Impairment losses on investment securities                                     $23.4 million
Provision for loan and lease losses                                            $21.8 million
Non-cash charge to establish valuation allowance for deferred tax asset        $15.5 million
Decreased net interest income                                                  $ 3.2 million
Payout of former President's contract                                          $ 2.1 million

Impairment losses on investment securities were related to the recent bankruptcy filing of Lehman Brothers Holdings, Inc. ("Lehman"), the FDIC seizure of Washington Mutual and another bank in Texas, the significant loss of capital in another bank in California and the increased loss severity and credit default rate of two collateralized

mortgage obligations. Non-performing loans at December 31, 2008 amounted to $85.8 million representing an increase of $60.4 million from year end 2007. Basic and diluted losses per share were both $2.86 for the 2008 compared to basic and diluted earnings per share of $0.04 in 2007.
The $15.5 million deferred tax asset valuation allowance could be reversed going forward and result in the recognition of an income tax benefit to the extent the Company generates adequate income.
Net income in 2007 amounted to $564,000 versus $21.6 million in 2006. The $21.0 million decrease year over year was due to an increase of $11.2 million in the provision for loan and lease losses related to increased non-performing loans associated with the weakened housing market, a $6.2 million charge associated with impairment in an equity investment in a condominium project, and a $5.9 million impairment charge for a real estate joint venture. Basic and diluted earnings per share were $0.04 for 2007, while basic and diluted earnings per share were $1.60 and $1.59, respectively for 2006.
Net Interest Income: Net interest income is the Company's primary source of income. Its level is a function of the average balance of interest-earning assets, the average balance of interest-bearing liabilities, and the spread between the yield on assets and liabilities. In turn, these factors are influenced by the pricing and mix of the Company's interest-earning assets and funding sources. Additionally, net interest income is affected by market and economic conditions, which influence rates on loan and deposit growth. The Company utilizes the effective yield interest method for recognizing interest income as required by SFAS 91. This pronouncement also guides our accounting for nonrefundable fees and costs associated with lending activities such as discounts, premiums, and loan origination fees. In the case of loan restructurings, if the terms of the new loan resulting from a loan refinancing or restructuring other than a troubled debt restructuring are at lease as favorable to the Company as the terms for comparable loans to other customers with similar collection risks who are not refinancing or restructuring a loan with the Company, the refinanced loan is accounted for as a new loan. This condition is met if the new loan's effective yield is at least equal to the effective yield for such loans. Any unamortized net fees or costs and any prepayment penalties from the original loan shall be recognized in interest income when the new loan is granted.
Net interest income was $34.7 million in 2008 as compared to $37.9 million in 2007. The decrease in net interest income in 2008 of $3.2 million was primarily due to the 400 basis point decline in the prime rate and the increase in non-performing loans which was partially offset by lower rates for brokered and retail certificates of deposit. (See the "Average Balance" table included in this discussion.) Despite the reduction, the net interest margin of 3.11% earned in 2007 increased four basis points to 3.15% for 2008.
Net interest income was $37.9 million in 2007 as compared to $46.6 million in 2006. The decrease in net interest income in 2007 of $8.7 million was primarily due the increase in non-performing loans during 2007 as well as a decrease in loan fee income of approximately $3.0 million. During 2006, the Company collected a $1.5 million prepayment fee from a borrower. As a result of the items noted above, the net interest margin of 3.11% earned in 2007 was lower than the 3.87% recorded in 2006.
Other: For 2007, included in the operating results is a $1.0 million reduction to net income related to the following accounting errors: a $667,000 reduction in net income resulting from an accounting error related to investments in real estate joint ventures, a $417,000 reduction in net income associated with an accounting error related to the consolidation of an investment in real estate owned via an equity investment and an increase in net income of $60,000 related to an error in the accounting for deferred loan costs per SFAS No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases." Business Segments: Under SFAS No. 131, "Segment Reporting", management of the Company has identified three reportable operating segments, "Community Banking", "Tax Liens" and "Equity Investments"; and two operating segments that do not meet the quantitative thresholds for requiring disclosure, but have different characteristics than the Community Banking, Tax Liens and Equity Investments segments, and from each other, "RBA Leasing" and "RBA Capital" ("Other" in the segment table in "Note B - Segment Information" to the Consolidated Financial Statements).

† Community Bank segment: At December 31, 2008, the Community Bank had total assets of $1.0 billion, a decrease of $130.4 million or 11% from $1.2 billion at December 31, 2007. Total deposits declined $10.1 million or 1% from $770.2 million at December 31, 2007 to $760.1 million at December 31, 2008. Net interest income for 2008 was $27.4 million compared to $34.4 million for 2007 representing a $7.0 million, or 20%, decline. The reduction in net interest income is primarily related to the 400 basis point drop in the prime rate coupled with the increase in non-performing assets. For 2008, non-interest income was a loss of $19.1 million compared to non-interest income of $8.5 million for 2007. This loss is mostly attributed to $23.4 million in impairment charges recorded on the available-for-sale investment portfolio. In 2008 non-interest expense was $26.1 million, an increase of $4.8 million, or 23%, from $21.3 million in 2007. The increase is mostly attributed to the $2.1 million payout of the formers President's contract and $1.3 million increase in legal and professional fees. The net loss for 2008 was $38.3 million compared to net income of $3.6 million.

† Tax Lien segment: At December 31, 2008, the Tax Lien segment had total assets of $85 million compared to $63.2 million at December 31, 2007 representing an increase of $21.8 million, or 34%. Net interest income doubled from $2.4 million in 2007 to $4.8 million in 2008. The provision for losses grew from $150,000 in 2007 to $2.6 million in 2008. The increase in the provision was related to a specific reserve for a portfolio described under "Credit Quality" in the non-accrual loan section. Non-interest income was $560,000 in 2008 compared to $1.1 million in 2007. Non-interest income is derived mostly from the gains on sale of OREO property. Non-interest expense was $2.0 million for 2008 compared to $1.6 million for 2007. Net income was $781,000 in 2008 compared to $979,000 for 2007.

† Equity Investment segment: At December 31, 2008 the Equity Investment segment had total assets of $17.4 million compared to $22.7 million at December 31, 2007 representing a decline of $5.3 million, or 23%. Net losses were $351,000 for 2008 compared to net losses of $4.2 million for 2007. The losses reflect impairment charges resulting from the downturn in the real estate market that continued into 2008.

Impairment of Investments in Real Estate Joint Ventures: In 2007, Royal Bank incurred an impairment expense of $5.9 million relating to an investment in a real estate joint venture for the construction of a 55 unit condominium project. RIA, a subsidiary of Royal Bank, is a limited partner in an apartment to condominium project. During 2007 this partnership made a determination that because of a downturn in the market for homes, its assets became impaired by approximately $8.5 million. RIA has $6.6 million as the remaining amount of its investment in this project. Since RIA is a limited partner and does not guarantee any partnership debt, $6.6 million is the maximum exposure in this investment. See "Note A.8 and Note A.18 Summary of Significant Accounting Policies" to the Consolidated Financial Statements.
Interest Income: For the full year December 31, 2008, total interest income amounted to $72.8 million versus $86.7 million for full year 2007 resulting in a decline of $13.9 million, or 16%. The decrease was attributable to both a lower level and yield on average interest earning assets year over year. Average interest earning assets for 2008 of $1.1 billion declined $118.5 million, or 10%, which was comprised of a decline in average cash and cash equivalents of $12.9 million, or 34%, a decline in average investment securities of $145.7 million, or 27%, and a partially offsetting increase in average total loans of $40.1 million, or 6%. The decline in investment securities occurred primarily during the first half of 2008 and resulted from maturities and calls on investments, primarily government agencies; management elected not to replace them in order to maintain strong capital ratios during the current weak housing market and economy. The growth in average total loans during 2008 resulted from new business relationships, new advances under existing lines of credit and a lower level of loan payoffs resulting from the weak economy.
The decline in the yield on average interest earning assets also contributed to the decline in interest income year over year (6.61% in 2008 versus 7.12% in 2007). This 51 basis point decline was related to a decline of 331 basis points on cash and cash equivalents and a 151 basis point decline in total loans, which were partially offset by a 43 basis point increase in the yield on investment securities. The decline in the yield on cash and cash equivalents year over year was attributed to a steep decline in short term market interest rates from the fourth quarter of 2007 through the

fourth quarter of 2008. The 151 basis point decline in the yield on average total loans, which amounted to 7.37% during 2008, resulted from lower market interest rates, which impacted new loans as well as existing prime-based loans and the significant increase in non-performing loans. For 2008, interest income on loans declined by $6.7 million, of which $5.1 million was attributed to lost interest on non-accrual loans. In addition during 2008, the prime rate declined by 400 basis points to 3.25%, which negatively impacted the interest income associated with the variable rate loan portfolio. At year end 2008, the variable rate portfolio represented 56% of total loans; however the Company was able to mitigate a portion of this negative impact through the utilization of rate floors in many of the commercial loan agreements that exceeded the current prime rate.
At December 31, 2008, non-performing loans to total loans amounted to 12% of total loans, whereas the same ratio at December 31, 2007, amounted 4%. The total interest income lost as a result of non-performing loans during 2008 amounted to $5.1 million. These unfavorable yield declines were partially offset by an increase in the yield on investment securities, which increased from 5.18% to 5.61% year over year. The improvement in investment securities yield year over year was associated with the reduction in government agency securities during the first half of 2008, which generally had a lower yield relative to the remainder of the investment portfolio.
Interest income for 2007 amounted to $86.7 million, which amounted to a decline of $6.3 million from the level of $93.0 million in 2006. The change year over year was attributed to an increase in the level of non-performing loans during 2007 coupled with a decrease of loan fee income of approximately $3.0 million. During 2006, the Company collected a $1.5 million prepayment fee from a borrower.
Interest Expense: Interest expense of $38.1 million for the full year 2008 decreased $10.8 million, or 22%, from the level in 2007 resulting from a decline in average interest-bearing deposits and a reduction in the interest rates paid for liabilities year over year. Average interest-bearing liabilities in 2008 amounted to $974.8 million, which represented a decline of $81.3 million, or 8%, from the prior years' average. This change was primarily comprised of a decline in average interest-bearing deposits of $134.1 million, or 17%, and an increase in average borrowings, mainly PNC borrowings, of $60.5 million, or 29%. This net decline in interest-bearing liabilities reflected reduced funding needs related to a reduction of investments securities. In addition, management was able to shift the funding mix of interest-bearing liabilities by allowing maturing higher cost certificates of deposit in a very competitive deposit market to run-off and utilizing more cost-effective FHLB advances and PNC borrowings. Rates paid on all major liability categories declined year over year resulting from the general decline in market rates attributed to the Federal Reserve's lowering of the prime rate by 400 basis points during 2008. The most significant declines are as follows: certificates of deposits declined by 66 basis points, money market accounts declined by 131 basis points, borrowings declined by 42 basis points and subordinated debt declined by 117 basis points.
Interest expense of $48.9 million for the year ended December 31, 2007 increased $2.5 million from the level of 2006 due to an increase in the average rates paid on interest bearing liabilities, primarily for money market accounts, time deposits and subordinated debt. The average interest rate paid on time deposits in 2007 relative to the prior year amounted to an increase of 45 basis points and an increase in money market accounts of 96 basis points, while the increase in the interest rate paid on subordinated debt increased by 20 basis points. Net Interest Margin: The net interest margin of 3.15% during 2008 amounted to a modest increase of 4 basis points above the level of 3.11% for 2007. The negative impact of falling interest rates on the variable rate segment of the loan portfolio and the added impact of the increased level of non-performing loans added to the already existing net interest margin compression. However management was able to mitigate this negative effect by shifting the mix of earning assets through redeploying part of the matured and called investment securities into higher yielding loans and not replacing the remainder thereby reducing the overall size of the balance sheet. The shifting of liabilities more towards cost-effective FHLB advances and PNC borrowings and away from maturing higher cost certificates of deposit also contributed to the modest increase in net interest margin. In addition, immediate savings were realized for interest bearing deposits other than time deposits as market interest rates declined during 2008.
The net interest margin amounted to 3.11% in 2007 compared to 3.87% in 2006. The decrease in the margin resulted from an increase in non-performing loans in 2007, a reduction in loan fee income year over year, a decline in the yield on variable rate loans in the fourth quarter of 2007 and an increase in the average rates paid on time deposits and money market accounts in 2007 versus 2006.

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

                                                                                 For the years ended December 31,
                                              2008                                              2007                                             2006
                             Average                          Yield /          Average                         Yield /          Average                         Yield /
(Dollars in thousands)       Balance         Interest          Rate            Balance         Interest          Rate           Balance         Interest          Rate
Assets
Interest bearing
deposits                   $    23,788       $     495            2.08 %     $    35,158       $   1,896           5.39 %     $     7,361       $     377           5.12 %
Federal funds                    1,323              24            1.81 %           2,900             147           5.07 %             844              43           5.09 %
Investment securities
Held to maturity                56,658           3,241            5.72 %         205,686          10,032           4.88 %         255,448          11,830           4.63 %
Available for sale             341,982          19,141            5.60 %         338,620          18,143           5.36 %         323,172          17,377           5.38 %

Total investment
securities                     398,640          22,382            5.61 %         544,306          28,175           5.18 %         578,620          29,207           5.05 %
Loans
Commercial demand
loans                          395,109          25,270            6.40 %         376,002          31,874           8.48 %         372,623          33,889           9.09 %
Real estate secured            256,124          22,153            8.65 %         238,929          22,187           9.29 %         233,816          28,158          12.04 %
Other loans                     25,528           2,440            9.56 %          21,681           2,457          11.33 %          12,152           1,332          10.96 %

Total loans                    676,761          49,863            7.37 %         636,612          56,518           8.88 %         618,591          63,379          10.25 %


Total interest
earnings assets              1,100,512          72,764            6.61 %       1,218,976          86,736           7.12 %       1,205,416          93,006           7.72 %


Non interest earnings
assets
Cash & due from banks            7,552                                            12,369                                           16,559
Other assets                   106,447                                            97,649                                          109,031
Allowance for loan
loss                           (23,301 )                                         (12,405 )                                        (11,066 )
Unearned discount               (1,692 )                                          (2,228 )                                         (2,252 )

Total non-interest
earning assets                  89,006                                            95,385                                          112,272

Total assets               $ 1,189,518                                       $ 1,314,361                                      $ 1,317,688


Liabilities &
Shareholders' Equity
Deposits
Savings                    $    15,125       $      76            0.50 %     $    16,461       $      85           0.52 %     $    18,549       $      98           0.53 %
Now                             48,414             894            1.85 %          52,975           1,185           2.24 %          59,472           1,473           2.48 %
Money market                   168,972           4,947            2.93 %         199,921           8,486           4.24 %         226,920           7,454           3.28 %
Time deposits                  434,662          19,497            4.49 %         531,965          27,384           5.15 %         393,685          18,503           4.70 %

Total interest bearing
deposits                       667,173          25,414            3.81 %         801,322          37,140           4.63 %         698,626          27,528           3.94 %
Federal funds                        -               -            0.00 %               -               -           0.00 %               -               -
Borrowings                     266,284          11,008            4.13 %         205,823           9,374           4.55 %         308,236          14,051           4.56 %
Obligation through VIE
equity investments              15,539             251            1.62 %          23,160             623           2.69 %          43,129           3,108           7.21 %
Subordinated debt               25,774           1,436            5.57 %          25,774           1,736           6.74 %          25,774           1,685           6.54 %


Total interest bearing
liabilities                    974,770          38,109            3.91 %       1,056,079          48,873           4.63 %       1,075,765          46,372           4.31 %


Non interest bearing
deposits                        57,211                                            68,562                                           62,641
Other liabilities               26,382                                            31,025                                           20,550

Total liabilities            1,058,363                                         1,155,666                                        1,158,956
Stockholders' equity           131,155                                           158,695                                          158,732

Total liabilities and
stockholder's equity       $ 1,189,518                                       $ 1,314,361                                      $ 1,317,688

Net interest income                          $  34,655                                         $  37,863                                        $  46,634

Net interest margin                                               3.15 %                                           3.11 %                                           3.87 %

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

(2) Portions of interest related to obligations through VIE are capitalized on the VIE's books.

The following table sets forth a rate/volume analysis, which segregates in detail the major factors contributing to the change in net interest income exclusive of interest on obligation through VIE, for the years ended December 31, 2008 and 2007, as compared to respective previous periods, into amounts attributable to both rate and volume variances.

                                                2008 versus 2007                               2007 versus 2006
                                                 Changes due to:                               Changes due to:
(In thousands)                        Volume          Rate           Total          Volume          Rate            Total
Interest income
Short term earning assets
Interest bearing deposits in
banks                                $   (237 )     $ (1,164 )     $  (1,401 )     $  1,504       $      15       $   1,519
Federal funds sold                        (28 )          (95 )          (123 )          104               -             104

Total short term earning assets          (265 )       (1,259 )        (1,524 )        1,608              15           1,623


Investments securities
Held to maturity                       (8,583 )        1,790          (6,793 )       (2,256 )           458          (1,798 )
Available for sale                        255            745           1,000            814             (48 )           766

Total Investments securities           (8,328 )        2,535          (5,793 )       (1,442 )           410          (1,032 )


Loans
Commercial demand loans                 1,329         (6,984 )        (5,655 )          380          (6,962 )        (6,582 )
Commercial mortgages                      634         (2,161 )        (1,527 )          278             (33 )           245
Residential and home equity
loans                                    (267 )         (147 )          (414 )         (340 )           (17 )          (357 )
Leases receivables                        459           (380 )            79            892             256           1,148
Real estate tax liens                   1,900              7           1,907            649             557           1,206
Other loans                               (26 )          (70 )           (96 )          (18 )            (4 )           (22 )
Loan fees                                (949 )            -            (949 )       (2,499 )             -          (2,499 )

Total loans                             3,080         (9,735 )        (6,655 )         (658 )        (6,203 )        (6,861 )


Total increase (decrease) in
interest income                      $ (5,513 )     $ (8,459 )     $ (13,972 )     $   (492 )     $  (5,778 )     $  (6,270 )


Interest expense
Deposits
NOW and money market                 $ (1,227 )     $ (2,603 )     $  (3,830 )     $   (842 )     $   1,578       $     736
Savings                                    (7 )           (2 )            (9 )           (8 )            (5 )           (13 )
Time deposits                          (4,633 )       (3,254 )        (7,887 )        5,227           3,662           8,889

Total deposits                         (5,867 )       (5,859 )       (11,726 )        4,377           5,235           9,612

. . .