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U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-K/A

Amendment No. 2

(Mark One)


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

For the fiscal year ended December 31, 2005


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

For the transition period from to

Commission File Number 0-26366

ROYAL BANCSHARES OF PENNSYLVANIA, INC.

(Exact name of registrant as specified in its charter)


Pennsylvania		23-2812193

(State of other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


732 Montgomery Avenue, Narberth, Pennsylvania		19072

(Address of principal executive offices)		(Zip Code)

(610) 668-4700

(Issuer’s telephone number, including area code)

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


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

Securities registered pursuant to Section 12(g) of the Act:		Class A Common Stock ($2.00 par value)
		Class B Common Stock ($.10 par value)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o Yes þ No

Indicate by check mark if the registrant is required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.
o Yes þ No

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

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

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

TABLE OF CONTENTS


	ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PART IV
	ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
SIGNATURES
Consent of Independent Accountants from Beard Miller Company LLP
Consent of Independent Accountants Grant Thornton LLP
Rule 13a-14(a)/15-d-14(a) Certification of Chief Executive Officer
Rule 13a-14(a)/15-d-14(a) Certification of Chief Financial Officer
Section 1350 Certification of Chief Executive Officer
Section 1350 Certification of Chief Financial Officer
Opinion letter of Independent Accounts Grant Thornton LLP

The aggregate market value of Registrant’s Common Stock held by non-affiliates is $96,871,266, based on the June 30, 2005 closing price of the Registrant’s Common Stock of $22.96 per share (restated for stock dividend).

As of February 28, 2006, the Registrant had 10,700,513 and 1,992,156 shares outstanding of Class A and Class B common stock, respectively.

EXPLANATORY NOTE

As previously disclosed in a Current Report on Form 8-K filed on December 22, 2006, Royal Bancshares of Pennsylvania, Inc. (“the Company”) is filing this Amendment No. 2 to its Form 10-K for the year ended December 31, 2005 (the “Form 10-K”) to restate its consolidated statement of cash flows for the year ended December 31, 2005 included in the Form 10-K. As further described in the Company’s Current Report on Form 8-K filed on December 22, 2006, the restatement of the Company’s consolidated statement of cash flows for year ended December 31, 2005 results principally from a misclassification of certain cash flows relating to cash derived from equity real estate investments received during the period.

The Form 10-K as amended hereby continues to speak as of the date of the Form 10-K and the disclosures have not been updated to speak as of any later date. Any items in this Form 10-K/A that are not expressly changed hereby shall be as set forth in the Form 10-K, as previously amended. All information contained in this Amendment No. 2 and the Form 10-K is subject to updating and supplementing as provided in the Company’s periodic reports filed with the Security and Exchange Commission subsequent to the filing of the Form 10-K.

Pursuant to SEC Rule 12-b-15, in connection with this Amendment No. 2 on Form 10-K/A, the Company is filing updated Exhibits 31(v), 31(vi), 32(iii) and 32(iv).

Report of Independent Registered Public Accounting Firm

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

We have audited the accompanying consolidated balance sheets of Royal Bancshares of Pennsylvania, Inc. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. The consolidated statements of income, changes in stockholders’ equity and cash flows of Royal Bancshares of Pennsylvania, Inc. for the year ended December 31, 2003 were audited by other auditors, whose report dated January 22, 2004, expressed an unqualified opinion on those statements.

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

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Royal Bancshares of Pennsylvania, Inc. and its subsidiaries as of December 31, 2005 and 2004, and the consolidated results of their operations and their consolidated cash flows for each of the years in the two-year period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Royal Bancshares of Pennsylvania, Inc. internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 14, 2006 expressed an unqualified opinion on management’s assessment of internal control over financial reporting and an unqualified opinion on the effectiveness of internal control over financial reporting.

As discussed in Note A to the consolidated financial statements, the consolidated statement of cash flows for the year ended December 31, 2005 has been restated.

Beard Miller Company LLP
Reading, Pennsylvania
March 14, 2006 (January 23, 2007 as to the effects of the restatement discussed in Note A)

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Consolidated Balance Sheets


	December 31,
	2005			2004
	(In thousands, except share data)
ASSETS
Cash and due from banks	$	17,095		$	26,109
Federal funds sold		13,800			1,000


Total cash and cash equivalents		30,895			27,109

Investment securities held to maturity (fair value of $253,198 and $211,865 in 2005 and 2004, respectively)		255,467			212,227
Investment securities available for sale — at fair value		326,189			360,934
Federal Home Loan Bank stock, at cost		17,073			11,100
Loans held for sale		803			2,204

Loans		549,636			467,294
Less allowance for loan losses		10,276			12,519


Net loans		539,360			454,775

Premises and equipment, net		8,373			8,780
Real estate owned via equity investments		58,209			63,653
Accrued interest receivable		14,843			15,634
Bank owned life insurance		22,059			21,214
Other assets		27,748			27,644


Total assets	$	1,301,019		$	1,205,274


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits
Non-interest bearing	$	75,754		$	64,371
Interest bearing		621,655			678,011


Total deposits		697,409			742,382

Accrued interest payable		6,606			5,602
Other liabilities		11,879			8,736
Borrowings		354,000			222,000
Obligations related to equity investments in real estate		47,356			56,249
Subordinated debentures		25,774			25,774


Total liabilities		1,143,024			1,060,743

Minority interests		2,487			3,655

Stockholders’ equity
Common stock
Class A, par value $2.00 per share; authorized, 18,000,000 shares; issued, 10,699,592 and 10,276,672 shares in 2005 and 2004, respectively		21,400			20,553
Class B, par value $0.10 per share; authorized, 2,000,000 shares; issued, 1,992,957 and 1,939,490 shares in 2005 and 2004, respectively		199			194
Undistributed Class B shares		2			—
Additional paid in capital		104,285			92,037
Retained earnings		32,827			26,558
Accumulated other comprehensive (loss) income		(940	)		3,799

		157,773			143,141
Treasury stock — at cost, 215,388 Class A shares in 2005 and 2004		(2,265	)		(2,265	)


Total stockholders’ equity		155,508			140,876


Total liabilities and stockholders’ equity	$	1,301,019		$	1,205,274

The accompanying notes are an integral part of these statements.

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Consolidated Statements of Income


	Years ended December 31,
	2005		2004		2003
	(In thousands, except per share data)

Interest income
Loans, including fees	$	46,995	$	40,044	$	46,609
Investment securities held to maturity		10,122		6,365		3,087
Investment securities available for sale		19,229		20,621		22,007
Deposits in banks		56		409		475
Federal funds sold		58		102		142


TOTAL INTEREST INCOME		76,460		67,541		72,320


Interest expense
Deposits		17,549		16,918		22,193
Borrowings		13,690		8,744		7,748
Obligations related to equity investments in real estate		557		1,639		—


TOTAL INTEREST EXPENSE		31,796		27,301		29,941


NET INTEREST INCOME		44,664		40,240		42,379

Provision for loan losses		1		6		674


NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		44,663		40,234		41,705


Other income
Service charges and fees		1,293		1,496		1,125
Gains on sale of investment securities available for sale		227		810		719
Income related to equity investments in real estate		19,418		7,133		—
Income from bank owned life insurance		845		966		248
Gains on sale of other real estate		2,494		2,102		568
Gains on sale of loans		508		480		637
Other income		41		173		407

		24,826		13,160		3,704


Other expenses
Salaries and employee benefits		13,488		10,767		9,958
Occupancy and equipment		1,611		1,509		1,330
Expenses related to equity investments		262		4,780		—
Other operating expenses		9,438		8,391		7,599

		24,799		25,447		18,887


INCOME BEFORE INCOME TAXES		44,690		27,947		26,522

Income taxes		12,637		7,914		7,996


NET INCOME	$	32,053	$	20,033	$	18,526


Per share data

Net income — basic	$	2.50	$	1.57	$	1.47


Net income — diluted	$	2.49	$	1.56	$	1.46

The accompanying notes are an integral part of these statements.

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Consolidated Statement of Changes in Stockholders’ Equity

Years ended December 31, 2005, 2004 and 2003

(In thousands, except per share data)


																Accumulated
											Additional					other
	Class A common stock				Class B common stock						paid in		Retained			comprehensive			Treasury			Comprehensive
	Shares		Amount		Shares			Amount			capital		earnings			income (loss)			stock			income

Balance, December 31, 2002		9,595	$	19,190		1,861		$	186		$	76,984	$	24,819		$	2,415		$	(2,265	)
Net income for the year ended December 31, 2003		—		—		—			—			—		18,526			—			—		$	18,526
Conversion of Class B common stock to Class A common stock		8		16		(7	)		(1	)		—		(15	)		—			—			—
3% stock dividends declared		281		562		55			6			6,443		(7,011	)		—			—			—
Cash in lieu of fractional shares		—		—		—			—			—		(8	)		—			—			—
Stock options exercised		143		286		—			—			2,021		—			—			—			—
Cash dividends on common stock (Class A $0.96, Class B $1.11)		—		—		—			—			—		(11,321	)		—			—			—
Other comprehensive income, net of reclassifications and taxes		—		—		—			—			—		—			4,000			—			4,000


Comprehensive income																						$	22,526


Balance, December 31, 2003		10,027		20,054		1,909			191			85,448		24,990			6,415			(2,265	)
Net income for the year ended December 31, 2004		—		—		—			—			—		20,033			—			—		$	20,033
Conversion of Class B common stock to Class A common stock		10		20		(1	)		(1	)		—		(19	)		—			—			—
2% stock dividends declared		196		392		31			3			5,842		(6,236	)		—			—			—
Cash in lieu of fractional shares		—		—		—			—			—		(11	)		—			—			—
Stock options exercised		44		87		—			—			747		—			—			—			—
Cash dividends on common stock (Class A $1.00, Class B $1.15)		—		—		—			—			—		(12,199	)		—			—			—
Other comprehensive loss, net of reclassifications and taxes		—		—		—			—			—		—			(2,616	)		—			(2,616	)


Comprehensive income																						$	17,417


Balance, December 31, 2004		10,277		20,553		1,939			194			92,037		26,558			3,799			(2,265	)

(Continued)

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Consolidated Statement of Changes in Stockholders’ Equity — Continued

Years ended December 31, 2005, 2004 and 2003

(In thousands, except per share data)


																		Accumulated
											Un-		Additional					other
	Class A common stock				Class B common stock						Distributed		Paid in		Retained			comprehensive			Treasury			Comprehensive
	Shares		Amount		Shares			Amount			B-shares		Capital		earnings			income (loss)			stock			income

Balance, December 31, 2004		10,277	$	20,553		1,939		$	194		$	—	$	92,037	$	26,558		$	3,799		$	(2,265	)
Net income for the year ended December 31, 2005		—		—		—			—					—		32,053			—			—		$	32,053
Conversion of Class B common stock to Class A common stock		6		11		(4	)		(1	)				—		(11	)		—			—			—
2% stock dividends declared (January)		201		402		39			3					6,481		(6,887	)		—			—			—
2% stock dividends declared (December)		206		412		19			3			2		5,599		(6,015	)
Cash in lieu of fractional shares		—		—		—			—			—		—		(12	)		—			—			—
Stock options exercised		10		22		—			—			—		168		—			—			—			—
Cash dividends on common stock (Class A $1.03, Class B $1.18)		—		—		—			—					—		(12,859	)		—			—			—
Other comprehensive loss, net of reclassifications and taxes		—		—		—			—			—		—		—			(4,739	)		—			(4,739	)


Comprehensive income																								$	27,314


Balance, December 31, 2005		10,700	$	21,400		1,993		$	199		$	2	$	104,285	$	32,827		$	(940	)	$	(2,265	)

The accompanying notes are an integral part of this statement.

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Year ended December 31,


	(As restated
	see Note A)

	2005			2004			2003
				(In thousands)

Cash flows from operating activities
Net income	$	32,053		$	20,033		$	18,526
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Depreciation and amortization		1,307			2,633			1,035
Provision for loan losses		1			6			674
Amortization of premiums and discounts on loans, mortgage-backed securities and investments		(1,106	)		7,577			289
Income tax benefit on stock options		53			331			—
(Benefit)provision for deferred income taxes		189			(1,442	)		2,078
Gains on sale other real estate		(2,494	)		(2,102	)		(568	)
Gains on sale of loans		(508	)		(480	)		(637	)
Gains on sales of investment securities available for sale		(227	)		(810	)		(719	)
Gains on sales of premises and equipment — VIE’s		(16,779	)		—			—
Gain from refinance of assets — VIE		(1,892	)		—			—
Changes in assets and liabilities:
Increase (decrease) in accrued interest receivable		(1,400	)		719			(2,575	)
Decrease (increase) in other assets		8,216			(9,191	)		(26,021	)
Increase (decrease) in accrued interest payable		1,004			(2,131	)		(3,673	)
Increase in other liabilities		3,807			3,666			1,238


Net cash provided by (used in) operating activities		22,224			18,809			(10,353	)


Cash flows from investing activities
Proceeds from calls and maturities of investment securities held to maturity		46,685			153,714			9,982
Purchases of investment securities held to maturity		(90,025	)		(255,150	)		(89,310	)
Proceeds from calls and maturities of investment securities available for sale		38,066			60,836			201,341
Proceeds from sales of investment securities available for sale		13,897			27,860			91,339
Purchase (redemption) of Federal Home Loan Bank stock		(5,973	)		307			(3,532	)
Purchases of investment securities available for sale		(25,137	)		(13,812	)		(321,451	)
Net (increase) decrease in loans		(84,372	)		46,256			61,647
Purchases of premises and equipment		(900	)		(596	)		(513	)
Net proceeds from sale of premises and equipment —VIE’s		88,171			—			—
Net cash disbursed to partners — VIE’s		(22,068	)		—			—
Purchases of premises and equipment through VIE		(58,691	)		(66,990	)		—


Net cash used in investing activities		(100,347	)		(47,575	)		(50,497	)

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(Continued)

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows — Continued

Year ended December 31,


	(As restated
	See Note A)

	2005			2004			2003
	(In thousands, except per share data)

Cash flows from financing activities
Increase (decrease) in non-interest bearing and interest bearing demand deposits and savings accounts	$	(164,396	)	$	(14,295	)	$	63,511
Increase (decrease) in time deposits		119,424			(34,382	)		(93,292	)
Principal payments on mortgage		(63	)		(60	)		(62	)
Proceeds from subordinated debentures, net		—			25,000			—
Cash dividends in lieu of fractional shares		(12	)		(11	)		(8	)
Proceeds from borrowings, net of repayments		132,000			10,000			84,500
Mortgage debt incurred — VIE’s		65,097			56,249			—
Repayment of mortgage debt — VIE’s		(57,472	)		—			—
Issuance of common stock under stock option plans		190			503			2,021
Cash dividends paid		(12,859	)		(12,199	)		(11,321	)


Net cash provided by financing activities		81,909			30,805			45,349


Net increase (decrease) in cash and cash equivalents		3,786			2,039			(15,501	)

Cash and cash equivalents at beginning of year		27,109			25,070			40,571


Cash and cash equivalents at end of year	$	30,895		$	27,109		$	25,070


Supplemental disclosure of cash flow information
Cash paid during the year for
Interest	$	30,792		$	29,432		$	33,615


Income taxes	$	13,450		$	8,705		$	7,000

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The accompanying notes are an integral part of these statements.

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

1. Basis of Financial Statement Presentation

The accompanying consolidated financial statements include the accounts of Royal Bancshares and its wholly-owned subsidiaries, Royal Investments of Delaware, Inc. and Royal Bank, including Royal Bank’s subsidiaries, Royal Real Estate of Pennsylvania, Inc., Royal Investment America, LLC, and Royal Bank America Leasing, LP, and Crusader Servicing Corporation which both are 60% owned by Royal Bank America. Both Royal Bancshares’ Trusts’ are not consolidated as further discussed in Note A-17. During 2004, Royal Bancshares through Royal Bank started a banking division called Royal Asian Bank which operates three branches in Pennsylvania and one branch in Northern New Jersey. All significant inter-company transactions and balances have been eliminated.

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

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

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

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(Continued)

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements — Continued

NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued

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

Royal Bancshares’ investments in real estate partnerships and trusts are further discussed in Note A -17.

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement 123(R), “Share-Based Payment,” an Amendment of SFAS No. 123 and APB No. 95. The Statement addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. Statement 123(R) requires that all forms of share-based payments to employees, including employee stock options, would be treated the same as other forms of compensation by recognizing the related cost in the income statement. The expense of the award would generally be measured at fair value at the grant date. Current accounting guidance requires that the expense relating to fixed plan employee stock options only be disclosed in the footnotes to the financial statements. The Statement eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25, “Accounting for Stock Issued to Employees.” This statement is effective for all share-based payment transactions entered into for fiscal years beginning after June 15, 2005 and to any awards modified, repurchased, or cancelled after that date. Royal Bancshares estimates its compensation expense relating to stock options will be $762,000 during 2006.

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(Continued)

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements — Continued

NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued

2. Investment Securities

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

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

3. Loans held for sale

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

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

4. Loans and Allowance for Loan Losses

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

(Continued)

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements — Continued

NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued

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

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

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

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

Royal Bancshares accounts for guarantees in accordance with FIN 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others”. FIN 45 requires a guarantor entity, at the inception of a guarantee covered by the measurement provisions of the interpretation, to record a liability for the fair value of the obligation undertaken in issuing the guarantee. Royal Bancshares has financial and performance letters of credit. Financial letters of credit require a company to make a payment if the customer’s condition deteriorates, as defined in agreements. Performance letters of credits require Royal Bancshares to make payments if the customer fails to perform certain non-financial contractual obligations.

5. Other Real Estate

Royal Bancshares carries other real estate at the fair market value less estimated costs for the disposition of the property. Management will monitor cases in which the property value exceeds the book value. Costs relating to holding the property are expensed when incurred. Other real estate owned of approximately $3,834,000 and $5,424,000 at December 31, 2005 and 2004, respectively, is included in other assets on the consolidated balance sheets. Real estate acquired in settlement of loans during 2005, 2004 and 2003 was approximately $5,053,000, $5,535,000 and $4,575,000, respectively.

(Continued)

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements — Continued

NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued

6. Premises and Equipment

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

7. Bank-Owned Life Insurance

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

8. Income Taxes

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

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(Continued)

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements — Continued

NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued

9. Per Share Information

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

The Class B shares of Royal Bancshares may be converted to Class A shares at the rate of 1.15 to 1.

10. Stock Option Plans

SFAS No. 123, “Accounting for Stock-Based Compensation,” as Amended by SFAS No.148, contains a fair value-based method for valuing stock-based compensation that entities may use to measure compensation cost at the grant date based on the fair value of the award. Compensation is recognized over the service period, which is usually the vesting period. Alternatively, SFAS No. 123 permits entities to continue accounting for employee stock options and similar equity instruments under Accounting Principles Board (APB) Opinion 25, “Accounting for Stock Issued to Employees.” Entities that continue to account for stock options using APB Opinion 25 are required to make a pro forma disclosure of net income and earnings per share, as if the fair value-based method of accounting defined in SFAS No. 123 had been applied. Effective January 1, 2006, Royal Bancshares will apply SFAS No. 123(R).

At December 31, 2005, Royal Bancshares had both a director and employee stock-based compensation plan, which are more fully described in Note L. Royal Bancshares accounts for these plans under the recognition and measurement principles of APB Opinion No. 25 and related interpretations. Stock-based employee compensation costs are not reflected in net income, as all options granted under the plan had an exercise price equal to the market value under the underlying common stock of the date of the grant. The following table illustrates the effect on net income and earnings per share if Royal Bancshares had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation.


	2005			2004			2003

Net income, as reported	$	32,053		$	20,033		$	18,526
Less: Stock-based compensation costs under fair value based method for all awards, net of tax		(682	)		(490	)		(425	)

Pro forma net income		31,371			19,543			18,101


Earnings per share —Basic As Reported	$	2.50		$	1.57		$	1.47
Pro forma		2.45			1.53			1.43
Earnings per share —Diluted As Reported		2.49			1.56			1.46
Pro forma		2.43			1.52			1.43

(Continued)

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements — Continued

NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued

11. Benefit Plans

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

12. Cash and Cash Equivalents

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

13. Financial Instruments

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

14. Advertising Costs

Royal Bancshares’ expensed advertising costs of $360,000, $289,000 and $314,000 for 2005, 2004 and 2003, respectively.

15. Comprehensive Income

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

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


	December 31, 2005
				Tax			Net of
	Before tax			(benefit)			tax
	amount			expense			amount

Unrealized losses on securities
Unrealized holding losses arising during period	$	(6,978	)	$	(2,387	)	$	(4,591	)
Less reclassification adjustment for gains realized in net income		227			79			148


Other comprehensive loss, net	$	(7,205	)	$	(2,466	)	$	(4,739	)

(Continued)

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements — Continued

NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued


	December 31, 2004
				Tax			Net of
	Before tax			(benefit)			tax
	amount			expense			amount

Unrealized losses on securities
Unrealized holding gains arising during period	$	(3,150	)	$	(1,069	)	$	(2,081	)
Less reclassification adjustment for gains realized in net income		810			275			535


Other comprehensive loss, net	$	(3,960	)	$	(1,344	)	$	(2,616	)


	December 31, 2003
			Tax		Net of
	Before tax		(benefit)		tax
	amount		expense		amount

Unrealized gains on securities
Unrealized holding gains arising during period	$	6,791	$	2,316	$	4,475
Less reclassification adjustment for gains realized in net income		719		244		475


Other comprehensive income, net	$	6,072	$	2,072	$	4,000

16. Reclassifications

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

17. Variable Interest Entities (VIE)

Real estate owned via equity investments

Royal Bancshares, together with a real estate development company, formed Brook View Investors, L.L.C. (“Brook View”) in May 2001. Brook View was formed to construct 13 apartment buildings with a total of 116 units in a gated apartment community. The development company is the general partner of the project. Royal Bancshares invested 60% of initial capital contributions with the development company holding the remaining equity interest. Upon the repayment of the initial capital contributions and a preferred return, distributions will convert to 50% for Royal Bancshares and 50% for the development company. On October 19, 2005 Brook View sold the apartment buildings for approximately $23.7 million which resulted in the Company recording an after tax gain of approximately $3.3 million. As a result of the sale, the company discontinued consolidating the financial statements of Brook View during the fourth quarter 2005.

(Continued)

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements — Continued

NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued

Royal Bancshares, together with a real estate development company, formed Burrough’s Mill Apartment, L.L.C. (“Burrough’s Mill”) in December 2001. Burrough’s Mill was formed to construct 32 apartment buildings with a total of 308 units in a gated apartment community. The development company is the general partner of the project. Royal Bancshares invested 60% of initial capital contributions with the development company holding the remaining equity interest. Upon the repayment of the initial capital contributions and a preferred return, distributions will convert to 50% for Royal Bancshares and 50% for the development company. On October 19, 2005, Burrough’s Mill sold the apartment buildings for approximately $62.2 million which resulted in the Company recording an after tax gain of approximately $7.6 million. As a result of the sale the Company discontinued consolidating the financial statements of Burrough’s Mill during the fourth quarter 2005.

Royal Bancshares, together with a real estate development company, formed Main Street West Associates, L.P. (“Main Street”) in February 2002. Main Street was formed to acquire, maintain, improve, and operate office space located in Norristown, Pennsylvania. The development company is the general partner of the project. Royal Bancshares invested 93% of initial capital contributions with the development company holding the remaining equity interest. Upon the repayment of the initial capital contributions and a preferred return, distributions will convert to 50% for Royal Bancshares and 50% for the development company. On June 30, 2005, Main Street sold the property for approximately $5.3 million and paid back the Company’s original investment plus the accrued preferred return in full. As a result of the return of capital the Company discontinued consolidating the financial statements of Main Street during the second quarter 2005.

Royal Bancshares, together with a real estate investment company, formed 212 C Associates, L.P. (“212 C”) in May 2002. 212 C was formed to acquire, hold, improve, and operate office space located in Lansdale, Pennsylvania. The investment company is the general partner of the project. Royal Bancshares invested 90% of initial capital contributions with the investment company holding the remaining equity interest. Upon the repayment of the initial capital contributions and a preferred return, distributions will convert to 50% for Royal Bancshares and 50% for the investment company. On June 7, 2005, 212 C refinanced the debt for approximately $19.1 million which resulted a distribution to the Company of approximately $4.0 million which paid back the Company’s original investment and accrued preferred return. In addition, the Company received a profit of $1.8 million as result of this distribution. As a result of the transaction, the Company no longer qualifies as the primary beneficiary and discontinued consolidating this VIE during the second quarter 2005.

Royal Bancshares, together with a real estate development company, formed Royal Scully Associates, G.P. (“Royal Scully”) in September 2005. Royal Scully was formed to convert an apartment complex into condominiums in Blue Bell, Pennsylvania. The development company is the general partner of the project. Royal Bancshares invested 66% of initial capital contributions, or $2.5 million, with the development company holding the remaining equity interest. In addition the Company holds two notes totaling $9.2 million with a competitive term and interest rate. Upon the repayment of the initial capital contributions and a preferred return, distributions will convert to 50% for Royal Bancshares and 50% for the development company. Royal Scully has total assets of $61.0 million and total borrowings of $47.4 million, of which $-0- is guaranteed by Royal Bancshares. Royal Bancshares has determined that Royal Scully is a VIE and it is the primary beneficiary. Royal Bancshares’ exposure to loss due to its investment in and receivables due from Royal Scully is $11.7 million at December 31, 2005.

(Continued)

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements — Continued

NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued

Trust Preferred Securities

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

Royal Bancshares adopted the provisions under the revised interpretation, FIN 46(R), in the first quarter of 2004. Accordingly, Royal Bancshares does not consolidate the Trusts. FIN 46(R) precludes consideration of the call option embedded in the preferred stock when determining if Royal Bancshares has the right to a majority of the Trusts’ expected residual returns. The deconsolidation resulted in the investment in the common stock of the Trusts to be included in other assets as of December 31, 2005 and the corresponding increase in outstanding debt of $774,000. In addition, the income received on Royal Bancshares’ common stock investment is included in other income.

18. Interest Rate Swaps

For asset/liability management purposes, Royal Bancshares uses interest rate swap agreements to hedge various exposures or to modify interest rate characteristics of various balance sheet accounts. Such derivatives are used as part of the asset/liability management process, 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. Interest rate swap contracts in which a series of interest flows are exchanged over a prescribed period. The notional amount of $60 million on which interest payments are based is not exchanged. During the third quarter ended September 30, 2005 the Company recorded an expense in the amount of $676,000 in other operating expenses which reflects the fair value of the interest rate swaps resulting from the Company not meeting the upfront documentation and the effectiveness assessment requirements of SFAS 133. As of October 1, 2005 and December 31, 2005, the Company had completed documentation determining the effectiveness of each hedge using the Volatility Reduction Measure (“VRM”). It was determined that these swaps are to be effective and should be treated as a fair value hedge.

At December 31, 2005 and 2004, the information pertaining to outstanding interest rate swap agreement used to hedge fixed rate loans and investments is as follows:


	December 31,
(in thousands)	2005			2004
Notional Amount	$	60,000		$	25,000
Weighted average pay rate		4.40	%		2.33	%
Weighted average receive rate		3.87	%		2.50	%
Weighted average maturity (years)		4.5			1.72
Unrealized loss relating to interest rate swaps		($1,281	)		($135	)

(Continued)

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements — Continued

NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued

The change in the fair value of the swaps from 2004 to 2005 is related to $50 million of new contracts during 2005 along with $15 million of the swaps which were in existence at the end of 2004 maturing during 2005.

19. Restatement

In connection with the preparation of the Company’s Consolidated Statement of Cash Flows for the year ended December 31, 2005, included in this Annual Report on Form 10-K/A, management reconsidered the classification of certain cash flows principally relating to income derived from equity real estate investments received during the period along with the treatment of the deconsolidation of these investments. In addition, management reconsidered the treatment of OREO transfers from loans and the treatment of accretion and amortization of loans and investments.

The following table identifies the restatements made to the consolidated statement of cash flows:


	Year ended December 31, 2005
	As			As
	Reported			Restated
	In 2005			for 2005
(amounts in thousands)	10-K			10-K/A
Cash Flows from Operating Activities:
Amortization of premiums and discounts on loans, mortgage-backed securities and investments		14			(1,106	)
(Benefit) provision for deferred income taxes		(2,493	)		189
Gain on sale of premises and equipment — VIE’s		—			(16,779	)
Gain from refinance of assets — VIE’s		—			(1,892	)
Decrease (increase) in accrued interest receivable		791			(1,400	)
Decrease in other assets		1,545			8,216
Increase in other liabilities		1,975			3,807
Net cash provided by operating activities		33,021			22,224

Cash flows from investing activities:
Proceeds from calls and maturities of investments available for sale		33,729			38,066
Proceeds from sales of investment securities available for sale		15,600			13,897
Net (increase) in loans		(73,996	)		(84,372	)
Net proceeds from sale of premises and equipment —VIE’s		—			88,171
Net cash disbursed to partners — VIE’s		—			(22,068	)
Deconsolidation of premises and equipment — VIE		57,966			—
Purchase of premises and equipment through VIE’s		(52,522	)		(58,691	)
Net cash used in investing activities		(94,573	)		(100,347	)

Cash flows from financing activities:
Obligations through equity investments		(8,893	)		—
Mortgage debt incurred — VIE’s		—			65,097
Repayment of mortgage debt — VIE’s		—			(57,472	)
Issuance of common stock under stock option plan		137			190
Net cash provided by financing activities		65,338			81,909

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements — Continued

NOTE B — SEGMENT INFORMATION

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

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

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

As a result of FIN 46(R), as of December 31, 2005 Royal Bancshares is reporting on a consolidated basis its interest in one equity investment as a VIE which has different characteristics than the community banking segment. Royal Bancshares has an investment in an apartment complex that is being converted into condominiums.

As of December 31, 2004, Royal Bancshares reported on a consolidated basis its interest in four equity investments as VIE’s which have different characteristics that the community banking segment. Royal Bancshares had investments in two apartment complexes and two buildings leased as a commercial office space.

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

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(Continued)

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements — Continued

NOTE B — SEGMENT INFORMATION — Continued

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


	Community		Tax Lien		Equity
(in thousands)	Bank		Operation		Investments			Consolidated
December 31, 2005
Total assets	$	1,187,825	$	52,162	$	61,032		$	1,301,019

Total deposits		697,409		—		—			697,409

Net interest income (losses)		43,356		1,865		(557	)		44,664
Provision for loan losses		—		1		—			1
Total non-interest income		3,827		1,581		19,418			24,826
Total non-interest expense		21,751		2,786		262			24,799
Income taxes		5,830		297		6,510			12,637

Net Income	$	19,602	$	362	$	12,089		$	32,053


December 31, 2004
Total assets	$	1,088,031	$	50,196	$	67,047		$	1,205,274

Total deposits		742,382		—		—			742,382

Net interest income		38,846		3,024		(1,630	)		40,240
Provision for loan loss		—		6		—			6
Total non-interest income		4,800		1,227		7,133			13,160
Total non-interest expense		17,295		3,372		4,780			25,447
Income taxes		7,272		389		253			7,914

Net Income	$	19,079	$	484	$	470		$	20,033


December 31, 2003
Total assets	$	1,103,619	$	50,791	$	—		$	1,154,410

Total deposits		791,059		—		—			791,059

Net interest income		38,773		3,606		—			42,379
Provision for loan loss		500		174		—			674
Total non-interest income		3,196		508		—			3,704
Total non-interest expense		16,023		2,864		—			18,887
Income taxes		7,528		468		—			7,996

Net Income	$	17,918	$	608	$	470		$	18,526

Interest paid to the Community Bank segment by the Tax Lien Operation was approximately $2,862,000, $1,896,000 and $1,879,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

(Continued)

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements — Continued

NOTE C — INVESTMENT SECURITIES

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


	2005
			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			value

Investment securities held to maturity
Corporate securities	$	60,300	$	1,902	$	—		$	62,202
U.S. government agencies		195,000		—		(4,171	)		190,829
Mortgage backed securities		167		—		—			167


	$	255,467	$	1,902	$	(4,171	)	$	253,198


	2005
			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			value

Investment securities available for sale
Preferred and common stock	$	5,129	$	88	$	—		$	5,217
Corporate bonds		109,564		670		(1,700	)		108,534
U.S. government agencies		104,979		—		(3,281	)		101,698
Trust preferred securities		36,174		3,559		—			39,733
Foreign bonds		2,995		20		—			3,015
Mortgage backed securities		56,628		126		(862	)		55,892
Other securities		12,166		81		(147	)		12,100


	$	327,635	$	4,564	$	(6,010	)	$	326,189

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(Continued)

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements — Continued

NOTE C — INVESTMENT SECURITIES — Continued


	2004
			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			value

Investment securities held to maturity
Corporate securities	$	26,995	$	371	$	—		$	27,366
U.S. government agencies		185,000		9		(742	)		184,267
Mortgage backed securities		232		—		—			232


	$	212,227	$	380	$	(742	)	$	211,865


	2004
			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			value

Investment securities available for sale
Preferred and common stock	$	5,113	$	250	$	—		$	5,363
Corporate bonds		125,750		4,104		(48	)		129,806
U.S. government agencies		94,977		—		(1,672	)		93,305
Trust preferred securities		37,196		2,754		(388	)		39,562
Foreign bonds		9,212		293		—			9,505
Mortgage backed securities		81,303		496		(130	)		81,669
Other securities		1,624		100		—			1,724


	$	355,175	$	7,997	$	(2,238	)	$	360,934

(The remainder of the page was intentionally left blank)

(Continued)

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements — Continued

NOTE C — INVESTMENT SECURITIES — Continued

The amortized cost and estimated fair value of investment securities at December 31, 2005, by contractual maturity, are shown below (in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	2005
	Held to maturity				Available for sale
	Amortized		Fair		Amortized		Fair
	cost		value		cost		value

Within 1 year	$	6	$	6	$	21,961	$	22,053
After 1 but within 5 years		205,316		203,703		136,362		133,571
After 5 but within 10 years		50,000		49,344		33,841		32,839
After 10 years		145		145		130,316		132,509
No contractual maturity		—		—		5,155		5,217


	$	255,467	$	253,198	$	327,635	$	326,189

Proceeds from the sale of investment securities available for sale during 2005, 2004 and 2003 were $15,370,000, $68,576,000 and $91,339,000, respectively, resulting in gross realized gains (losses) of $300,000 ($73,000), $900,000 ($90,000) and $1,016,000 ($297,000) and during 2005, 2004 and 2003, respectively. Royal Bancshares recorded a tax expense equivalent to 35% of the gains which resulted in a tax expense of $79,000, $284,000 and $252,000 during 2005, 2004, and 2003, respectively.

As of December 31, 2005, investment securities with a book value of $10,000,000 were pledged as collateral to secure public deposits and for other purposes required or permitted by law.

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at December 31, 2005:


	Less than 12 months					12 months or longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Description of Securities	value		losses			value		losses			value		losses

Held to maturity
US government agencies	$	108,426	$	(1,574	)	$	82,403	$	(2,597	)	$	190,829	$	(4,171	)

Total held to maturity	$	108,426	$	(1,574	)	$	82,403	$	(2,597	)	$	190,829	$	(4,171	)

Available for Sale
US government agencies	$	9,886	$	(114	)	$	91,812	$	(3,167	)	$	101,698	$	(3,281	)
Mortgage backed securities		22,387		(381	)		17,992		(481	)		40,379		(862	)
Corporate bonds		51,312		(1,700	)		—		—			51,312		(1,700	)
Other bonds		10,121		(167	)		—		—			10,121		(167	)

Total available for sale	$	93,706	$	(2,362	)	$	109,804	$	(3,648	)		203,510	$	(6,010	)


Total temporarily impaired securities	$	202,132	$	(3,936	)	$	192,207	$	(6,245	)	$	394,339	$	(10,181	)

(Continued)

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements — Continued

NOTE C — INVESTMENT SECURITIES — Continued

In management’s opinion the unrealized losses reflect changes in interest rates subsequent to the purchase of specific securities. At December 31, 2005, there were 26 securities in the less than twelve month category and 11 in the twelve or more month category and of the $394 million fair value of investments, $333 million consisted of government bonds and government secured mortgage backed securities which maintain a AAA rating. Royal Bancshares has the ability to hold these securities until maturity or market price recovery. Management believes that the unrealized losses represent temporary impairments of the securities.

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


	Less than 12 months					12 months or longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Description of Securities	value		losses			value		losses			value		losses

Held to Maturity
US government agencies	$	84,258	$	(742	)	$	—	$	(—	)	$	84,258	$	(742	)

Total held to maturity		84,258		(742	)		—		(—	)		84,258		(742	)

Available for Sale
US government agencies	$	14,941	$	(36	)	$	78,364	$	(1,636	)	$	93,305	$	(1,672	)
Mortgage backed securities		401		(2	)		23,217		(128	)		23,618		(130	)
Trust preferred		10,000		(385	)		4,330		(3	)		14,330		(388	)
Corporate bonds		6,149		(48	)		—		—			6,149		(48	)

Total available for sale		31,491		(471	)		105,911		(1,767	)		137,402		(2,238	)

Total temporarily impaired securities	$	115,749	$	(1,213	)	$	105,911	$	(1,767	)	$	221,660	$	(2,980	)

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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements — Continued

NOTE D — LOANS

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


	2005			2004

Commercial and industrial	$	30,075		$	37,468
Construction and land development		177,102			109,129
Single family and residential		41,900			45,816
Other real estate secured		296,051			273,099
Leases (net of unearned income)		2,623			—
Other		3,868			3,322


		551,619			468,834
Less
Unearned income		(1,983	)		(1,540	)


Total loans	$	549,636		$	467,294

Loans on which the accrual of interest has been discontinued or reduced amounted to approximately $4,371,000 and $4,526,000 at December 31, 2005 and 2004, respectively. If interest had been accrued, such income would have been approximately $506,000, $209,000 and $401,000 for the years ended December 31, 2005, 2004 and 2003, respectively. Management believes it has adequate collateral to limit its credit risk with these loans.

Royal Bancshares granted loans to the officers and directors of Royal Bancshares and to their associates. In accordance with Regulation O related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than normal risk of collectibility. The aggregate dollar amount of these loans was $13,338,000 and $5,163,000 at December 31, 2005 and 2004, respectively. During 2005, three new loans totaling $8,658,000 were made and repayments totaled $483,000.

Impaired loans which include the loans on which the accrual of interest has been discontinued, was approximately $10,003,000 and $14,087,000 at December 31, 2005 and 2004, respectively. Royal Bancshares has identified a loan as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreements. The income recognized on impaired loans during 2005 and 2004 was $-0- and $-0-, respectively. During 2005, the average balance of impaired loans was $13,471,000. At December 31, 2005 there was $1,473,000 of the allowance for possible loan loss reserved specifically for impaired loans.

Total cash collected on impaired loans during 2005 was $3,001,000 of which $3,001,000 was credited to the principal balance outstanding on such loans. Royal Bancshares’ policy for interest income recognition on impaired loans is to recognize income on currently performing restructured loans under the accrual method. Royal Bancshares recognizes income on non-accrual loans under the cash basis when the principal payments on the loans become current and the collateral on the loan is sufficient to cover the outstanding obligation to Royal Bancshares. If these factors do not exist, Royal Bancshares does not recognize income.

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements — Continued

NOTE D — LOANS —Continued

Royal Bancshares primarily grants commercial and real estate loans in the greater Philadelphia metropolitan area. Royal Bancshares has concentrations of credit risk in real estate development loans at December 31, 2005. A substantial portion of its debtors’ ability to honor these contracts is dependent upon the economic sector.

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


	2005			2004			2003

Balance at beginning of year	$	12,519		$	12,426		$	12,470
Charge-offs		(2,335	)		(204	)		(811	)
Recoveries		91			291			93

Net (charge-offs) recoveries		(2,244	)		87			(718	)
Provision for loan losses		1			6			674


Balance at end of year	$	10,276		$	12,519		$	12,426

NOTE E — PREMISES AND EQUIPMENT

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


	Estimated
	Useful
	Lives	2005		2004

Land	—	$	2,396	$	2,396
Buildings and leasehold improvements	7 – 31.5 years		7,764		8,178
Furniture, fixtures and equipment	3 – 7 years		5,225		6,812

			15,385		17,386
Less accumulated depreciation and amortization			7,012		8,606


		$	8,373	$	8,780

(The remainder of the page was intentionally left blank)

(Continued)

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements — Continued

NOTE E — PREMISES AND EQUIPMENT—Continued

Depreciation and amortization in expense, related to premises and equipment, was approximately $1,300,000, $977,000 and $944,000 for the years ended 2005, 2004 and 2003, respectively.

NOTE F — DEPOSITS

Deposits are summarized as follows (in thousands):


	2005		2004

Demand	$	75,754	$	64,371
NOW and money market		279,602		451,671
Savings		20,109		23,820
Time, $100,000 and over		203,611		90,596
Other time		118,333		111,924


	$	697,409	$	742,382

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


2006	$	120,676
2007		41,920
2008		74,177
2009		7,630
2010		74,183
Thereafter		3,358


	$	321,944

NOTE G — BORROWINGS

1. Advances from the Federal Home Loan Bank

At December 31, 2005, advances from the Federal Home Loan Bank (FHLB) totaling $354,000,000 will mature within one to eight years. The advances are collateralized by FHLB stock and certain first mortgage loans, and mortgage-backed securities. These advances had a weighted average interest rate of 4.20%. Royal Bancshares available borrowing capacity is based on qualified collateral as of December 31, 2005.

(Continued)

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements — Continued

NOTE G — BORROWINGS — Continued

Outstanding borrowings mature as follows with its corresponding weighted average rate (in thousands):


2006	3.69	%	$	104,500
2007	—			—
2008	—			—
2009	5.58	%		15,000
2010	4.92	%		147,500
Thereafter	3.33	%		87,000


			$	354,000

2. Subordinated Debentures

On October 27, 2004, Royal Bancshares completed a private placement of an aggregate of $25.0 million of Trust Preferred Securities through two newly-formed Delaware trust affiliates, Royal Bancshares Capital Trust I (“Trust I”) and Royal Bancshares Capital Trust II (“Trust II”) (collectively, the “Trusts”). As part of this transaction, Royal Bancshares issued an aggregate principal amount of $12,887,000 of floating rate junior subordinate debt securities to Trust I, which debt securities bear an interest rate of 6.64% at December 31, 2005, and reset quarterly at 3-month LIBOR plus 2.15%, and an aggregate principal amount of $12,887,000 of fixed/floating rate junior subordinated deferrable interest to Trust II, which debt securities bear an initial interest rate of 5.80% until December 2009 and then which will reset quarterly at 3-month LIBOR plus 2.15%.

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

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

(Continued)

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements — Continued

NOTE H — LEASE COMMITMENTS

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


2006	$	661,000
2007		664,000
2008		654,000
2009		475,000
2010		305,000
Thereafter		165,000


	$	2,924,000

Rental expense for all leases was approximately $716,000, $664,000 and $612,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

NOTE I — COMMON STOCK

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

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

Per share information and weighted average shares outstanding have been restated to reflect the 2% stock dividend of December 2005 and the 2% stock dividend of January 2005

NOTE J — INCOME TAXES

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


	2005		2004			2003

Income tax expense (benefit)
Current	$	12,448	$	9,356		$	9,221
Deferred federal tax		189		(1,442	)		(1,225	)


	$	12,637	$	7,914		$	7,996

(Continued)

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements — Continued

NOTE J — INCOME TAXES — Continued

The difference between the applicable income tax expense and the amount computed by applying the statutory federal income tax rate of 35% in 2005 and 2004, and 34% in 2003 is as follows (in thousands):


	2005			2004			2003

Computed tax expense at statutory rate	$	15,642		$	9,781		$	9,286
Tax-exempt income		(361	)		(466	)		(263	)
Low-income housing tax credit		(545	)		(545	)		(545	)
Reduction of valuation allowance		(1,761	)		—			—
Other, net		(338	)		(619	)		(482	)
Effect of 35% rate bracket		—			(237	)		—


Applicable income tax expense	$	12,637		$	7,914		$	7,996

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


	2005		2004

Deferred tax assets
Allowance for loan losses	$	3,597	$	5,366
Asset valuation reserves		431		836
Goodwill from Knoblauch State Bank		539		808
Accrued pension liability		1,806		1,156
Net operating loss carryovers from Knoblauch State Bank		1,761		7,140
Unrealized losses on investment securities available for sale		506		—
Other		—		46

		8,640		15,352
Less valuation allowance		—		(7,140	)


		8,640		8,212

Deferred tax liabilities
Unrealized gains on investment securities available for sale		—		1,957
Penalties on delinquent tax certificates		182		243
Deferred tax related to VIE’s		662		—
Other		321		720


		1,165		2,920


Net deferred tax asset, included in other assets	$	7,475	$	5,292

Royal Bancshares has approximately $21,000,000 of net operating loss carryovers from the acquisition of Knoblauch State Bank (KSB). These losses will fully expire in 2009. The utilization of these losses is subject to limitation under Section 382 of the Internal Revenue Code. As a result, a valuation allowance existed at December 31, 2004 to eliminate the deferred tax asset attributable to these net operating losses.

(Continued)

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements — Continued

NOTE J — INCOME TAXES — Continued

During 2005 the Company recorded an approximate $1.7 million decrease in tax expense, resulting from the completion of an IRS audit, with respect to a valuation allowance against the deferred tax asset derived from these net operating loss carryovers.

In addition, Royal Bancshares has approximately $15,700,000 of tax goodwill from the acquisition of KSB. The ability to deduct this goodwill for tax purposes will expire in 2015. The utilization of this goodwill for tax purposes was subject to the limitations under Section 382 of the Internal Revenue Code. For 2005, 2004 and 2003 approximately $1,353,000 has been utilized for tax purposes.

NOTE K — EARNINGS PER SHARE

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


	2005
			Average
	Income		shares		Per share
	(numerator)		(denominator)		amount

Basic EPS
Income available to common shareholders	$	32,053		12,797	$	2.50

Effect of dilutive securities
Stock options		—		95		(0.01	)


Diluted EPS
Income available to common shareholders plus assumed exercise of options	$	32,053		12,892	$	2.49

All options to purchase shares of common stock were included in the computation of 2005 diluted EPS because the exercise price was less than the average market price of the common stock.

(The remainder of the page was intentionally left blank)

(Continued)

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements — Continued

NOTE K — EARNINGS PER SHARE — Continued


	2004
			Average
	Income		shares		Per share
	(numerator)		(denominator)		Amount

Basic EPS
Income available to common shareholders	$	20,033		12,755	$	1.57

Effect of dilutive securities
Stock options		—		104		(0.01	)


Diluted EPS
Income available to common shareholders plus assumed exercise of options	$	20,033		12,859	$	1.56

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


	2003
			Average
	Income		shares		Per share
	(numerator)		(denominator)		Amount

Basic EPS
Income available to common shareholders	$	18,526		12,640	$	1.47

Effect of dilutive securities
Stock options		—		54		(0.01	)


Diluted EPS
Income available to common shareholders plus assumed exercise of options	$	18,526		12,694	$	1.46

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

(Continued)

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements — Continued

NOTE L — STOCK OPTION PLANS

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

1. Outside Directors’ Stock Option Plan

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

Stock option transactions consist of the following:


	2005					2004					2003
				Weighted					Weighted					Weighted
				average					average					average
				exercise					exercise					exercise
	Shares			price		Shares			price		Shares			price

Outstanding at beginning of year		80,485		$	16.95		72,751		$	14.62		81,897		$	13.84
Granted		16,830			22.79		17,167			23.50		17,017			19.57
Exercised		(6,247	)		10.28		(9,433	)		11.31		(26,163	)		11.79
Cancelled		—			—		—			—		—			—


Outstanding at end of year		91,068		$	18.53		80,485		$	16.95		72,751		$	14.62


Weighted average fair value of options granted during the year				$	4.48				$	5.15				$	3.55

The following table summarizes information about options outstanding and exercisable at December 31, 2005:


	Options outstanding						Options exercisable
			Weighted
			average		Weighted				Weighted
			remaining		average				average
Range of	Number		contractual		exercise		Number		exercise
exercise prices	outstanding		life (years)		price		exercisable		price

$9.40		2,151		1.2	$	9.40		2,194	$	9.40
$10.89 – 18.81		54,927		5.5		15.65		60,788		15.65
$22.53 – 23.05		33,990		8.7		22.79		17,503		23.05


		91,068						80,485

(Continued)

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements — Continued

NOTE L — STOCK OPTION PLANS — Continued

2. Employee Stock Option and Appreciation Right Plan

Royal Bancshares adopted a Stock Option and Appreciation Right Plan (the Plan). The Plan is an incentive program under which Company officers and other key employees may be awarded additional compensation in the form of options to purchase up to 1,650,000 shares of Royal Bancshares’ Class A common stock (but not in excess of 15% of outstanding shares). At the time a stock option is granted, a stock appreciation right for an identical number of shares may also be granted. The option price is equal to the fair market value at the date of the grant. The options are exercisable at 20% per year beginning one year after the date of grant and must be exercised within ten years of the grant.

Stock option transactions consist of the following:


	2005					2004					2003
				Weighted					Weighted					Weighted
				average					average					average
				exercise					exercise					exercise
	Shares			price		Shares			price		Shares			price

Outstanding at beginning of year		605,409		$	18.80		437,001		$	15.45		508,779		$	13.84
Granted		153,000			22.53		260,493			23.50		160,569			19.57
Exercised		(5,398	)		14.52		(35,336	)		11.31		(122,921	)		11.21
Cancelled		(15,841	)		22.80		(56,749	)		20.11		(109,426	)		16.82


Outstanding at end of year		737,170			19.61		605,409			18.80		437,001		$	15.45


Weighted average fair value of options granted during the year				$	4.48				$	5.15				$	3.55

The following table summarizes information about options outstanding and exercisable at December 31, 2005:


	Options outstanding						Options exercisable
			Weighted
			average		Weighted				Weighted
			remaining		average				average
Range of	Number		contractual		exercise		Number		exercise
exercise prices	Outstanding		life (years)		price		exercisable		price

$9.39		17,643		1.2	$	9.39		17,643	$	9.39
$10.89 — 18.81		347,596		5.7		15.72		233,855		14.77
$22.53 — 23.04		371,931		8.6		23.83		46,666		23.04


		737,170						298,164

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements — Continued

NOTE M — PENSION PLANS

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


	2005			2004

Change in benefit obligation
Benefit obligation at beginning of year	$	4,303		$	3,591
Service cost		1,725			722
Interest cost		248			205
Other changes		(32	)		(215	)


Benefits obligation at end of year	$	6,244		$	4,303

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


	December 31
	2005			2004

Discount rate		6.00	%		6.00	%
Rate of compensation increase		4.00	%		4.00	%

The asset allocation for Royal Bancshares pension plans and the end of 2005 and 2004 consists of insurance policies under Royal Bancshares Owned Life Insurance program. The cash surrender value for these policies was approximately $1,462,000 and $1,203,000 for the years ended December 31, 2005 and 2004, respectively.

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


	2005		2004		2003

Service cost	$	1,477	$	570	$	410
Interest cost		248		205		214


Net periodic benefit cost	$	1,725	$	775	$	624

(Continued)

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements — Continued

NOTE M — PENSION PLANS—Continued

Royal Bancshares has a capital accumulation and salary reduction plan under Section 401(k) of the Internal Revenue Code of 1986, as amended. Under the plan, all employees are eligible to contribute up to the maximum allowed by IRS regulation, with Royal Bancshares matching 100% of any contribution between 1% and 5% subject to a $2,500 per employee annual limit. Matching contributions to the plan were approximately $155,000, $162,000 and $199,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

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

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

Royal Bancshares’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. Royal Bancshares uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

The contract amounts are as follows (in thousands):


	December 31.
	2005		2004

Financial instruments whose contract amounts represent credit risk
Commitments to extend credit	$	176,415	$	119,458
Standby letters of credit and financial guarantees written		3,228		1,797
Financial Instruments whose notional amount exceed the amount the amount of credit risk.
Interest rate swap agreements	$	60,000	$	25,000

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

(Continued)

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements — Continued

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

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

Standby letters of credit are conditional commitments issued by Royal Bancshares to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. Most guarantees extend for one year and expire in decreasing amounts through 2006. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Royal Bancshares holds personal or commercial real estate, accounts receivable, inventory and equipment as collateral supporting those commitments for which collateral is deemed necessary. The extent of collateral held for those commitments is approximately 80%.

NOTE O — FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

Fair values have been estimated using data which management considered the best available and estimation methodologies deemed suitable for the pertinent category of financial instrument. The estimation methodologies, resulting fair values and recorded carrying amounts at December 31, 2005 and 2004 were as follows:

(The remainder of the page was intentionally left blank)

(Continued)

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements — Continued

NOTE O — FAIR VALUE OF FINANCIAL INSTRUMENTS — Continued

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


	2005				2004
	Estimated		Carrying		Estimated		Carrying
	fair value		amount		fair value		amount

Cash and cash equivalents	$	30,895	$	30,895	$	27,109	$	27,109
Investment securities held to maturity		253,198		255,467		211,865		212,227
Investment securities available for sale		326,189		326,189		360,934		360,934

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


	2005				2004
	Estimated		Carrying		Estimated		Carrying
	fair value		amount		fair value		amount

Deposits with stated maturities	$	327,879	$	321,944	$	208,198	$	202,520
Borrowings		355,547		354,000		224,437		222,000
Subordinated debt		25,774		25,774		25,774		25,774
Obligations from equity investments		47,356		47,356		56,249		56,249

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


	2005				2004
	Estimated		Carrying		Estimated		Carrying
	fair value		amount		fair value		amount

Commitments to extend credit		—		—		—		—
Standby letters of credit		—		—		—		—

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

(Continued)

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements — Continued

NOTE O — FAIR VALUE OF FINANCIAL INSTRUMENTS — Continued


	2005				2004
	Estimated		Carrying		Estimated		Carrying
	fair value		amount		fair value		amount

Loans held for sale	$	803	$	803	$	2,221	$	2,204
Loans, net		538,804		539,360		454,882		454,775

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

The fair value of interest rate swaps are based on upon the estimated amount Royal Bank would receive or pay to terminate the contract or agreements, taking into account current interest rates and, when appropriate, the current creditworthiness of the counterparties. The fair value of the interest rate swaps as of December 31, 2005 was a negative $1.3 million on a notional amount $60 million. The fair value of the interest rate swaps as of December 31, 2004 was a negative $135 thousand on a notional amount $25 million.

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

NOTE P — REGULATORY MATTERS

1. Payment of Dividends

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

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

2. Capital Ratios

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

(Continued)

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements — Continued

NOTE P — REGULATORY MATTERS — Continued

Quantitative measures established by regulations to ensure capital adequacy require Royal Bancshares and Royal Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). As of December 31, 2005, management believes that Royal Bank meets all capital adequacy requirements to which it is subject.

As of December 31, 2005, Royal Bank met all regulatory requirements for classification as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, Royal Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed Royal Bank’s category.

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


	2005
											To be well
											capitalized under
						For capital					prompt corrective
	Actual					adequacy purposes					action provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio

Total capital (to risk-weighted assets)
Company (consolidated)	$	193,125		19.80	%	$	78,021		8.00	%		N/A		N/A
Bank		141,673		14.86	%		76,247		8.00	%	$	95,309		10.00	%

Tier I capital (to risk-weighted assets)
Company (consolidated)		182,849		18.75	%		39,010		4.00	%		N/A		N/A
Bank		131,397		13.79	%		38,123		4.00	%		57,185		6.00	%

Tier I capital (to average assets, leverage)
Company (consolidated)		182,849		14.24	%		38,528		3.00	%		N/A		N/A
Bank		131,397		10.43	%		37,790		3.00	%		62,983		5.00	%

(Continued)

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements — Continued

NOTE P — REGULATORY MATTERS — Continued


	2004
											To be well
											capitalized under
						For capital					prompt corrective
	Actual					adequacy purposes					action provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio

Total capital (to risk-weighted assets)
Company (consolidated)	$	176,557		20.43	%	$	69,149		8.00	%		N/A		N/A
Bank		124,847		14.55	%		68,663		8.00	%	$	85,829		10.00	%

Tier I capital (to risk-weighted assets)
Company (consolidated)		165,731		19.17	%		34,574		4.00	%		N/A		N/A
Bank		114,096		13.29	%		34,332		4.00	%		51,497		6.00	%

Tier I capital (to average assets, leverage)
Company (consolidated)		165,731		13.93	%		35,692		3.00	%		N/A		N/A
Bank		114,096		9.59	%		35,692		3.00	%		59,487		5.00	%

NOTE Q — CONDENSED FINANCIAL INFORMATION — PARENT COMPANY ONLY

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

CONDENSED BALANCE SHEETS


	December 31,
	2005		2004

Assets
Cash	$	24,119	$	30,326
Investment in Royal Investments of Delaware, Inc. — at equity		19,699		21,178
Investment in Royal Bank America — at equity		130,009		114,109
Loans, net		4,682		—
Other assets		2,773		1,037


	$	181,282	$	166,650


Subordinated debentures	$	25,774	$	25,774
Stockholders’ equity		155,508		140,876


	$	181,282	$	166,650

(Continued)

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements — Continued

NOTE R — SUMMARY OF QUARTERLY RESULTS (UNAUDITED)

CONDENSED STATEMENTS OF CASH FLOWS


	Year ended December 31,
	2005			2004			2003

Cash flows from operating activities
Net income	$	32,053		$	20,033		$	18,526
Adjustments to reconcile net income to net cash provided by operating activities
Undistributed earnings from subsidiaries		(19,160	)		(7,888	)		(7,241	)
Operating expenses		121			83			81
Rental income		—			—			(25	)
Non-cash income tax (benefit) expense		18			(29	)		(20	)


Net cash provided by operating activities		13,032			12,199			11,321


Cash flows from financing activities
Loan funding		(4,695	)		—			—
Cash dividends paid		(12,859	)		(12,199	)		(11,321	)
Proceeds from subordinated debentures		—			25,000			—
Other, net		(1,685	)		551			2,248


Net cash provided by (used in) financing activities		19,239			13,352			(9,073	)


Net increase (decrease) in cash		(6,207	)		25,551			2,248

Cash at beginning of year		30,326			4,775			2,527


Cash at end of year	$	24,119		$	30,326		$	4,775

(The remainder of the page was intentionally left blank)

(Continued)

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements — Continued

NOTE R — SUMMARY OF QUARTERLY RESULTS (UNAUDITED)

The following summarizes the consolidated results of operations during 2005 and 2004, on a quarterly basis, for Royal Bancshares (in thousands except per share data):


	2005
	Fourth		Third		Second		First
	Quarter		Quarter		Quarter		Quarter

Interest income	$	20,281	$	19,645	$	19,330	$	17,204
Net interest income		12,297		10,894		11,635		9,838
Provision for loan losses		—		—		—		1

Net interest income after provision		12,297		10,894		11,635		9,837
Non interest income		15,039		3,294		3,880		2,613
Non interest expenses		3,345		7,526		7,569		6,359
Income before income taxes		23,991		6,662		7,946		6,091

Net income	$	15,587	$	4,903	$	7,242	$	4,321


Net income per share
Basic	$	1.22	$	0.38	$	0.57	$	0.33
Diluted	$	1.21	$	0.38	$	0.57	$	0.33


	2004
	Fourth		Third		Second		First
	Quarter		Quarter		Quarter		Quarter

Interest income	$	16,990	$	16,515	$	16,508	$	17,528
Net interest income		10,181		9,722		9,539		10,798
Provision for loan losses		—		1		4		1

Net interest income after provision		10,181		9,721		9,535		10,797
Non interest income		2,691		3,822		3,464		3,183
Non interest expense		5,864		6,225		6,782		6,576
Income before income taxes		7,008		7,318		6,217		7,404

Net income	$	5,363	$	5,112	$	4,394	$	5,164


Net income per share
Basic	$	0.42	$	0.40	$	0.34	$	0.41
Diluted	$	0.42	$	0.40	$	0.34	$	0.40

PART IV

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

1. Financial Statements

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

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets.

Consolidated Statements of Income.

Consolidated Statements of Changes in Stockholders’ Equity.

Consolidated Statement of Cash Flows.

Notes to Consolidated Financial Statements.

Financial Statement Schedules

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

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

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

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

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

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

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

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

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

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

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

	10.1		Stock Option and Appreciation Right Plan. As amended on May 16, 2005 (Incorporated by reference to the Registrant’s Registration Statement N0. 333-25855, on form S-8 filed with the Commission on November 22, 2005).

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

	10.3		Employment agreement between Royal Bancshares of Pennsylvania, Inc. and Joseph P. Campbell, President and Chief Executive Officer, entered into on April 23, 2004. (Incorporated by reference to Exhibit 10.1 to Registrant’s Quarterly Report on Form 10- Q filed with the Commission on November 9, 2004.)

	10.4		Employment agreement between Royal Bancshares of Pennsylvania, Inc. and James J. McSwiggan, Executive Vice President, entered into on April 23, 2004. (Incorporated by reference to Exhibit 10.3 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 9, 2004.)

	10.5		Employment agreement between Royal Bank America and Robert R. Tabas, entered into on April 23, 2004. (Incorporated by reference to Exhibit 10.6 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 9, 2004.)

	10.6		Employment agreement between Royal Bancshares of Pennsylvania, Inc. and Murray Stempel, Senior Vice President, entered into on April 23, 2004. (Incorporated by reference to Exhibit 10.4 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 9, 2004.)

	10.7		Employment agreement between Royal Bancshares of Pennsylvania, Inc. and John Decker, Senior Vice President, entered into on April 23, 2004. (Incorporated by reference to Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 9, 2004.)

	10.8		Employment agreement between Royal Bank America and Edward Shin, entered into on April 23, 2004. (Incorporated by reference to Exhibit 10.5 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 9, 2004.)

	11.		Statement Re: Computation of Earnings Per Share. Included at Item 8, hereof, Note K, “Per Share Information”.

	12.		Statement re: Computation of Ratios. (Included at Item 8 here of, Note P, “Regulatory Matters.”)

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

	21.		Subsidiaries of Registrant.

	23a.		Consent of Independent Accountants from Beard Miller Company LLP.

	23b.		Consent of Independent Accountants from Grant Thornton LLP.

	31.1		Rule 13a-14(a)/15-d-14(a) Certification of Chief Executive Officer

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

	32.1		Section 1350 Certification of Chief Executive Officer.

	32.2		Section 1350 Certification of Chief Financial Officer.

	99.1		Opinion letter of Independent Accountants Grant Thornton LLP.

(b)

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

Royal Bancshares filed a repot on Form 8-K with the Securities and Exchange Commission as of October 20, 2005, announcing the sale of two equity positions held in Royal Investments America, LLC.

Royal Bancshares filed a repot on Form 8-K with the Securities and Exchange Commission as of October 25, 2005, reporting its third quarter earnings and the declaration of its 42^nd consecutive cash dividend.

Royal Bancshares filed a repot on Form 8-K with the Securities and Exchange Commission as of December 22, 2005, announcing the declaration of a 2% stock dividend on both Class A and Class B shares.

Royal Bancshares filed a repot on Form 8-K with the Securities and Exchange Commission as of January 23, 2006, reporting its fourth quarter earnings and the declaration of its 43^rd consecutive cash dividend.

Royal Bancshares filed a repot on Form 8-K with the Securities and Exchange Commission as of February 22, 2006, announcing the appointment of Patrick J. McCormick to the Boards of Directors of Royal Bancshares and Royal Bank.

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

(d)		Not applicable.

SIGNATURES

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


	ROYAL BANCSHARES OF PENNSYLVANIA, INC.
	/s/ Joseph P. Campbell
	Joseph P. Campbell
	Chief Executive Officer January 23, 2007.

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


23.1		Consent of Independent Accountants from Beard Miller Company LLP.

23.2		Consent of Independent Accountants Grant Thornton LLP.

31.1		Rule 13a-14(a)/15-d-14(a) Certification of Chief Executive Officer

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

32.1		Section 1350 Certification of Chief Executive Officer.

32.2		Section 1350 Certification of Chief Financial Officer.

99.1		Opinion letter of Independent Accounts Grant Thornton LLP.