UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

     (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, 2010

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

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 incorporation or organization)		(IRS Employer identification No.)

732 Montgomery Avenue, Narberth, PA 19072
(Address of principal Executive Offices)

(610) 668-4700
(Registrant’s telephone number, including area code)

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

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

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding twelve months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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 definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12-b-2 of the Exchange Act.

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o 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, 2010
$2.00 par value		10,856,978
Class B Common Stock		Outstanding at July 31, 2010
$0.10 par value		2,086,689

 

 

PART I — FINANCIAL STATEMENTS

Item 1. Financial Statements

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)

		June 30,				December 31,
		2010				2009
		(In thousands, except share data)
ASSETS
Cash and due from banks		$	22,844			$	25,289
Interest bearing deposits			91,987				33,009
Total cash and cash equivalents			114,831				58,298
Investment securities available-for-sale (“AFS”) at fair value			338,819				438,719
Federal Home Loan Bank (“FHLB”) stock, at cost			10,952				10,952
Total investment securities and FHLB stock			349,771				449,671
Loans and leases held for sale			—				2,254
Loans and leases			634,960				686,864
Less allowance for loan and lease losses			22,763				30,331
Net loans and leases			612,197				656,533
Bank owned life insurance			8,450				8,263
Real estate owned via equity investment			10,676				12,492
Accrued interest receivable			15,985				14,942
Other real estate owned (“OREO”), net			30,795				30,317
Premises and equipment, net			6,040				6,306
Investment in real estate joint ventures			—				2,520
Other assets			34,733				51,130
Total assets		$	1,183,478			$	1,292,726
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits
Non-interest bearing		$	62,302			$	63,168
Interest bearing			729,525				818,587
Total deposits			791,827				881,755
Short-term borrowings			99,500				114,500
Long-term borrowings			136,339				139,675
Subordinated debentures			25,774				25,774
Obligations related to real estate owned via equity investment			727				3,652
Accrued interest payable			8,339				6,150
Other liabilities			16,967				16,906
Total liabilities			1,079,473				1,188,412
Shareholders’ equity
Royal Bancshares of Pennsylvania, Inc. equity:
Preferred stock, Series A perpetual, $1,000 liquidation value, 500,000 shares authorized,
30,407 shares issued and outstanding at June 30, 2010 and December 31, 2009			28,167				27,945
Common stock
Class A, par value $2.00 per share, authorized 18,000,000 shares; issued, 11,355,466 and 11,352,482 at June 30, 2010 and December 31, 2009, respectively			22,711				22,705
Class B, par value $0.10 per share; authorized 3,000,000 shares; issued, 2,086,689 and 2,089,284 at June 30, 2010 and December 31, 2009, respectively			209				209
Additional paid in capital			126,095				126,117
Accumulated deficit			(73,036	)			(67,197	)
Accumulated other comprehensive income (loss)			2,971				(1,652	)
Treasury stock — at cost, shares of Class A, 498,488 at June 30, 2010 and December 31, 2009			(6,971	)			(6,971	)
Total Royal Bancshares of Pennsylavania, Inc. shareholders’ equity			100,146				101,156
Noncontrolling interest			3,859				3,158
Total equity			104,005				104,314
Total liabilities and shareholders’ equity		$	1,183,478			$	1,292,726
The accompanying notes are an integral part of these consolidated financial statements.

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Statements of Operations — (unaudited)

		For the three months								For the six months
		ended June 30,								ended June 30,
(In thousands, except per share data)		2010				2009				2010				2009
Interest income
Loans and leases, including fees		$	11,331			$	11,204			$	22,450			$	22,549
Investment securities available-for-sale:											—
Taxable interest			3,804				5,308				8,273				10,270
Tax exempt interest			—				—				—				19
Deposits in banks			38				58				73				86
Total Interest Income			15,173				16,570				30,796				32,924
Interest expense
Deposits			4,472				6,632				9,479				12,884
Short-term borrowings			1,056				42				2,336				84
Long-term borrowings			1,306				2,944				2,608				5,895
Obligations related to real estate owned via equity investments			5				63				19				103
Total Interest Expense			6,839				9,681				14,442				18,966
Net Interest Income			8,334				6,889				16,354				13,958
Provision for loan and lease losses			4,290				6,956				6,193				9,753
Net Interest Income (Loss) after Provision for Loan and Lease Losses			4,044				(67	)			10,161				4,205
Other income (loss)
Service charges and fees			285				359				576				705
Income from bank owned life insurance			93				349				188				693
Income related to real estate owned via equity investments			583				681				780				867
Gains on sales of loans and leases			124				277				628				277
Net gains on sales of other real estate owned			174				74				331				37
Net gains (losses) on the sale of AFS investment securities			422				(74	)			588				(288	)
Other income			202				35				273				64
Other income,excluding other-than-temporary impairment losses			1,883				1,701				3,364				2,355
Total other-than-temporary impairment losses on investment securities			(165	)			(12,668	)			(341	)			(16,906	)
Portion of loss recognized in other comprehensive loss			—				7,563				—				7,563
Net impairment losses recognized in earnings			(165	)			(5,105	)			(341	)			(9,343	)
Total Other Income (Loss)			1,718				(3,404	)			3,023				(6,988	)
Other expenses
Employee salaries and benefits			2,793				3,063				5,754				6,179
Impairment of real estate joint ventures			1,552				—				1,552				—
Professional and legal fees			1,130				968				1,933				1,992
OREO impairment			960				—				1,762				550
Occupancy and equipment			788				857				1,587				1,729
FDIC and state assessments			765				834				1,629				1,065
OREO and loan collection expenses			670				1,200				1,358				1,482
Pennsylvania shares tax			370				318				739				639
Expenses related to real estate owned via equity investments			140				221				265				384
Directors’ fees			98				146				179				345
Stock option expense (benefit)			50				(53	)			(22	)			58
Other operating expenses			725				765				1,358				1,121
Total Other Expenses			10,041				8,319				18,094				15,544
Loss Before Taxes			(4,279	)			(11,790	)			(4,910	)			(18,327	)
Income taxes			—				—				—				—
Net Loss		$	(4,279	)		$	(11,790	)		$	(4,910	)		$	(18,327	)
Less net income attributable to noncontrolling interest		$	259			$	264			$	701			$	480
Net loss attributable to Royal Bancshares of Pennsylvania, Inc.		$	(4,538	)		$	(12,054	)		$	(5,611	)		$	(18,807	)
Less Preferred stock Series A accumulated dividend and accretion		$	491			$	484			$	981			$	699
Net loss available to common shareholders		$	(5,029	)		$	(12,538	)		$	(6,592	)		$	(19,506	)
Per common share data
Net loss — basic and diluted		$	(0.38	)		$	(0.95	)		$	(0.50	)		$	(1.47	)
The accompanying notes are an integral part of these consolidated financial statements.

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders’ Equity and Comprehensive Income
Six months ended June 30, 2010
(unaudited)

																														Accumulated
																						Additional								other												Total
		Preferred stock				Class A common stock								Class B common stock								paid in				Accumulated				comprehensive				Treasury				Noncontrolling				Shareholders’
(In thousands, except share data)		Series A				Shares				Amount				Shares				Amount				capital				deficit				income				stock				Interest				Equity
Balance January 1, 2010		$	27,945				11,352			$	22,705				2,089			$	209			$	126,117			$	(67,197	)		$	(1,652	)		$	(6,971	)		$	3,158			$	104,314
Comprehensive loss
Net loss																											(5,611	)											701				(4,910	)
Other comprehensive income, net of reclassifications and taxes																															4,623												4,623
Total comprehensive loss																																										$	(287	)
Common stock conversion from Class B to Class A							3				6				(2	)			—								(6	)															—
Accretion of discount on preferred stock			222																								(222	)															—
Stock option benefit																							(22	)																			(22	)
Balance June 30, 2010		$	28,167				11,355			$	22,711				2,087			$	209			$	126,095			$	(73,036	)		$	2,971			$	(6,971	)		$	3,859			$	104,005

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders’ Equity and Comprehensive Loss
Six months ended June 30, 2009
(unaudited)

																														Accumulated
																						Additional								other												Total
		Preferred stock				Class A common stock								Class B common stock								paid in				Accumulated				comprehensive				Treasury				Noncontrolling				Shareholders’
(In thousands, except share data)		Series A				Shares				Amount				Shares				Amount				capital				deficit				loss				stock				Interest				Equity
Balance January 1, 2009		$	—				11,345			$	22,690				2,096			$	210			$	123,425			$	(33,561	)		$	(26,106	)		$	(6,971	)		$	1,898			$	81,585
Comprehensive loss
Net loss																											(18,807	)											480				(18,327	)
Other comprehensive income, net of																																											—
reclassification and taxes																															15,460												15,460
Total comprehensive loss																																										$	(2,867	)
Issuance of Series A perpetual preferred stock (30,407 shares) and warrants to purchase common stock (1,140,307 shares)			27,582																				2,825																				30,407
Accretion of discount on preferred stock			150																								(150	)															—
Dividends paid on preferred stock																							(359	)																			(359	)
Stock option expense																							58																				58
Balance June 30, 2009		$	27,732				11,345			$	22,690				2,096			$	210			$	125,949			$	(52,518	)		$	(10,646	)		$	(6,971	)		$	2,378			$	108,824

     The accompanying notes are an integral part of these consolidated financial statements.

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (unaudited)
Six months ended June 30,

(In thousands)		2010				2009
Cash flows from operating activities:
Net loss		$	(5,611	)		$	(18,807	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			347				458
Stock compensation (benefit) expense			(22	)			58
Provision for loan and lease losses			6,193				9,753
Impairment charge for other real estate owned			1,762				—
Net amortization (accretion) of discounts and premiums on loans and investment securities			972				(117	)
Net gains on sales of other real estate			(331	)			(37	)
Proceeds from sales of loans and leases			4,145				3,065
Gains on sales of loans and leases			(628	)			(277	)
Net (gains) losses on sales of investment securities			(596	)			288
Distribution from investments in real estate			(110	)			(100	)
Gain from sale of premises of real estate owned via equity investment			(328	)			(502	)
Income from bank owned life insurance			(188	)			(693	)
Impairment of real estate joint ventures			1,552				—
Impairment of available-for-sale investment securities			341				9,343
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable			(1,043	)			50
Decrease (increase) in other assets			17,266				(8,582	)
Increase in accrued interest payable			2,189				4,353
Increase in other liabilities			1,048				2,085
Net cash provided by operating activities			26,958				338
Cash flows from investing activities:
Proceeds from call/maturities of available-for-sale (“AFS”) investment securities			58,231				89,912
Proceeds from sales of AFS investment securities			113,318				42,442
Purchase of AFS investment securities			(66,113	)			(186,002	)
Net decrease (increase) in loans			27,262				(49,904	)
Purchase of premises and equipment			(81	)			(265	)
Net proceeds from sale of premises of real estate owned via equity investments			3,498				1,918
Distribution from investments in real estate			110				100
Net decrease in real estate owned via equity investments			(3,170	)			(1,416	)
Proceeds from sales of foreclosed real estate			7,709				253
Net cash provided by (used in) investing activities			140,764				(102,962	)
Cash flows from financing activities:
(Decrease) increase in non-interest bearing and interest bearing demand deposits and savings accounts			(9,483	)			12,589
(Decrease) increase in certificates of deposit			(80,445	)			104,032
Repayments in short-term borrowings			(15,000	)			—
Repayments of long-term borrowings			(3,336	)			(3,224	)
Repayment of mortgage debt of real estate owned via equity investments			(2,925	)			(872	)
Proceeds from issuance of preferred stock			—				30,407
Cash dividends			—				(359	)
Net cash (used in) provided by financing activities			(111,189	)			142,573
Net increase in cash and cash equivalents			56,533				39,949
Cash and cash equivalents at the beginning of the period			58,298				14,259
Cash and cash equivalents at the end of the period		$	114,831			$	54,208
Supplemental Disclosure
Interest paid		$	12,253			$	14,613
Transfers to other real estate owned		$	9,618			$	17,184

The accompanying notes are an integral part of these consolidated financial statements.

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

Note 1. Summary of Significant Accounting Policies

Basis of Financial Presentation

The accompanying unaudited consolidated financial statements include the accounts of Royal Bancshares of Pennsylvania, Inc. (“Royal Bancshares” or the “Company”) and its wholly-owned subsidiaries, Royal Investments of Delaware, Inc., including Royal Investments of Delaware, Inc.’s wholly owned subsidiary, Royal Preferred, LLC, Royal Captive Insurance Company, Royal Asian Bank (“Royal Asian”) and Royal Bank America (“Royal Bank”), including Royal Bank’s subsidiaries, Royal Real Estate of Pennsylvania, Inc., Royal Investments America, LLC, RBA Property LLC, Narberth Property Acquisition LLC, Rio Marina LLC, and its three 60% ownership interests in Crusader Servicing Corporation, Royal Tax Lien Services, LLC, and Royal Bank America Leasing, LP. The two Delaware trusts, Royal Bancshares Capital Trust I and Royal Bancshares Capital Trust II are not consolidated per requirements under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, “Consolidation” (“ASC Topic 810”). These consolidated financial statements reflect the historical information of the Company. All significant intercompany transactions and balances have been eliminated.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information. Applications of the principles in the Company’s preparation of the consolidated financial statements in conformity with US GAAP require management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. These estimates and assumptions are based on information available as of the date of the consolidated financial statements; therefore, actual results could differ from those estimates. 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 consolidated 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, 2009. The results of operations for the three and six month periods ended June 30, 2010 are not necessarily indicative of the results to be expected for the full year.

Accounting Policies Recently Adopted and Pending Accounting Pronouncements

In June 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-16 “Accounting for Transfers of Financial Assets” (“ASU 2009-16”) which updates ASC Topic 860 “Transfers and Servicing”. The purpose of ASU 2009-16 is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. ASU 2009-16 became effective on January 1, 2010. Earlier application was prohibited. ASU 2009-16 must be applied to transfers occurring on or after the effective date. Additionally, on and after the effective date, the concept of a qualifying special purpose entity is no longer relevant for accounting purposes. Therefore, formerly qualifying special-purpose entities (as defined under previous accounting standards) should be evaluated for consolidation by reporting entities on and after the effective date in accordance with the applicable consolidation guidance. If the evaluation on the effective date results in consolidation, the reporting entity should apply the transition guidance provided in the pronouncement that requires consolidation. The adoption of ASU 2009-16 did not have a significant impact on the Company’s consolidated financial statements.

In June 2009, the FASB issued ASU No. 2009-17 “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities” (“ASU 2009-17”) which updates ASC Topic 810 “Consolidations”. The purpose of ASU 2009-17 is to improve financial reporting by enterprises involved with variable interest entities. The FASB undertook this project to address (1) the effects on certain provisions in ASC Topic 860 as a result of the elimination of the qualifying special-purpose entity concept in ASC Topic 860, and (2) constituent concerns about

the application of certain key provisions of ASC Topic 810, including those in which the accounting and disclosures do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. ASU 2009-17 became effective on January 1, 2010. Earlier application was prohibited. The adoption of ASU 2009-17 did not have a significant impact on the Company’s consolidated financial statements.

In January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”), which updates ASC Topic 820 “Fair Value Measurements and Disclosures”. ASU 2010-06 is intended to provide a greater level of disaggregated information and more robust disclosures about valuation techniques and inputs to fair value measurements. A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. Additionally, a reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009. The adoption of ASU 2010-06 did not have a significant impact on the Company’s consolidated financial statements.

In February 2010, the FASB issued ASU No. 2010-08, “Technical Corrections to Various Topics” (“ASU 2010-08”). ASU 2010-08 clarifies guidance on embedded derivatives and hedging. ASU 2010-08 is effective for interim and annual periods beginning after December 15, 2009. The adoption of ASU 2010-08 did not have a significant impact on the Company’s consolidated financial statements.

In February 2010, the FASB issued ASU No. 2010-09, “Amendments to Certain Recognition and Disclosure Requirements” (“ASU 2010-09”), which updates ASC Topic 855 “Subsequent Events”. ASU 2010-09 states that an SEC filer must evaluate subsequent events through the date the financial statements are issued but is no longer required to disclose the date through which subsequent events have been evaluated. This change alleviates potential conflicts between Subtopic 855-10 and the SEC’s requirements. The adoption of ASU 2010-09 did not have a significant impact on the Company’s consolidated financial statements.

In February 2010, the FASB issued ASU No. 2010-10, “Consolidation: Amendments for Certain Investment Funds” (“ASU 2010-10”), which defers, for certain investment funds, the consolidation requirements resulting from the issuance of ASU 2009-17. Specifically, the deferral is applicable for a reporting entity’s interest in an entity (1) that has all the attributes of an investment company or (2) for which it is industry practice to apply measurement principles for financial reporting purposes that are consistent with those followed by investment companies. ASU 2010-10 is effective for periods beginning after November 15, 2009. The Company adopted the provisions of ASU 2010-10 during the first quarter of 2010. The adoption of ASU 2010-10 did not have a significant impact on the Company’s consolidated financial statements.

In March 2010, the FASB issued ASU No. 2010-11, “Derivatives and Hedging: Scope Exception Related to Embedded Credit Derivatives” (“ASU 2010-11”), which amends and clarifies the accounting for credit derivatives embedded in interests in securitized financial assets. ASU 2010-11 is effective for interim periods beginning after June 15, 2010. The adoption of ASU 2010-11 is not expected to have a significant impact on the Company’s consolidated financial statements.

In July 2010, the FASB issued ASU No. 2010-20, “Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” (“ASU 2010-20”), which is intended to help investors assess the credit risk of a company’s receivables portfolio and the adequacy of its allowance for credit losses held against the portfolios by expanding credit risk disclosures. (“ASU 2010-20”) requires more information about the credit quality of financing receivables in the disclosures to financial statements, such as aging information and credit quality indicators. Both new and existing disclosures must be disaggregated by portfolio segment or class. The disaggregation of information is based on how a company develops its allowance for credit losses and how it manages its credit exposure. The amendments in ASU 2010-20 apply to all public and nonpublic entities with financing receivables. Financing receivables include loans and trade accounts receivable. However, short-term trade accounts receivable, receivables

measured at fair value or lower of cost or fair value, and debt securities are exempt from these disclosure amendments.

The effective date of ASU 2010-20 differs for public and nonpublic companies. For public companies, the amendments that require disclosures as of the end of a reporting period are effective for periods ending on or after December 15, 2010. The amendments that require disclosures about activity that occurs during a reporting period are effective for periods beginning on or after December 15, 2010. For nonpublic companies, the amendments are effective for annual reporting periods ending on or after December 15, 2011. The adoption of ASU 2010-20 is not expected to have a significant impact on the Company’s consolidated financial statements.

Note 2. Regulatory Orders

FDIC Orders

On July 15, 2009, Royal Bank agreed to enter into a Stipulation and Consent to the Issuance of an Order to Cease and Desist (the “Orders”) with each of the Federal Deposit Insurance Corporation (“FDIC”) and the Commonwealth of Pennsylvania Department of Banking (“Department”). The material terms of the Orders are identical and require Royal Bank to: (i) have and retain qualified management, and notify the FDIC and the Department of any changes in Royal Bank’s board of directors or senior management; (ii) increase participation of Royal Bank’s board of directors in Royal Bank’s affairs by having the board assume full responsibility for approving Royal Bank’s policies and objectives and for supervising Royal Bank’s management; (iii) eliminate all assets classified as “Loss” and formulate a written plan to reduce assets classified as “Doubtful” and “Substandard” at its regulatory examination; (iv) develop a written plan to reduce delinquent loans, and restrict additional advances to borrowers with existing credits classified as “Loss,” “Doubtful” or “Substandard”; (v) develop a written plan to reduce Royal Bank’s commercial real estate loan concentration; (vi) maintain, after establishing an adequate allowance for loan and lease losses, a ratio of Tier 1 capital to total assets (“leverage ratio”) equal to or greater than 8% and a ratio of qualifying total capital to risk-weighted assets (total risk-based capital ratio) equal to or greater than 12%; (vii) formulate and implement written profit plans and comprehensive budgets for each year during which the Orders are in effect; (viii) formulate and implement a strategic plan covering at least three years, to be reviewed quarterly and revised annually; (ix) revise the liquidity and funds management policy and update and review the policy annually; (x) refrain from increasing the amount of brokered deposits held by Royal Bank and develop a plan to reduce the reliance on non-core deposits and wholesale funding sources; (xi) refrain from paying cash dividends without prior approval of the FDIC and the Department; (xii) refrain from making payments to or entering contracts with Royal Bank’s Holding Company or other Royal Bank affiliates without prior approval of the FDIC and the Department; (xiii) submit to the FDIC for review and approval an executive compensation plan that incorporates qualitative as well as profitability performance standards for Royal Bank’s executive officers; (xiv) establish a compliance committee of the board of directors of Royal Bank with the responsibility to ensure Royal Bank’s compliance with the Orders; and (xv) prepare and submit quarterly reports to the FDIC and the Department detailing the actions taken to secure compliance with the Orders. The Orders will remain in effect until modified or terminated by the FDIC and the Department.

The Orders do not restrict Royal Bank from transacting its normal banking business. Royal Bank will continue to serve its customers in all areas including making loans, establishing lines of credit, accepting deposits and processing banking transactions. Customer deposits remain fully insured to the highest limits set by the FDIC. The FDIC and the Department did not impose or recommend any monetary penalties in connection with the Orders.

Following are the actions Royal Bank has taken to respond to and comply with the Orders as of the date of this report:

	1.		Board Oversight and Senior Management
			The board of director’s has increased their participation in the affairs of Royal Bank. A Regulatory Compliance Committee comprised of outside directors and management was created in the third quarter of 2009. The purpose of the Committee is to monitor compliance with the Orders. Royal Bank has recently completed an internal assessment of senior management’s qualifications and has submitted the report to the FDIC and the Department for their review.

	2.		Reduction of Classified Assets
			Royal Bank has eliminated from its books via charge-off all assets classified as “Loss”. Royal Bank submitted to the FDIC and the Department a “Plan for the Reduction of Classified Assets” (“classified assets plan”) required under the Orders. The FDIC and the Department have approved the classified assets plan. No material advances were made on any classified loan unless approved by the board of directors and determined to be in Royal Bank’s best interest. Royal Bank was successful in reducing net classified loans (outstanding loan balance less charge-offs) plus other real estate owned (“OREO”) from $149.6 million at June 30, 2009 to $118.3 million at June 30, 2010.
	3.		Reduction of Delinquencies
			Royal Bank submitted to the FDIC and the Department a “Plan for the Reduction of Delinquencies” (“delinquency reduction plan”) required under the Orders. The FDIC and the Department have approved the delinquency reduction plan. No advances were made on any delinquent loan unless approved by the board of directors and determined to be in Royal Bank’s best interest. Royal Bank’s delinquent loans (30 to 90 days) amounted to $36.3 million at June 30, 2009 versus $22.4 million at June 30, 2010. Royal Bank’s non-accrual loans were $80.8 million and $67.2 million at June 30, 2009 and June 30, 2010, respectively.
	4.		Reduction of Commercial Real Estate Concentrations
			Royal Bank submitted to the FDIC and the Department a “Plan for the Reduction of Commercial Real Estate Concentrations” (“CRE concentration plan”) required under the Orders. The FDIC and the Department have approved the CRE concentration plan. Management has been working diligently to reduce the concentration in commercial real estate loans (“CRE loans”). Royal Bank was successful in reducing the CRE concentration from $289.1 million at June 30, 2009 to $238.4 million at June 30, 2010, which amounted to 223.42% of total capital and 244.73% of Tier 1 capital.
			At June 30, 2010, total construction/land loans (“CL loans”) amounted to $106.2 million, or 99.51%, of total capital and 109.0% of Tier 1 capital. CL loans were approximately $21 million less than what was projected under the CRE concentration plan at year end 2009. Royal Bank no longer has a concentration of commercial real estate loans as defined in the joint agency “Guidance on Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices” issued on December 12, 2006.
	5.		Capital Maintenance
			Under the Orders, Royal Bank must maintain a minimum total risk-based capital ratio and a minimum Tier 1 leverage ratio of 12% and 8%, respectively. At June 30, 2010, Royal Bank’s total risk-based capital and Tier 1 leverage ratios were 14.57% and 8.83%, respectively.
	6.		Budget Plan
			Royal Bank submitted to the FDIC and the Department a revised 2009 budget and profit plan required under the Orders. The FDIC and the Department have approved the 2009 budget and profit plan. In addition Royal Bank has submitted to the FDIC and the Department a 2010 budget and profit plan.
	7.		Strategic Plan
			Royal Bank submitted to the FDIC and the Department a three-year strategic plan required under the Orders. The FDIC and the Department have approved the three-year strategic plan. The board of directors and senior management are executing the strategic plan and will incorporate any modifications as deemed necessary by our regulators.
	8.		Liquidity and Funds Management

			Royal Bank submitted to the FDIC and the Department a liquidity and funds management plan (“liquidity plan”) required under the Orders. The FDIC and the Department have approved the liquidity plan. At June 30, 2010, Royal Bank had $112.5 million in cash on hand and $57.9 million in unpledged agency securities. At June 30, 2010, the liquidity to deposits ratio was 28.2% compared to Royal Bank’s 12% target and the liquidity to total liabilities ratio was 19.9% compared to Royal Bank’s 10% target.
	9.		Brokered Deposits and Borrowings
			Royal Bank submitted to the FDIC and the Department a plan for reduction of reliance on non-core deposits and wholesale funding sources plan (“brokered deposit plan”) required under the Orders. The FDIC and the Department have approved the brokered deposit plan. Since entering the Orders Royal Bank has not renewed, accepted, or rolled over any maturing brokered certificates of deposit (“CDs”); nor has Royal Bank issued new brokered CDs. Brokered CDs declined $82.8 million from $226.9 million at June 30, 2009 to $144.1 million at June 30, 2010. Royal Bank has redeemed an additional $36.4 million in brokered CDs through July 2010. Borrowings declined $48.1 million from $283.9 million at June 30, 2009 to $235.8 million at June 30, 2010. The borrowing amounts do not include the $727,000 in obligations owned via equity investment which are not guaranteed by Royal Bank or any of its subsidiaries.
	10.		Cash Dividends and other Payments to the Company
			Royal Bank will seek approval from the FDIC and the Department prior to declaring a cash dividend to the Company and prior to making payments or entering into new contracts with our affiliates.
	11.		Executive Compensation
			Royal Bank submitted to the FDIC an executive compensation plan (“compensation plan”) required under the Orders. The FDIC has approved the compensation plan. Royal Bank was not required to submit the compensation plan to the Department.

Royal Bank has submitted all required quarterly reports to the FDIC and the Department detailing the actions taken to secure compliance with the Orders as of the date of this Report.

Federal Reserve Agreement

On March 17, 2010, the Company agreed to enter into a Written Agreement (the “Federal Reserve Agreement”) with the Federal Reserve Bank of Philadelphia (the “Reserve Bank”). The material terms of the Federal Reserve Agreement provide that: (i) the Company’s board of directors will take appropriate steps to fully utilize the Company’s financial and managerial resources to serve as a source of strength to its subsidiary banks, including taking steps to ensure that Royal Bank complies with the Orders previously entered into with the FDIC and the Department on July 15, 2009; (ii) the Company’s board of directors will, within 60 days of the Federal Reserve Agreement, submit to the Reserve Bank a written plan to strengthen board oversight of the management and operations of the consolidated operation; (iii) the Company will not declare or pay any dividends without the prior written approval of the Reserve Bank and the Director of the Division of Banking Supervision and Regulation of the Board of Governors of the Federal Reserve System; (iv) the Company and its non-bank subsidiaries will not make any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities without the prior approval of the Reserve Bank and the Director of the Division of Banking Supervision and Regulation of the Board of Governors of the Federal Reserve System; (v) the Company and its nonbank subsidiaries will not, directly or indirectly, incur, increase, or guarantee any debt without the prior written approval of the Reserve Bank; (vi) the Company will not, directly or indirectly, purchase or redeem any shares of its stock without the prior written approval of the Reserve Bank; (vii) the Company will, within 60 days of the Federal Reserve Agreement, submit to the Reserve Bank an acceptable written capital plan to maintain sufficient capital at the Company on a consolidated basis, which plan will at a minimum address: regulatory requirements for the Company and the Banks, the adequacy of the Banks’ capital taking into account the volume of classified credits, the allowance for loan and lease losses, current and projected asset growth, and projected retained earnings; the source and timing of additional funds necessary to fulfill the consolidated organization’s and the Banks’ future capital requirements; supervisory requests

for additional capital at the Banks or the requirements of any supervisory action imposed on the Banks by federal or state regulators; and applicable legal requirements that the Company serve as a source of strength to the Banks; (viii) the Company will, within 60 days of the Federal Reserve Agreement, submit to the Reserve Bank cash flow projections for 2010 showing planned sources and uses of cash for debt service, operating expenses, and other purposes, and will submit similar cash flow projections for each subsequent calendar year at least one month prior to the beginning of such year; (ix) the Company will comply with applicable legal notice provisions in advance of appointing any new director or senior executive officer or changing the responsibilities of any senior executive officer such that the officer would assume a different senior executive officer position, and comply with restrictions on indemnification and severance payments imposed by the Federal Deposit Insurance Act; and (x) the Company’s board of directors will, within 45 days after the end of each quarter, submit progress reports to the Reserve Bank detailing the form and manner of all actions taken to secure compliance with the Agreement and the results thereof, together with a parent company-level balance sheet, income statement, and, as applicable, report of changes in shareholders’ equity.

The Federal Reserve Agreement will remain in effect and enforceable until stayed, modified, terminated or suspended by the Reserve Bank. Royal Bancshares has submitted all progress reports and responses required under the Federal Reserve Agreement as of the date of this Report.

Note 3. Investment Securities

The carrying value and fair value of investment securities at June 30, 2010 are as follows:

						Included in Accumulated Other
						Comprehensive Income (AOCI)
										Gross unrealized losses
														Non-credit
						Gross								related
As of June 30, 2010		Amortized				unrealized				Non-OTTI				OTTI in
(In thousands)		cost				gains				in AOCI				AOCI				Fair value
Investment securities available-for-sale
Mortgage-backed securities-residential		$	18,535			$	714			$	—			$	—			$	19,249
U.S. government agencies			1,125				2				—				—				1,127
Preferred stocks			2,335				—				—				—				2,335
Common stocks			381				142				(16	)			—				507
Collateralized mortgage obligations:
Issued or guaranteed by U.S. government agencies			260,363				4,221				(844	)			—				263,740
Non-agency			16,853				110				(349	)			(714	)			15,900
Corporate bonds			1,020				6				(7	)			—				1,019
Trust preferred securities			23,809				3,322				—				(182	)			26,949
Other securities			7,841				152				—				—				7,993
Total available for sale		$	332,262			$	8,669			$	(1,216	)		$	(896	)		$	338,819

The carrying value and fair value of investment securities at December 31, 2009 are as follows:

						Included in Accumulated Other
						Comprehensive Loss (AOCL)
										Gross Unrealized Losses
														Non-credit
						Gross								related
As of December 31, 2009		Amortized				unrealized				Non-OTTI				OTTI in
(In thousands)		cost				gains				in AOCL				AOCL				Fair value
Investment securities available-for-sale
Mortgage-backed securities-residential		$	21,393			$	234			$	(26	)		$	—			$	21,601
U.S. government agencies			1,150				3				(2	)			—				1,151
Preferred stocks			2,500				—				(270	)			—				2,230
Common stocks			381				71				(8	)			—				444
Collateralized mortgage obligations:
Issued or guaranteed by U.S. government agencies			316,911				2,871				(1,281	)			—				318,501
Non-agency			23,010				145				(875	)			(1,082	)			21,198
Collateralized debt obligations			24,825				—				—				—				24,825
Corporate bonds			7,911				9				(423	)			(630	)			6,867
Trust preferred securities			32,926				2,064				(177	)			(678	)			34,135
Other securities			7,892				8				(133	)			—				7,767
Total available for sale		$	438,899			$	5,405			$	(3,195	)		$	(2,390	)		$	438,719

The amortized cost and fair value of investment securities at June 30, 2010, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

		As of June 30, 2010
		Amortized
(In thousands)		cost				Fair value
Within 1 year		$	620			$	622
After 1 but within 5 years			1,525				1,524
After 5 but within 10 years			—				—
After 10 years			23,809				26,949
Mortgage-backed securities-residential			18,535				19,249
Collateralized mortgage obligations:
Issued or guaranteed by U.S. government agencies			260,363				263,740
Non-agency			16,853				15,900
Total available for sale debt securities			321,705				327,984
No contractual maturity			10,557				10,835
Total available for sale securities		$	332,262			$	338,819

The following table summarizes gross realized gains and losses realized on the sale of securities recognized in earnings in the periods indicated:

		For the three months								For the six months
		ended June 30,								ended June 30,
(In thousands)		2010				2009				2010				2009
Gross realized gains		$	604			$	201			$	857			$	533
Gross realized losses			(182	)			(275	)			(269	)			(821	)
		$	422			$	(74	)		$	588			$	(288	)

The Company evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis. The Company assesses whether OTTI is present when the fair value of a security is less than its amortized cost. All investment securities are evaluated for OTTI under FASB ASC Topic 320, “Investments-Debt & Equity Securities” (“ASC Topic 320”). The non-agency collateralized mortgage obligations that are rated below AA are evaluated under FASB ASC Topic 320 Subtopic 40, “Beneficial Interests in Securitized Financial Assets” under FASB ASC Topic 325, “Investments-Other”. In determining whether OTTI exists, management considers numerous factors, including but not limited to: (1) the length of time and the extent to which the fair value is less than the amortized cost, (2) the Company’s intent to hold or sell the security, (3) the financial condition and results of the issuer including changes in capital, (4) the credit rating of the issuer, (5) analysts earnings estimate, (6) industry trends specific to the security, and (7) timing of debt maturity and status of debt payments.

Under ASC Topic 320, OTTI is considered to have occurred with respect to debt securities (1) if an entity intends to sell the security; (2) if it is more likely than not an entity will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of the expected cash flows is not sufficient to recover the entire amortized cost basis. In addition, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell or will more likely than not be required to sell the security. If an entity intends to sell the security or will be required to sell the security, the OTTI shall be recognized in earnings equal to the entire difference between the fair value and the amortized cost basis at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before the recovery of its amortized cost basis, the OTTI shall be separated into two amounts, the credit-related loss and the noncredit-related loss. The credit-related loss is based on the present value of the expected cash flows and is recognized in earnings. The noncredit-related loss is based on other factors such as illiquidity and is recognized in other comprehensive income.

The following table summarizes other-than-temporary impairment losses on securities recognized in earnings in the periods indicated:

		For the three months								For the six months
		ended June 30,								ended June 30,
(In thousands)		2010				2009				2010				2009
Preferred stocks		$	165			$	—			$	165			$	1,117
Common stocks			—				1,213				—				4,334
Collateralized mortgage obligations:
Non-agency			—				459				—				459
Corporate bonds			—				1,353				58				1,353
Trust preferred securities			—				1,865				55				1,865
Other securities			—				215				63				215
		$	165			$	5,105			$	341			$	9,343

The following table presents a roll-forward of the balance of credit-related impairment losses on debt securities held at June 30, 2010 for which a portion of an other-than-temporary impairment was recognized in other comprehensive income:

		Six months ended
(In thousands)		June 30, 2010
Balance at January 1, 2010		$	1,896
Reductions for securities sold during the period (realized)			(573	)
Reductions for securities for which the amount previously recognized in other comprehensive income was recognized in earnings because the Company intends to sell the security			(113	)
Balance at June 30, 2010		$	1,210

The tables below indicate the length of time individual securities have been in a continuous unrealized loss position at June 30, 2010 and December 31, 2009:

		Less than 12 months								12 months or longer								Total
						Gross								Gross								Gross
June 30, 2010						unrealized								unrealized								unrealized
(In thousands)		Fair value				losses				Fair value				losses				Fair value				losses
Investment securities available for sale
Common stocks		$	131			$	(15	)		$	5			$	(1	)		$	136			$	(16	)
Collateralized mortgage obligations:
Issued or guaranteed by U.S. government agencies			74,443				(844	)			—				—				74,443				(844	)
Non-agency			1,177				(4	)			8,579				(1,059	)			9,756				(1,063	)
Corporate bonds			92				(7	)			—				—				92				(7	)
Trust preferred securities			—				—				1,565				(182	)			1,565				(182	)
Total available for sale		$	75,843			$	(870	)		$	10,149			$	(1,242	)		$	85,992			$	(2,112	)

		Less than 12 months								12 months or longer								Total
						Gross								Gross								Gross
December 31, 2009						unrealized								unrealized								unrealized
(In thousands)		Fair value				losses				Fair value				losses				Fair value				losses
Investment securities available for sale
Mortgage-backed securities-residential		$	11,922			$	(26	)		$	—			$	—			$	11,922			$	(26	)
U.S. government agencies			398				(2	)			—				—				398				(2	)
Preferred stocks			—				—				2,230				(270	)			2,230				(270	)
Common stocks			41				(8	)			—				—				41				(8	)
Collateralized mortgage obligations:
Issued or guaranteed by U.S. government agencies			111,661				(1,281	)			—				—				111,661				(1,281	)
Non-agency			—				—				12,487				(1,957	)			12,487				(1,957	)
Corporate bonds			—				—				5,602				(1,053	)			5,602				(1,053	)
Trust preferred securities			—				—				12,630				(855	)			12,630				(855	)
Other securities			—				—				1,158				(133	)			1,158				(133	)
Total available for sale		$	124,022			$	(1,317	)		$	34,107			$	(4,268	)		$	158,129			$	(5,585	)

The AFS portfolio had gross unrealized losses of $2.1 million at June 30, 2010, which recovered from gross unrealized losses of $5.6 million at December 31, 2009. The improvement in gross unrealized losses is related to the overall improvement in the fair values of the securities in the Company’s investment portfolio slightly offset by $341,000 in impairment charges, including $165,000 on a preferred stock and $113,000 on two bonds the Company decided to sell before recovery of its cost basis. In determining the Company’s intent not to sell and that it is more likely than not that the Company will not be required to sell the investments before recovery of its amortized cost basis, management considers the following factors: current liquidity and availability of other non-pledged assets that

permits the investment to be held for an extended period of time but not necessarily until maturity, capital planning, and any specific investment committee goals or guidelines related to the disposition of specific investments.

Preferred stock: As of June 30, 2010, the Company had one preferred stock holding of a financial institution with a total fair value of $2.3 million. During the second quarter the Company decided to sell the stock and recorded an impairment charge of $165,000. Management evaluated analysts’ near term earnings estimates and recent stock price recovery in relation to the severity and duration of the unrealized loss. While the stock was rated below investment grade, and the stock price had seen a significant price recovery since the second quarter of 2009, the price began to decline again during the second quarter. The Company decided to sell the stock to minimize the loss.

In the first quarter of 2009, the Company recorded an other-than-temporary impairment charge of $1.1 million on one preferred stock which was subsequently sold during the third quarter of 2009.

Common stocks: As of June 30, 2010, the Company had three common stocks of financial institutions with a total fair value of $136,000 and an unrealized loss of $16,000, or 10.4% of its aggregate cost. The Company recorded an OTTI charge to earnings of $225,000 related to two of these common stocks during the second quarter of 2009. Because the Company does not intend to sell this stock before recovery of its cost basis and will not more likely than not be required to sell this stock before recovery of its cost basis, it does not consider the unrealized loss to be other-than-temporary at June 30, 2010.

For all debt security types discussed below the fair value is based on prices provided by brokers and safekeeping custodians with the exception of trust preferred securities which are described below.

U.S. government issued or sponsored collateralized mortgage obligations (“Agency CMOs”): As of June 30, 2010, the Company had 20 Agency CMOs with a fair value of $74.4 million and gross unrealized losses of $844,000, or 1.1% of their aggregate cost. All of these Agency CMOs have been in an unrealized loss position for less than twelve months. The unrealized loss is attributable to a combination of factors, including relative changes in interest rates since the time of purchase. The contractual cash flows for these securities are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. Based on its assessment of these factors, management believes that the unrealized losses on these debt securities are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. The Company does not intend to sell these securities before recovery of their cost basis and will not more likely than not be required to sell these securities before recovery of their cost basis. Therefore, management has determined that these securities are not other-than-temporarily impaired at June 30, 2010.

Non-agency collateralized mortgage obligations (“Non-agency CMOs”): As of June 30, 2010, the Company had five non-agency CMOs with a fair value of $9.8 million and gross unrealized losses of $1.1 million, or 9.8% of their aggregate cost. Three of the non-agency CMO bonds were in an unrealized loss position for more than twelve months and accounted for $1.1 million, or 99.6% of the gross unrealized loss. During the second quarter of 2009, the Company concluded that two of these three bonds were other-than-temporarily impaired and recognized in earnings the credit-related loss of $459,000. The Company evaluated the impairment to determine if it could expect to recover the entire amortized cost basis of the non-agency CMO bonds by considering numerous factors including credit default rates, Veteran’s Administration support, conditional prepayment rates, current and expected loss severities, delinquency rates, and geographic concentrations. Two of the bonds are below investment grade and the third bond is rated A.

Management utilized discounted cash flow analysis as required under ASC Topic 320 and ASC Topic 325 to determine the credit component of the unrealized loss for the three bonds that have been in an unrealized loss position for more than twelve months. As a result, management concluded that there was no additional credit-related loss on the two bonds that were previously deemed other-than-temporarily impaired. In addition there was no credit-related loss on the third bond. Management expects to fully collect the amortized cost basis of all five bonds. The Company does not intend to sell the non-agency CMOs and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis. Therefore, the Company does not consider the other three bonds to be other-than-temporarily impaired as of June 30, 2010. The total gross unrealized loss of $1.1 million recognized in comprehensive income is comprised of the $714,000 in noncredit-

related losses on the two bonds deemed other-than-temporarily impaired and $349,000 in unrealized losses on the three bonds not considered other-than-temporarily impaired.

Corporate bonds: As of June 30, 2010, the Company had one corporate bond with a fair value of $92,000 and a gross unrealized loss of $7,000, or 7.5% of the aggregate cost. This corporate bond has been in an unrealized loss position for less than one month and was downgraded to A in the second quarter of 2010. The Company does not intend to sell the bond and it is not more likely than not that the Company will be required to sell the bond before recovery of its amortized cost basis. Therefore, the Company does not consider the bond to be other-than-temporarily impaired as of June 30, 2010.

During the second quarter of 2010, the Company sold a corporate bond and recorded a loss of $125,000. During the first quarter of 2010, the Company decided to sell this corporate bond mainly due to the downgrade of the credit rating of the bond’s issuer, which is a finance company. An impairment charge of $58,000 was recorded in the first quarter of 2010. The unrealized loss on this bond at December 31, 2009 was $423,000.

During the first quarter of 2010, the Company sold a corporate bond that was deemed other-than-temporarily impaired during the second quarter of 2009. The Company recorded an $87,000 loss when the bond was sold. The Company sold the bond because the credit rating of the bond issuer had been downgraded and the price had improved. The unrealized loss on this bond at December 31, 2009 was $630,000.

Trust preferred securities: At June 30, 2010, the Company had eight trust preferred securities issued by six individual name companies (reflecting, where applicable the impact of mergers and acquisitions of issuers subsequent to original purchase) in the financial services/banking industry. The valuations of trust preferred securities were based upon the fair market values of active trades for one of the securities and ASC Topic 320 using cash flow analysis for the remaining seven securities. Contractual cash flows and a market rate of return were used to derive fair value for each of these securities. Factors that affected the market rate of return included (1) any uncertainty about the amount and timing of the cash flows, (2) the credit risk, (3) liquidity of the instrument, and (4) observable yields from trading data and bid/ask indications. Credit risk spreads and liquidity premiums were analyzed to derive the appropriate discount rate. As of June 30, 2010, the Company had one trust preferred security with a fair value of $1.6 million and gross unrealized losses of $182,000, or 10.5% of its aggregate cost. This trust preferred security has been in an unrealized loss position for longer than twelve months, is not rated, and was deemed other-than-temporarily impaired at June 30, 2009.

The unrealized loss in the trust preferred security reflects the credit concerns related to the financial institution that issued this long term financial obligation. The recent financial losses and reductions of capital coupled with bank failures and the overall market uncertainty within the financial services industry has resulted in a lower value. Management applied a discounted cash flow analysis based upon the liquidity risk premiums and the recent corporate spreads for similar securities to arrive at the credit risk component of the unrealized loss as required by ASC Topic 320. As a result, there was no additional credit-related loss on the bond. The total gross unrealized loss of $182,000 recognized in comprehensive income is the noncredit-related loss on the security.

During the second quarter of 2010, the Company completed the sale of one trust preferred security that was deemed other-than-temporarily impaired during the second quarter of 2009 and recorded a loss of $8,000. The Company decided to sell the security during the first quarter of 2010 and recorded an impairment charge of $55,000. During the first quarter of 2010 the Company completed the sale of two trust preferred securities deemed other-than-temporarily impaired at June 30, 2009 and recorded total gains of $124,000.

Other securities: As of June 30, 2010, the Company had eight investments in real estate and SBA funds. As of June 30, 2010, one of the private equity real estate funds has a fair value of $237,000. During the first quarter of 2010, after reviewing the fund’s recent financials, asset values, and its near-term projections, management concluded that the fund was other-than-temporarily impaired and recorded an impairment charge of $63,000. There was no additional impairment during the second quarter of 2010

The Company has two investments in private equity global commercial real estate investment funds with a total fair value of $914,000 at June 30, 2010. These funds were deemed other-than-temporarily impaired during 2009. There was no additional impairment in 2010.

The Company will continue to monitor these investments to determine if the discounted cash flow analysis, continued negative trends, market valuations or credit defaults result in impairment that is other than temporary.

Note 4. Loans and Leases

		June 30,				December 31,
(In thousands)		2010				2009
Commercial and industrial		$	90,368			$	104,063
Construction			50,527				52,196
Land Development			62,264				66,878
Real Estate — residential			34,185				48,498
Real Estate — residential-mezzanine			—				2,480
Real Estate — non-residential			265,236				277,234
Real Estate — multi-family			15,582				22,017
Tax certificates			74,651				73,106
Leases			41,308				39,097
Other			1,481				2,173
Total gross loans		$	635,602			$	687,742
Deferred fees, net			(642	)			(878	)
Total loans and leases		$	634,960			$	686,864

The Company grants commercial and real estate loans, including construction and land development loans primarily in the greater Philadelphia metropolitan area as well as selected locations throughout the mid-Atlantic region. The Company also has participated with other financial institutions in selected construction and land development loans outside our geographic area. The Company has a concentration of credit risk in commercial real estate, construction and land development loans at June 30, 2010. A substantial portion of its debtors’ ability to honor their contracts is dependent upon the housing sector specifically and the economy in general.

The Company classifies its leases as capital leases, in accordance with FASB ASC Topic 840, “Leases”. The difference between the Company’s gross investment in the lease and the cost or carrying amount of the leased property, if different, is recorded as unearned income, which is amortized to income over the lease term by the interest method.

The Company’s policy for income recognition on restructured loans is to recognize income on currently performing restructured loans under the accrual method. As of June 30, 2010, the Company did not have any restructured loans.

The Company identifies a loan as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement. The Company does not accrue interest income on impaired loans. Excess proceeds received over the principal amounts due on impaired loans are recognized as income on a cash basis.

The following is a summary of information pertaining to impaired loans:

		June 30,				December 31,
(In thousands)		2010				2009
Impaired loans with a valuation allowance		$	13,835			$	46,670
Impaired loans without a valuation allowance			60,602				27,009
Total impaired loans		$	74,437			$	73,679
Valuation allowance related to impaired loans		$	3,171			$	10,958

Non-accrual and impaired loans were $74.4 million at June 30, 2010, compared to $73.7 million at December 31, 2009, a slight net increase of $700,000. The $700,000 increase was primarily the result of $33.5 million in additions offset by $14.5 million in charge-offs, a $9.8 million reduction in existing non-accrual loan balances through payments or loans becoming current and placed back on accrual and $8.4 million transferred to other real estate owned. If interest had been accrued, such income would have been approximately $1.6 million and $3.1 million for the three and six months ended June 30, 2010, respectively. The Company has no troubled debt restructured loans or loans past due 90 days or more on which it has continued to accrue interest during the quarter. The $60.6 million in impaired loans without a valuation allowance reflects total charge-offs of $17.6 million, of which $7.5 million occurred in the second quarter of 2010. The $7.8 million decline in the valuation allowance was related to $10.2 million in loan charge-offs of specific reserves offset by $2.4 million in valuation allowances on five new and six previous non-accrual relationships.

Total cash collected on impaired loans during the six months ended June 30, 2010 and June 30, 2009 was $11.1 million and $12.6 million respectively, of which $10.9 million and $11.1 million was credited to the principal balance outstanding on such loans, respectively.

Note 5. Allowance for Loan and Lease Losses

Changes in the allowance for loan and lease losses were as follows:

		Three months ended								Six months ended
		June 30,								June 30,
(In thousands)		2010				2009				2010				2009
Balance at beginning period		$	28,661			$	27,269			$	30,331			$	28,908
Charge-offs by loan type
Commercial and industrial			(2,152	)			(239	)			(4,183	)			(254	)
Construction and land development			(5,604	)			(4,357	)			(5,659	)			(4,357	)
Construction and land development — mezzanine			—				(298	)			—				(298	)
Real Estate — residential			—				(153	)			—				(153	)
Real Estate — residential — mezzanine			(1,018	)			—				(2,480	)			—
Real Estate — non-residential			(1,156	)			(665	)			(1,156	)			(3,834	)
Real estate — non-residential real estate — mezzanine			—				—				—				(1,132	)
Real Estate — multifamily			(457	)			—				(457	)			—
Leases			(427	)			(157	)			(529	)			(310	)
Tax certificates			(9	)			—				(10	)			—
Total charge-offs			(10,823	)			(5,869	)			(14,474	)			(10,338	)
Recoveries by loan type
Commercial and industrial			68				1				68				3
Construction and land development			105				—				105				—
Real Estate — residential			228				2				245				33
Real Estate — non-residential			196				—				207				—
Leases			1				15				51				15
Other			37				—				37				—
Total recoveries			635				18				713				51
Net charge offs			(10,188	)			(5,851	)			(13,761	)			(10,287	)
Provision for loan and lease losses			4,290				6,956				6,193				9,753
Balance at the end of period		$	22,763			$	28,374			$	22,763			$	28,374