	)		17,521
Provision for loan losses		371		—		—			371
Total non-interest income		2,724		645		1,898			5,267
Total non-interest expense		11,347		523		825			12,695
Minority interest		40		68		601			709
Income tax expense		1,505		224		999			2,728
Net income (loss)	$	6,595	$	552	$	(862	)	$	6,285

	Six months ended June 30, 2006
	Community			Tax Lien		Equity
(in thousands)	Banking			Operation		Investments			Consolidated
Total assets	$	1,266,871		$	44,886	$	47,452		$	1,359,209
Total deposits		758,445			—		—			758,445
Interest income	$	41,796		$	2,305	$	—		$	44,101
Interest expense		18,537			1,670		1,501			21,708
Net interest income		23,259			635		(1,501	)		22,393
Provision for loan losses		1,295			3		—			1,298
Total non-interest income		2,994			795		2,109			5,898
Total non-interest expense		11,233			722		709			12,664
Minority interest		(75	)		57		(50	)		(68	)
Income tax expense		4,376			124		(35	)		4,465
Net income (loss)	$	9,424		$	524	$	(16	)	$	9,932

     Interest paid to the Community Banking segment by the Tax Lien Operation was approximately $1,802,000 and $1,670,000 for the six-month periods ended June 30, 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 the Company 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 the Company 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 June 30, 2007
	Income		Average shares		Per share
(dollars in thousands, except for per share data)	(numerator)		(denominator)		Amount
Basic EPS
Income available to common shareholders	$	3,958		13,495	$	0.29
Effect of dilutive securities:
Stock options		—		67		—
Diluted EPS
Income available to common shareholders plus assumed exercise of options	$	3,958		13,562	$	0.29

	Three months ended June 30, 2006
	Income		Average shares		Per share
(dollars in thousands, except for per share data)	(numerator)		(denominator)		Amount
Basic EPS
Income available to common shareholders	$	4,586		13,441	$	0.34
Effect of dilutive securities:
Stock options		—		107		—
Diluted EPS
Income available to common shareholders plus assumed exercise of options	$	4,586		13,548	$	0.34

	Six months ended June 30, 2007
	Income		Average shares		Per share
(dollars in thousands, except for per share data)	(numerator)		(denominator)		Amount
Basic EPS
Income available to common shareholders	$	6,285		13,497	$	0.47
Effect of dilutive securities:
Stock options		—		80		(0.01	)
Diluted EPS
Income available to common shareholders plus assumed exercise of options	$	6,285		13,577	$	0.46

	Six months ended June 30, 2006
	Income		Average shares		Per share
(dollars in thousands, except for per share data)	(numerator)		(denominator)		Amount
Basic EPS
Income available to common shareholders	$	9,932		13,439	$	0.74
Effect of dilutive securities:
Stock options		—		111		(0.01	)
Diluted EPS
Income available to common shareholders plus assumed exercise of options	$	9,932		13,550	$	0.73

Note: The stock dividend declared on December 20, 2006 and paid 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.

	Before		Tax		Net of
	Tax		(expense)		Tax
(in thousands)	Amount		Benefit		Amount
June 30, 2007
Unrealized gains on securities:
Unrealized holding gains arising during period	$	1,379	$	483	$	896
Less reclassification adjustment for gains realized in net income		733		257		476
Unrealized gains on investment securities	$	646	$	226	$	420
Adjustment to net periodic pension cost		87		30		57
Other comprehensive income	$	733	$	256	$	477

	Before			Tax			Net of
	Tax			(expense)			Tax
(in thousands)	Amount			Benefit			Amount
June 30, 2006
Unrealized gains on securities:
Unrealized holding losses arising during period	$	(4,140	)	$	(1,449	)	$	(2,691	)
Less reclassification adjustment for gains realized in net income		244			85			159
Other comprehensive income	$	(3,896	)	$	(1,364	)	$	(2,532	)

The accumulated other comprehensive income unrecognized pension obligation was reduced from $2.5 million to $1.4 million during the second quarter of 2007, to reflect the Company’s projected benefit obligation.

5. Investment Securities:

The carrying value and approximate market value of investment securities at June 30, 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	$	118	$	—	$	—		$	118	$	118
US Agencies		135,000		—		(1,802	)		133,198		135,000
Other Securities		62,300		2,005		—			64,305		62,300
Total Held to Maturity	$	197,418	$	2,005	$	(1,802	)	$	197,621	$	197,418
Available for sale:
Mortgage Backed	$	34,662	$	43	$	(1,010	)	$	33,695	$	33,695
CMO’s		33,234		140		(458	)		32,916		32,916
US Agencies		124,981		—		(3,576	)		121,405		121,405
Other securities		122,343		6,213		(348	)		128,208		128,208
Total Available for Sale	$	315,220	$	6,396	$	(5,392	)	$	316,224	$	316,224

6.	Allowance for Loan Losses:
	Changes in the allowance for loan losses were as follows:

	Three months ended June 30,						Six months ended June 30,
(in thousands)	2007			2006			2007			2006
Balance at beginning period	$	11,648		$	10,550		$	11,455		$	10,276
Charge-offs
Single family residential		(50	)		(50	)		(51	)		(173	)
Non-residential		—			—			—			(2	)
Tax certificates		—			(1	)		—			(1	)
Commercial and Industrial		(44	)		—			(69	)		—
Total charge-offs		(94	)		(51	)		(120	)		(176	)
Recoveries
Single family residential		19			2			23			57
Non-residential		1			1			4			4
Commercial and Industrial		6			1			6			1
Other loans		—			—			—			5
Total recoveries		26			4			33			67
Net Loan (charge offs) recoveries		(68	)		(47	)		(87	)		(109	)
Provision for loan losses		159			963			371			1,299
Balance at the end of period	$	11,739		$	11,466		$	11,739		$	11,466

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 and six-month periods ended June 30, 2007 and 2006 included the following components:

	Three months ended				Six months ended
	June 30,				June 30,
(in thousands)	2007		2006		2007		2006
Service cost	$	154	$	70	$	257	$	140
Interest cost		148		85		246		170
Amortization of prior service cost		30		23		47		47
Amortization of actuarial loss		23		—		39		—
Net periodic benefit cost	$	355	$	178	$	589	$	357

The total projected benefit obligation under the plan including adjustments is estimated to be $9.0 million at June 30, 2007. This projected benefit 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 ability to issue new grants under this plan has expired. See the discussion below concerning the 2007 Long- Term Incentive Plan.

The following table presents the activity related to the Director Plan for the six months ended June 30, 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		(2,258	)		9.13
Forfeited		—			—
Options outstanding at June 30, 2007		100,294		$	18.62		5.8	$	109,437
Options exercisable at June 30, 2007		100,294		$	18.62		5.8	$	109,437

As of June 30, 2007, there were no non-vested shares under the Director’s Plan.

Employee Stock Option Plan and Appreciation Right Plan

The Company has adopted a Stock Option and Appreciation Right Plan (the “Employee Plan”). The Employee 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). 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 ability to issue new grants under the plan has expired. See the discussion below concerning the 2007 Long-Term Incentive Plan.

The following table presents the activity related to the Employee Plan for the three six ended June 30, 2007.

				Weighted		Weighted
				Average		Average		Average
				Exercise		Remaining		Intrinsic
	Options			Price		Term (yrs)		Value
Options outstanding at December 31, 2006		853,804		$	19.47
Granted		—			—
Exercised		(14,334	)		9.21
Forfeited		—			—
	-
Options outstanding at June 30, 2007		839,470		$	19.65		6.3	$	54,461
Options exercisable at June 30, 2007		519,080		$	17.72		5.7	$	1,032,969

The following table provides detail for non-vested shares under the Employee Plan at June 30, 2007.

				Weighted
				Average
				Exercise
	Options			Price
Non-vested options – December 31, 2006		462,985		$	21.35
Granted		—			—
Vested		(142,595	)		20.40
Forfeited/expired		—			—
Non-vested options — June 30, 2007		320,390		$	21.21

As of June 30, 2007, there was approximately $1.5 million of total unrecognized compensation cost related to non-vested options under the Director Plan and the Employee Plan.

The 2007 Long-Term Incentive Plan was approved at the May 16, 2007 Annual Meeting. All employees and non-employee directors of the Company and its designated subsidiaries are eligible participants. The plan includes 1,000,000 shares of Class A common stock, subject to customary anti-dilution adjustments, or approximately 9.0% of total outstanding shares of the Class A common stock. As of June 30, 2007, no shares from this plan have been granted.

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 June 30, 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:

	June 30,			Dec. 31,
(in thousands)	2007			2006
Notional Amount	$	60,539		$	60,588
Weighted average pay rate		5.57	%		5.52	%
Weighted average receive rate		4.76	%		4.58	%
Weighted average maturity (years)		4.1			4.6
Fair value relating to interest rate swaps	$	(849	)	$	(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 June 30, 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 holding 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 June 30, 2007, the Partnership also had a $22.8 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 distribution, if any. The Company utilizes the period of December 2006 to May 2007 in consolidating the financial statements of Royal Scully.

At June 30, 2007, Royal Scully had total assets of $39.4 million of which $35.5 million is real estate as reflected on the consolidated balanced sheet and total borrowings of $32.0 million, of which $9.2 million relates to notes discussed above. None of the third party borrowings are guaranteed by the Company. The Company’s 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 Company’s $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 the Company. The Trusts hold, as their sole asset, subordinated debentures issued by the Company in 2006.

The Company does not consolidate the Trusts as FIN 46(R) precludes consideration of the call option embedded in the preferred stock when determining if the Company 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 common stock investments is included in other income. 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 June 30, 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 June 30, 2007 the investment in the construction of an office and residential building was $5.0 million. The balance of the investment in the construction of a 55 unit condominium building was $5.9 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):

	June 30, 2007		Dec. 31, 2006
Financial instruments whose contract amounts represent credit risk:
Open-end lines of credit	$	104,171	$	103,169
Commitment to extend credit		17,232		28,543
Standby letters of credit and financial guarantees written		8,465		4,862
Financial instruments whose notional amount exceed the amount of credit risk:
Interest rate swap agreements		60,496		60,588

================================================================================

15.Reclassifications and Restatement

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 June 30, 2007. The following information describes the changes made to the Company’s financial statements:

Royal Bancshares of Pennsyvania Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)

	As		As		As		As
	Reported		Restated		Reported		Restated
	In June 30		For June 30		In June 30		For June 30
	2007		2007		2007		2007
	Form 10-Q		Form 10-Q		Form 10-Q		Form 10-Q
	June 30, 2007		June 30, 2007		December 31, 2006		December 31, 2006
Assets
Loans	$	629,166	$	618,725	$	602,958	$	592,214
Net Loans		617,427		606,986		591,503		580,759
Accrued interest receivable		16,972		14,968		16,494		16,494
Investment in real estate joint ventures		—		10,889		—		10,744
Total Assets		1,330,980		1,328,158		1,356,311		1,356,311
Liabilities
Other liabilities		15,909		14,386		18,593		18,593
Total liabilities		1,163,817		1,162,294		1,189,907		1,189,907
Minority interests		3,442		3,767		3,150		3,150
Stockholders’ equity
Retained earnings		23,593		21,969		23,464		23,464
Total stockholders’ equity		163,721		162,097		163,254		163,254
Total liabilities and stockholders’ equity	$	1,330,980	$	1,328,158	$	1,356,311	$	1,356,311

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

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	As		As		As		As
	Reported		Restated		Reported		Restated
	In June 30		For June 30		In June 30		For June 30
	2007		2007		2007		2007
(in thousands, except per share data)	Form 10-Q		Form 10-Q		Form 10-Q		Form 10-Q
Interest income
Loans and leases, including fees	$	15,359	$	14,892	$	29,756	$	26,784
TOTAL INTEREST INCOME		23,068		22,601		45,033		42,061
Interest expense
Obligations related to real estate owned via equity investsments		264		151		519		335
TOTAL INTEREST EXPENSE		12,695		12,582		24,724		24,540
NET INTEREST INCOME		10,373		10,019		20,309		17,521
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES		10,214		9,860		19,938		17,150
Other income
Revenue related to real estate owned via equity investments		1,052		860		2,360		2,135
Gains on sales related to real estate joint ventures		—		—		—		350
Other income		29		30		126		40
TOTAL OTHER INCOME		2,906		2,714		5,229		5,267
Other expenses
Salaries and wages		2,695		2,695		5,371		4,875
Expenses related to real estate owned via equity investments		556		393		1,379		825
Other operating expenses		2,122		2,203		3,882		4,354
TOTAL OTHER EXPENSE		6,687		6,605		13,273		12,695
Minority interest		189		224		385		709
INCOME BEFORE INCOME TAXES		6,244		5,745		11,509		9,013
Income taxes		1,961		1,787		3,601		2,728
NET INCOME	$	4,283	$	3,958	$	7,908	$	6,285
Per share data
Net income – basic	$	0.32	$	0.29	$	0.59	$	0.47
Net income – diluted	$	0.32	$	0.29	$	0.58	$	0.46

Royal Bancshares of Pennsylvania,Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
Six Months ended June 30, 2007
(UNAUDITED)

	Six Months Ended
	June 30,
	(in thousands)
	As		As
	Reported		Restated
	In June 30		For June 30
	2007		2007
	Form 10-Q		Form 10-Q
Retained Earnings	$	23,593	$	21,969
Net Income	$	7,908	$	6,285

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended June 30,
(in thousands)

	As			As
	Reported			Restated
	In June 30			For June 30
	2007			2007
	Form 10-Q			Form 10-Q
	June 30, 2007			June 30, 2007
Cash flows from operating activities
Net income	$	7,908		$	6,285
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		—			(1,339	)
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable		(478	)		1,526
Decrease in other assets		4,171			126
Increase in minority interest		—			617
Decrease in other liabilities		(720	)		(2,496	)
Net cash provided by operating activities		12,836			6,111
Cash flows from investing activities
Net increase in loans		(25,255	)		(25,558	)
Purchase of premises and equipment		(405	)		(405	)
Net investment in real estate		—			205
Proceeds from sale of premises and equipment of real estate owned via equity investment		1,339			11,510
Net increase in premises and equipment relateing to real estate owned via equity invest.		—			(3,308	)
Net cash provided (used) in investing activities		23,308			30,074
Cash flows from financing activities:
Mortgage payments		(39	)		(79	)
Net cash used by financing activities		(36,606	)		(36,647	)
Supplemental Disclosure
Interest paid	$	20,665		$	20,145

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 does not expect it to have a material impact on the Company’s consolidated financial statements.

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.

In June 2007, the AICPA issued Statement of Position (“SOP”) No. 07-1, “Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies” (“SOP 07-1”). SOP 07-1 addresses when the accounting principles of the AICPA Audit and Accounting GuideInvestment Companiesmust be applied by an entity and whether those accounting principles must be retained by a parent company in consolidation or by an investor in the application of the equity method of accounting. The SOP is effective for fiscal years beginning on or after December 15, 2007, with earlier application encouraged. We are evaluating the effect of adopting SOP 07-1 on our Consolidated Financial Statements.

In April 2007, the FASB directed the FASB Staff to issue FSP No. FIN 39-1, “Amendment of FASB Interpretation No. 39” (“FSP FIN 39-1”). FSP FIN 39-1 modifies FIN No. 39, “Offsetting of Amounts Related to Certain Contracts,” and permits companies to offset cash collateral receivables or payables with net derivative positions under certain circumstances. FSP FIN 39-1 is effective for fiscal years beginning after November 15, 2007, with early adoption permitted. We are evaluating the effect of adopting FSP FIN 39-1 on our Consolidated Financial Statements.

In May 2007, the FASB issued FASB Staff Position (“FSP”) FIN 48-1 “Definition of Settlement in FASB Interpretation No. 48” (FSP FIN 48-1). FSP FIN 48-1 provides guidance on how to determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. FSP FIN 48-1 is effective retroactively to January 1, 2007. The implementation of this standard did not have a material impact on our consolidated financial position or results of operations.

In February 2007, the FASB issued FASB Staff Position (FSP) FAS 158-1, “Conforming Amendments to the Illustrations in FASB Statements No. 87, No. 88, and No 106 and to the Related Staff Implementation Guides.” This FSP makes conforming amendments to other FASB statements and staff implementation guides and provides technical corrections to SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” The conforming amendments in this FSP will not have a material impact on our consolidated financial statements or disclosures.

ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 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 and six-month periods ended June 30, 2007 and June 30, 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

The second quarter of 2007 net income of $4.0 million was $628,000 or 13.7% lower than the second quarter of 2006 net income of $4.6 million. The lower net income earned during the second quarter of 2007 was primarily the result of the continued pressures on funding costs and the reduction in interest income related to an increase in non-accruing loans during 2007. Non-accruing loans increased from $6.7 million at December 31, 2006 to

$29.1 million at June 30, 2007. Management is closely monitoring these loans. Basic earnings per share and diluted earnings per share were both $.29 for the second quarter of 2007. Basic earnings per share and diluted earnings per share were both $.34 for the second quarter of 2006.

Net income for the year to date period ending June 30, 2007 of $6.3 million was $3.6 million lower than the same period in 2006. The lower net income earned during the second quarter of 2007 was the result of $1.0 million reduction to net income related to accounting errors in 2006 and prior years, a decrease in interest income related to transferring loans to non-accrual status during the first six months of 2007 and the continued pressures on funding costs. The six months ended June 30, 2007 basic earnings per share and diluted earnings per share were $.47 and $.46, respectively. The six months ended June 30, 2006 basic earnings per share was $.74 and diluted earnings per share was $.73.

Interest Income

The second quarter of 2007 interest income decreased $87,000, compared to the second quarter of 2006. A $602,000 decrease in loan interest income and a $337,000 reduction in investment interest income were partially offset by a $852,000 increase in cash and cash equivalent interest income. The $602,000 lower loan interest income earned in the second quarter of 2007, was primarily due to the $728,000 reduction related to non-accruing loans, partially offset by interest income related to the $13.4 million increase in earnings assets in the second quarter of 2007 compared to the same period in 2006. During 2007, six loans in excess of $1.0 million each were added to non-accruing status.

Year to date June 30, 2007 total interest income decreased $2.0 million. Included in 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 this decrease was a $2.0 million reduction related to the non-accruing loans mentioned above. Partially offsetting these reductions was the increase in interest income related to the $32.2 million increase in average earning assets in the first six months of 2007, compared to the same period in 2006.

Interest Expense

Interest expense increased $953,000 to $12.6 million for the quarter ended June 30, 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. The increase was partially offset by a $738,000 reduction in interest expense related to an equity investment in real estate. Excluding interest expense related to the variable interest entity, interest expense grew $1.7 million or 15.7%. Average deposits grew 20.7% in the second quarter of 2007, compared to the second quarter of 2006. This increase was primarily a result of the growth average certificates of deposits through promotions featuring attractive rates. Higher rates in NOW and money market accounts also contributed to the higher interest expense in the second quarter of 2007. The increase in deposits was used to offset maturing Federal Home Loan Bank borrowings. Year to date June 30, 2007 interest expense increased $2.8 million compared to the same period in 2006. Interest expense related to an equity investment in real estate decreased $1.2 million. Excluding the interest expense related to the variable interest entity, interest expense grew $4.0 million or 19.8%. This increase was primarily due to the increase in overall funding cost and the increase in the mix of higher costing certificates of deposits during 2007.

Net Interest Margin

The second quarter 2007 net interest margin of 3.36% was lower than the second quarter 2006 net interest margin of 3.99%, though it was higher than the first quarter of 2007 net interest margin of 2.58. The year-to- date 2007 net interest margin of 2.97% was below the 4.09% experienced in the same period in 2006. The year-to-date 2007 net interest margin was impacted by the 2006 accounting errors recorded in the first quarter.

The following table represents the average daily balances of assets, liabilities and shareholders’ equity and the respective 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. The loans outstanding include non-accruing loans. The yield on earning assets and the net interest margin are presented on a fully tax-equivalent (FTE) and annualized basis. The FTE basis adjusts for the tax benefit of income on certain tax-exempt investments and loans using the federal statutory tax rate of 35% for each period presented.

	For the three months ended							For the three months ended
	June 30, 2007							June 30, 2006
	Average							Average
(in thousands)	Balance		Interest		Yield			Balance		Interest		Yield
Cash equivalents	$	65,596	$	868		5.31	%	$	1,339	$	16		4.79	%
Investments securities		537,032		6,841		5.11	%		573,973		7,177		5.02	%
Loans		612,541		14,892		9.75	%		626,463		15,495		9.92	%
Earning assets		1,215,169		22,601		7.46	%		1,201,775		22,688		7.57	%
Non earning assets		96,932							82,621
Total average assets	$	1,312,101						$	1,284,396
Deposits	$	896,814		9,816		4.39	%	$	743,310		6,385		3.45	%
Borrowings		218,843		2,615		4.79	%		363,110		4,355		4.81	%
Total interest bearing liabilities		1,115,657		12,431		4.47	%		1,106,420		10,740		3.89	%
Non-interest bearing liabilities and equity		196,444							177,976
Total average liabilities and equity	$	1,312,101						$	1,284,396
Net interest margin			$	10,170		3.36	%			$	11,948		3.99	%

	For the six months ended							For the six months ended
	June 30, 2007							June 30, 2006
	Average							Average
(in thousands)	Balance		Interest		Yield			Balance		Interest		Yield
Cash equivalents	$	54,492	$	1,453		5.38	%	$	2,029	$	49		4.87	%
Investments securities		551,794		13,824		5.05	%		580,399		14,462		5.03	%
Loans		604,796		26,784		8.93	%		596,470		29,590		10.00	%
Earning assets		1,211,082		42,061		7.00	%		1,178,898		44,101		7.54	%
Non earning assets		96,683							86,766
Total average assets	$	1,307,765						$	1,265,664
Deposits	$	892,166		18,914		4.28	%	$	724,048		11,848		3.30	%
Borrowings		222,028		5,291		4.81	%		363,385		8,358		4.64	%
Total interest bearing liabilities		1,114,194		24,205		4.38	%		1,087,433		20,206		3.75	%
Non-interest bearing liabilities and equity		193,571							178,231
Total average liabilities and equity	$	1,307,765						$	1,265,664
Net interest margin			$	17,856		2.97	%			$	23,895		4.09	%

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 and six-month periods ended June 30, 2007, as compared to the respective period in 2006, into amounts attributable to both rates and volume variances.

	For the three months ended									For the six months ended
	June 30,									June 30,
	2007 vs. 2006									2007 vs. 2006
	Increase (decrease)									Increase (decrease)
(in thousands)	Volume			Rate			Total			Volume			Rate			Total
INTEREST INCOME
Interest-bearing deposits	$	812		$	1		$	813		$	1,333		$	9		$	1,342
Federal funds sold		39			—			39			62			1			63
Investments securities
Held to maturity		(152	)		90			(62	)		(92	)		127			35
Available for sale		(496	)		221			(275	)		(642	)		(32	)		(674	)
Total Investments securities		203			312			515			661			105			766
Loans
Commercial demand loans		(196	)		(664	)		(860	)		560			(3,743	)		(3,183	)
Commercial mortgages		(25	)		(258	)		(283	)		(116	)		(146	)		(262	)
Residential and home equity		(288	)		69			(219	)		(244	)		85			(159	)
Leases receivables		353			(19	)		334			673			(31	)		642
Tax certificates		47			92			139			45			174			219
Other loans		(14	)		4			(10	)		(29	)		10			(19	)
Loan fees		297			—			297			(44	)		—			(44	)
Total loans		174			(776	)		(602	)		845			(3,651	)		(2,806	)
Total increase in interest income		377			(464	)		(87	)		1,506			(3,546	)		(2,040	)
INTEREST EXPENSE
Deposits
NOW and money market		(298	)		646			348			(489	)		1,294			805
Savings		(3	)		(1	)		(4	)		(6	)		(2	)		(8	)
Time deposits		2,457			630			3,087			4,856			1,413			6,269
Total deposits		2,156			1,275			3,431			4,361			2,705			7,066
Trust preferred		—			15			15			—			28			28
Borrowings		(1,602	)		(153	)		(1,755	)		(3,195	)		100			(3,095	)
Total increase in interest expense		554			1,137			1,691			1,166			2,833			3,999
Total increase (decrease) in net interest income	$	(177	)	$	(1,601	)	$	(1,778	)	$	340		$	(6,379	)	$	(6,039	)

Provision for Loan Losses

The provision for loan losses was $159,000 during the second quarter of 2007 and $371,000 year to date as of June 30, 2007, compared to $963,000 and $1,299,000 during the respective periods in 2006. The allowance for loan losses to total loans ratio was 1.90% at June 30, 2007, compared to from 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 principal and interest related to this loan were paid in full on April 6, 2007. The $1.0 million reduction in the specific reserve allocation for the impaired loan and the $371,000 allowance for loan losses funded the formula allowance reflecting historical losses, as adjusted by credit category for the $26.5 million increase in loans during the first quarter of 2007.

Non-interest Income

The second quarter 2007 non-interest income of $2.7 million was $186,000 lower than the second quarter of 2006. Lower income related to real estate owned via equity investments and other income were partially offset by increases in net gains on investments securities available for sale and gains on sales of other real estate. The year to date June 30, 2007 non-interest income was $631,000 lower than the $5.9 million recorded in 2006. This decrease was the result of both lower gains on sales of other real estate and other income, partially offset by higher net gains on investment securities available for sale.

Non-interest Expense

The second quarter of 2007 non-interest expense of $6.6 million increased $211,000, or 3.3% from the second quarter of 2006. These increases were associated with the opening of a new Royal Asian Bank branch in the first quarter of 2007, the addition of two specialty lending subsidiaries, Royal Bank America Asset Based Lending and RBA Capital during the second half of 2006 and higher expenses related to real estate owned via equity investments. Year to date June 30, 2007 non-interest expenses of $12.7 million was even with the same period in 2006.

Income Tax Expense

Total income tax expense for the second quarters of 2007 was $1.8 million compared to $2.0 million in the same period in 2006. The effective tax rate for the second quarter of 2007 was 31.1% compared to the 30.4% for the same period in 2006. The year to date June 30, 2007 effective tax rate of 30.3%, compared to 31.0% effective tax rate for the same period in 2006.

FINANCIAL CONDITION

Consolidated Assets

Total consolidated assets as of June 30, 2007 decreased $28.2 million from December 31, 2006. A $46.4 million decrease in investment securities and FHLB stock was partially offset by a $26.5 increase in higher yielding loans. Also contributing to this decrease was a $7.0 million reduction in real estate associated with the equity investment in real estate. The lower level of assets was related to the lower funding sources due to the planned decrease in Federal Home Loan Bank borrowings during the first half of 2007.

Loans

Total loans increased $26.5 million from the $592.2 million level at December 31, 2006 to $618.7 million at June 30, 2007. This increase is primarily due to an increase in secured other real estate loans, commercial and industrial loans and leases, which was partially offset by a decrease in construction and land development loans.

The following table represents loan balances by type:

(amounts in thousands)	June 30, 2007			Dec. 31, 2006
Commercial and industrial loans	$	63,967		$	43,019
Construction and land development		154,151			177,627
Single family residential		45,536			43,338
Other real estate secured		335,173			315,057
Leases		19,840			13,404
Other loans		1,581			1,333
Total gross loans		620,248			593,778
Deferred fees		(1,523	)		(1,564	)
Total loans	$	618,725		$	592,214

Non-performing loans

(in thousands)	30-Jun-07			Dec. 31, 2006
Non-accruing loans (1)	$	29,089		$	6,748
Other real estate owned		971			924
Total nonperforming assets	$	30,060		$	7,672
Nonperforming assets to total assets		2.26	%		0.57	%
Nonperforming loans to total loans		4.70	%		1.14	%
Allowance for loan loss to non-accruing loans		40.36	%		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 $29.1 million at June 30, 2007, as compared to $6.7 million at December 31, 2006, an increase of $22.4 million. The following is a detail listing of the significant additions to non-accruing loans during the first six months 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.

Second Quarter 2007 new non-accruing loans:

• A commercial loan in the amount of $3.1 million was added to non-accruing status in June 2007. This loan was classified as an impaired loan during the second quarter of 2007. The borrower is continuing to make payments on this loan.

• A $4.8 million construction loan for a 9 unit condominium building was added to non-accruing loans and impaired loans during the second quarter of 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 at June 30, 2007 was $28.0 million, a $14.5 million increase over the $13.5 million balance of impaired loans at December 31, 2006. The average year to date June 30, 2007 impaired loans was $23.7 million. The $14.5 million increase is a result of the addition of the 6 loans in the amount of $23.0 million mentioned above, partially offset by $8.1 million of impaired loans paid off during the second quarter of 2007. The allowance for loan losses related to impaired loans was $796,000 at June 30, 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 income recognized on impaired loans was $303,000 for the first six months of 2007.

The balance of impaired loans at December 31, 2006 was $13.5 million. The allowance for loan losses related to these impaired loans was $3.6 million. The average balance of impaired loans was $13.8 million during 2006 and the income recognized on impaired loans during 2006 was $641,000.

As part of a review of the reported impaired loans at December 31, 2006, the Company discovered $1.1 million of loans were not 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 $284,000 to $11.7 million at June 30, 2007 from $11.5 million at December 31, 2006. The $284,000 increase was attributed to recording a provision of $371,000 offset by net charge offs of $87,000. The amount of the allowance for loan losses represents 1.90% of total loans at June 30, 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. The principle and interest related to this loan were paid in full on April 6, 2007. As described above, there were six loans which contributed to the $14.5 million increase in impaired loans at June 30, 2007, compared to December 31, 2006. These loans required specific reserve allocations of $307,000. This net $693,000 reduction in a specific reserve allocation for impaired loans and the $212,000 net growth in the allowance for loan losses funded the formula allowance reflecting historical losses, as adjusted by credit category for the $26.5 million increase in loans during the first half 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. As noted in the review of the non-performing loans section of this report, the Company has experienced a significant increase in non-accruing loans during the first six months of 2007. Management is aggressively managing these loans in an effort to reduce the level of non-accrual loans. Management has allocated specific loan loss reserves to the loans when they believe the loans are not adequately collateralized. 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:

	June 30, 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
Domestic
Commercial and industrial loans	$	1,202		10.31	%	$	559		6.70	%
Construction and land development		3,662		24.85	%		4,526		29.93	%
Single family residential		1,320		7.34	%		845		6.71	%
Real estate -non residential		4,935		45.47	%		5,165		48.14	%
Real estate -multi-family		102		1.61	%		56		0.99	%
Tax certificates		—		6.97	%		—		5.18	%
Leases		503		3.20	%		293		2.17	%
Installment loans to individual		15		0.25	%		11		0.18	%
Total	$	11,739		100.00	%	$	11,455		100.00	%

Investment Securities

Total investment securities and FHLB stock decreased $46.4 million to $522.4 million at June 30, 2007, from the level 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 six months of 2007. These proceeds were primarily used to fund loan growth.

Cash and Cash Equivalents

Total cash and cash equivalents decreased $462,000 from the $82.4 million level at December 31, 2006 to $82.0 million at June 30, 2007 due to a reduction in federal funds sold.

Investment in Real Estate Joint Ventures

As discussed in Note 1, the restatement of the Company’s Form 10-Q for the quarter end June 30, 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 June 30, 2007 the investment in the construction of an office and residential building was $5.0 million. The balance of the investment in the construction of a 55 unit condominium building was $5.9 million.

Deposits

Total deposits, the primary source of funds, increased $32.2 million to $891.6 million at June 30, 2007, from the level at December 31, 2006. This growth was primarily related to the planned increase in time deposits through promotions featuring attractive rates. Time deposits under $100,000 grew $28.2 million, time deposits over $100,000 increased $20.4 million and non-interest bearing demand deposits grew $10.5 million. Partially offsetting these increases was a decrease to NOW and money market accounts of $26.2 million and a $749,000 reduction in savings accounts.

The following table represents ending deposit balances by type:

(in thousands)	June 30, 2007		Dec. 31, 2006
Demand (non-interest bearing)	$	71,482	$	61,002
NOW and Money Markets		249,944		276,190
Savings		16,436		17,185
Time deposits (over $100)		305,959		285,485
Time deposits (under $100)		247,794		219,595
Total deposits	$	891,615	$	859,457

Borrowings

Total borrowings decreased $53.1 million to $193.0 million at June 30, 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 deposit funding. The Company’s investment in VIE’s is further discussed in Note 10.

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 $22.8 million of debt at June 30, 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 $1.2 to $162.1 million at June 30, 2007 from $163.3 million at December 31, 2006. This decrease is primarily related to the $7.8 million year-to-date dividend payments exceeding the year-to-date net income of $6.3 million. A $1.5 million increase in treasury stock also contributed to the decrease in stockholders’ equity. Accumulated other comprehensive income grew $1.5 million related to an increase in gains in the available for sale portfolio of approximately $421,000 and an adjustment related to the adoption of FASB No. 158 of $1.1 million. Additional paid in capital grew $366,000 as a result of stock option activity.

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 June 30, 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 June 30, 2007 and the year ended December 31, 2006:

											To be well
											capitalized under
						For capital					prompt corrective
	Actual		Actual			adequacy purposes					action provision
June 30, 2007	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital (to risk- weighted assets)
Company (consolidated)	$	202,308		20.44	%	$	79,179		8.00	%		N/A		N/A
Royal Bank		150,494		16.42	%		73,317		8.00	%	$	91,647		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)	$	190,569		19.25	%	$	39,590		4.00	%		N/A		N/A
Royal Bank		139,492		15.22	%		36,659		4.00	%	$	54,988		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)	$	190,569		14.22	%	$	40,210		3.00	%		N/A		N/A
Royal Bank		139,492		11.06	%		37,828		3.00	%	$	63,047		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 43% 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 June 30, 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	$	67.2		$	—		$	—		$	—	$	13.8		$	81.0
Federal funds sold		1.0			—			—			—		—			1.0
Investment securities:
Available for sale		31.1			45.7			144.8			93.6		1.0			316.2
Held to maturity		30.1			100.3			67.0			—		—			197.4
Total investment securities		61.2			146.0			211.8			93.6		1.0			513.6
Loans:
Fixed rate		20.1			43.1			178.8			35.1		—			277.1
Variable rate		291.1			37.7			12.7			0.1		(11.7	)		329.9
Total loans		311.2			80.8			191.5			35.2		(11.7	)		607.0
Other assets		8.7			23.4			—			—		93.5			125.6
Total Assets	$	449.3		$	250.2		$	403.3		$	128.8	$	96.6		$	1,328.2
													`
Liabilities & Capital
Deposits:
Non interest bearing deposits	$	—		$	—		$	—		$	—	$	71.5		$	71.5
Interest bearing deposits		29.6			88.7			148.1			—		—			266.4
Certificate of deposits		56.6			286.4			207.7			3.0		—			553.7
Total deposits		86.2			375.1			355.8			3.0		71.5			891.6
Borrowings (1)		48.4			50.0			120.4			—		22.8			241.6
Other liabilities		0.1			—			—			—		32.8			32.9
Capital		—			—			—			—		162.1			162.1
Total liabilities & capital	$	134.7		$	425.1		$	476.2		$	3.0	$	289.2		$	1,328.2
Net interest rate GAP	$	314.6		$	(174.9	)	$	(72.9	)	$	125.8	$	(192.6	)
Cumulative interest rate GAP	$	314.6		$	139.7		$	66.8		$	192.6
GAP to total assets		24	%		-13	%
GAP to total equity		194	%		-108	%
Cumulative GAP to total assets		24	%		11	%
Cumulative GAP to total equity		194	%		86	%

(1) The $22.8 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 June 30, 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 June 30, 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

Stock Repurchases

     The following table provides information on repurchases by the Company of its common stock in each month of the quarter ended June 30, 2007:

					Total Number		Maximum
					of Shares		Number of
					Purchased		Shares that
					as Part of		may yet be
	Total		Average		Publicly		Purchased
	Number of		Price		Announced		Under the
	Shares		Paid per		Plans or		Plans or
Period	Repurchased		Share		Programs		Programs
April 1, 2007 through April 30, 2007		—	$	—		—	—
May 1, 2007 through May 31, 2007		17,900	$	20.46		17,900		652,100
June 1, 2007 through June 30, 2007		55,300	$	21.34		55,300		596,800
		73,200	$	21.12		73,200

1.	Transactions are reported as of settlement dates.
2.	The Company’s current stock repurchase program was approved by its Board of Directors and announced on May 16, 2007.
3.	The number of shares approved for repurchase under the Company’s current stock repurchase program is 670,000.
4.	The Company’s current stock repurchase program has no expiration date.
5.	The Company did not have a stock repurchase plan or program expire during the period covered by the table.
6.	The Company did not have a stock repurchase plan or program that is has determined to terminate prior to expiration or under which it does not intend to make further purchases.

Item 3. Default Upon Senior Securities

None

Item 4. Submission of Matters to Vote Security Holders

   On Wednesday, May 16, 2007, the Annual Meeting of Shareholders’ of the Company was convened in Philadelphia, PA at 6:30 P.M. to consider the following matters.

1. The following nominees were elected as Class II Directors of the Registrant to serve for a three year term. There was no solicitation in opposition to the nominees of the Board of Directors. The votes cast with respect to each individual nominees were as follows:

Name	For		Withhold
Anthony Micale		27,711,491		400,723
Mitchell Morgan		27,731,691		380,523
Albert Ominsky		27,727,721		384,493
Gregory Reardon		27,731,473		380,741
Robert Tabas		27,160,358		951,856

2. Approval of the 2007 Long-Term Incentive Plans. The votes cast in this matter were as follows:

For	23,724,812
Against	2,046,732
Abstain	80,952

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 and among Royal Bancshares of Pennsylvania, Inc. (“Corporation”), Royal Bank America (“Bank”) and Joseph P. Campbell, President and Chief Executive Officer of the Corporation and the Bank. (Incorporated by reference to Exhibit 10.1 to the Company’s report on Form 10-Q dated March 31, 2007, as filed on May 15, 2007.)

10.2	Employment Agreement dated September 22, 2006 by and among Royal Bancshares of Pennsylvania, Inc. (“Corporation”), Royal Bank America (“Bank”) and James J. McSwiggan, Jr, Chief Operating Officer of the Corporation and the Bank. (Incorporated by reference to Exhibit 10.2 to the Company’s report on Form 10-Q dated March 31, 2007, as filed on May 15, 2007.)
10.3	Employment Agreement dated February 22, 2007 by and 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. (Incorporated by reference to Exhibit 10.3 to the Company’s report on Form 10-Q dated March 31, 2007, as filed on May 15, 2007.)
10.4	Employment Agreement dated February 23, 2007 by and among Royal Bancshares of Pennsylvania, Inc. (“Corporation”), Royal Bank America (“Bank”) and John Decker, Executive Vice President Mezzanine/Equity Lending of the Corporation and the Bank. (Incorporated by reference to Exhibit 10.4 to the Company’s report on Form 10-Q dated March 31, 2007, as filed on May 15, 2007.)
10.5	Employment Agreement dated February 23, 2007 by and among Royal Bancshares of Pennsylvania, Inc. (“Corporation”), Royal Bank America (“Bank”) and Robert R. Tabas, Executive Vice President the Corporation and the Bank. (Incorporated by reference to Exhibit 10.5 to the Company’s report on Form 10-Q dated March 31, 2007, as filed on May 15, 2007.)
10.6	Employment Agreement dated February 22, 2007 by and among Royal Bancshares of Pennsylvania, Inc. (“Corporation”), Royal Asian Bank (“Bank”) and Edward Shin, President of Royal Asian Bank. (Incorporated by reference to Exhibit 10.6 to the Company’s report on Form 10-Q dated March 31, 2007, as filed on May 15, 2007.)
10.7	Royal Bancshares of Pennsylvania, Inc. 2007 Long-Term Incentive Plan. (Incorporated by reference to Exhibit A to the Company’s definitive Proxy Statement dated April 6, 2007.)
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, Principal 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 McSwiggan, Principal 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, Principal 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 McSwiggan, Principal 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