investor in a variable interest entity and is required to report its investment in the variable interest entity on a consolidated basis under FIN 46(R). The variable interest entity is responsible for providing its financial information to the Company. We complete an internal review of this financial information. This review requires substantive judgment and estimation. The Company has identified accounting for allowance for loan and leases losses, deferred tax assets, other than temporary impairment on investments securities, accounting for acquisition, development and construction loans and derivative securities as among the most critical accounting policies and estimates in that they are important to the presentation of the Company's financial condition and results of operations, and they require difficult, subjective or complex judgments as a result of the need to make estimates.
RESULTS OF OPERATIONS
Financial Highlights and Business Results Results of operations depend primarily on net interest income, which is the difference between interest income on interest earning assets and interest expense on interest bearing liabilities. Interest earning assets consist principally of loans and investment securities, while interest bearing liabilities consist primarily of deposits and borrowings. Interest income is recognized according to the effective interest yield method. Net income is affected by the provision for loan and lease losses, the level of non-interest income (loss) and non-interest expenses, including salary and employee benefits, occupancy expenses and other operating expenses. Interest income is also affected by the level of non-accrual loans.
At March 31, 2009, the Company had consolidated total assets of approximately $1.3 billion, total loans and leases of $707.4 million, total deposits of approximately $812.1 million, and shareholders' equity of approximately $106.3 million. The Company had interest income of $16.4 million for the three months ended March 31, 2009, reflecting a decrease of $3.7 million, or 18.5%, from the comparable period of 2008. The decline in interest income was attributed to a lower level of investments; a 200 basis point reduction in the prime rate by the Federal Reserve since the end of the first quarter in 2008; and an increase in non-performing loans since March 31, 2008, that resulted in the loss of accrued interest. The prime rate reduction negatively impacted prime based and variable rate loans. Interest expense for the three months ended March 31, 2009 was $9.3 million resulting in a decrease of $888,000, or 8.7%, from the comparable period of 2008 due to improved pricing of deposit products, mainly higher cost time deposits. The Company recorded a net loss for the quarter ended March 31, 2009 of $6.8 million compared to net income of $1.0 million reported for the quarter ended March 31, 2008. The net loss in 2009 was primarily associated with $4.2 million in impairment charges on equity securities in the available-for-sale investment portfolio, an increase in nonperforming loans which resulted in the loss of interest income associated with those nonperforming loans, and lower yields on loans and investments. The chief sources of revenue for the Company are interest income from extending loans and interest income from investing in security instruments, mostly through its subsidiaries Royal Bank and Royal Asian. Both Royal Bank and Royal Asian principally generate commercial real estate loans primarily secured by first mortgage liens. These types of loans make up 27% and 72% of the loan portfolios of Royal Bank and Royal Asian at March 31, 2009, respectively. Additionally, Royal Bank and Royal Asian offer construction loans, including construction loans for commercial real estate projects and for residential home development. At March 31 2009, construction loans comprised 27% and 13%, respectively, of the Royal Bank and Royal Asian loan portfolios. Land development loans at March 31, 2009 comprised 11% and 0% of the loan portfolios of Royal Bank and Royal Asian, respectively. Construction loans and land development loans can have more risk associated with them, especially when a weakened economy, such as we are experiencing now, adversely impacts the commercial rental or home sales market. During 2005, the Company received permission to offer loans, including mezzanine loans, by the Federal Reserve Board. Royal Bank also offers mezzanine loans. Mezzanine loans are typically inherently more risky, higher rewarding, loans. They are often secured by subordinate lien positions with loan to value ratios typically between 75% and 95% of collateral value. The Company and its subsidiaries do not typically offer mezzanine loans for purposes other than the acquisition or construction of projects related to real estate. On occasion, the Company has extended mezzanine financing on a project where Royal Bank extended senior debt financing. During the fourth quarter of 2007, management of the Company made a decision to curtail mezzanine lending due to the elevation of risk given the current economic conditions. At March 31, 2009, the Company had $5.7 million in mezzanine loans outstanding, and the percentage of mezzanine loans in the Company consolidated

loan portfolio was 0.8% of the portfolio. Mezzanine loans inherently carry more risk and accordingly at March 31, 2009, the portion of the Company's loan loss reserve attributed to mezzanine loans was $1.6 million, or 27% of outstanding mezzanine loans. Net earnings of the Company are largely dependent on taking in deposits at competitive market rates, and then redeploying those deposited funds into loans and investments in securities at rates higher than those paid to the depositors to earn an interest rate spread. Please see the "Net Interest Margin" section in Managements Discussion and Analysis of Financial Condition and Results of Operation below for additional information on interest yield and cost.
Consolidated Net Loss
During the first quarter of 2009, the Company recorded a net loss of $6.8 million, compared to net income of $1.0 million for the comparable quarter of 2008. The net loss was primarily the result of a $4.2 million impairment loss on available for sale investment securities, an increase in nonperforming loans which resulted in the loss of interest income associated with those nonperforming loans, and lower yields on loans and investments. Net interest income declined $2.8 million to $7.1 million for the three months ended March 31, 2009 compared to $9.9 million for the three months ended March 31, 2008. As a consequence of the slowdown in the housing market and the economic recession, the Company continued to experience a weakening in the performance of real estate related loans and impairment losses on equity investments. Impaired and non-accrual loans are reviewed in the "Credit Risk Management" section of this report while the impaired investment securities are discussed in the "Investment Securities" section under "Financial Condition". Basic and diluted losses per common share were both $0.53 for the first quarter of 2009, as compared to basic and diluted earnings per common share of $0.08 for the comparable quarter of 2008.
Interest Income
Total interest income for the first quarter of 2009 amounted to $16.4 million, which represented a decline of $3.7 million, or 18.5 %, from the comparable quarter of 2008. The decrease was primarily driven by a decline in the yields on all earning assets, loans in particular, due to a 200 basis point decline in the prime rate during the past twelve months related to the Federal Reserve's monetary policy that negatively impacted prime based loans and investments purchased within the past two quarters. Additionally, the year over year increase in non-accrual loans negatively impacted the yield on interest earning assets. Average interest earning assets, which amounted to $1.1 billion in the first quarter of 2009, increased $15.8 million, or 1.4%, above the first quarter of 2008 due almost entirely to an increase in cash equivalents year over year. Average loan balances of $720.4 million in the first quarter of 2009 increased $69.4 million (10.7%) year over year and was entirely offset by a decline in average investment securities of $69.3 million (14.6%) year over year. The loan growth was attributed to an increased focus on commercial and industrial lending during the past two quarters, the introduction of small business lending in the fourth quarter of 2008, advances against existing outstanding loans, continued growth in tax certificates and minimal loan prepayments. The decline in investment securities was primarily attributed to maturities and calls of agency bonds during the first two quarters of 2008.
The yield on average interest earning assets for the first quarter of 2009 of 5.80% amounted to a decline of 136 basis points from the prior year's first quarter yield. The yield reduction was comprised of year over year declines of 250, 42 and 206 basis points for cash equivalents (0.63% versus 3.13%), investments (4.98% versus 5.40%) and loans (6.39% versus 8.45%), respectively. Lower interest rates on all three earning asset categories reflected the general market decline in interest rates during the past year and the significant impact on variable rate loans in particular. In addition the yield on average loans was negatively impacted by the increase of non-accrual loans during the past year. Non-accrual loans were $70.0 million at March 31, 2009 compared to $41.9 million at March 31, 2008.
Interest Expense
Total interest expense of $9.3 million in the first quarter of 2009 declined by $888 thousand, or 8.7%, from the comparable quarter of 2008. The reduction in interest expense was mainly associated with a decline in rates paid on retail and brokered deposits. The average interest rate paid on average interest-bearing deposits for the first quarter of 2009 was 3.47% resulting in a decline of 78 basis points from the level of 4.25% during the comparable quarter

of 2008. As a result of the general decline in market interest rates, lower interest rates were paid on existing customer money market and savings accounts coupled with lower interest rates paid on new deposits, primarily customer and brokered time deposits. Average interest-bearing liabilities of $1.0 billion increased by $48.5 million, or 4.9%, due to an increase in interest-bearing deposits of $74.2 million, or 11.3%, which was partially offset by a reduction in borrowings, primarily consisting of FHLB advances, of $25.7 million, or 7.9%. As a result of the decline in market interest rates, retail and brokered deposits became more attractive during the past two quarters and management shifted the funding emphasis to these deposits and away from FHLB advances. Management elected to reduce the reliance on FHLB advances due to the suspension of the dividend at year end 2008 coupled with the current requirement of full collateral delivery status for FHLB advances. The average interest rate paid on FHLB advances of 4.04% during the first quarter of 2009 increased modestly from 3.94% during the prior year's first quarter. The overall increase in interest-bearing liabilities was approximately triple the increase in interest earning assets primarily due to the decline in funding associated with a reduction in shareholders' equity and a modest reduction in non-interest bearing deposits.
Net Interest Margin
The net interest margin in the first quarter of 2009 of 2.52% declined 103 basis points from 3.55% in the comparable quarter of 2008. The impact of the reduction of the prime rate on variable rate loans within the loan portfolio coupled with the negative impact associated with the increased level of non-performing loans added to the already existing net interest margin compression. Although a significant segment of the loan portfolio experienced an immediate decrease in yields on loans as the prime rate declined, the funding side of the balance sheet will only experience a lagged decline in rates paid on deposits since the majority of the deposits are time deposits that will re-price only at maturity. In addition, FHLB advances are fixed rate borrowings that will not immediately re-price since they mature over the next few years. In order to mitigate the impact of the margin decline, management has transitioned lower yielding investment securities that have matured or were called into new higher yielding loans during the past year. At March 31, 2009 loans amounted to 61% and investment securities amounted to 32% of total interest earning assets, while the same percentages at March 31, 2008 amounted to 59% and 38% of interest earning assets, respectively, for loans and investments securities.
The following table represents the average daily balances of assets, liabilities and shareholders' equity and the respective interest bearing assets and interest bearing liabilities, as well as average rates for the periods indicated, exclusive of interest on obligations related to real estate owned via equity investment. The loans outstanding include non-accruing loans. The yield on earning assets and the net interest margin are presented on a fully tax-equivalent (FTE) and annualized basis. The FTE basis adjusts for the tax benefit of income on certain tax-exempt investments and loans using the federal statutory tax rate of 35% for each period presented.

                                          For the three months ended               For the three months ended
                                                March 31, 2009                           March 31, 2008
                                       Average                                  Average
(In thousands, except percentages)     Balance       Interest      Yield        Balance       Interest      Yield

Cash equivalents                     $    17,931     $      28       0.63 %   $     2,313     $      18       3.13 %
Investments securities                   405,406         4,982       4.98 %       474,658         6,370       5.40 %
Loans                                    720,425        11,344       6.39 %       651,001        13,684       8.45 %

Earning assets                         1,143,762        16,354       5.80 %     1,127,972        20,072       7.16 %

Non-earning assets                        50,020                                   73,451


Total assets                         $ 1,193,782                              $ 1,201,423


Interest-bearing deposits            $   730,452         6,252       3.47 %   $   656,239         6,934       4.25 %
Borrowings                               300,127         2,993       4.04 %       325,823         3,193       3.94 %

Total interest bearing liabilities     1,030,579         9,245       3.64 %       982,062        10,127       4.15 %

Non-interest bearing deposits             53,704                                   59,578
Other liabilities                         14,288                                   13,744
Shareholders' equity                      95,211                                  146,039

Total liabilities and equity         $ 1,193,782                              $ 1,201,423

Net interest margin                                  $   7,109       2.52 %                   $   9,945       3.55 %

Rate Volume Analysis
The following tables 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 real estate owned via equity
investment, for the three month period ended March 31, 2009, as compared to the
respective period in 2008, into amounts attributable to both rates and volume
variances.

                                                         For the three months ended
                                                                 March 31,
                                                               2009 vs. 2008
                                                            Increase (decrease)
    (In thousands)                                    Volume        Rate        Total


    Interest income
    Interest-bearing deposits                       $     22     $     (8 )   $     14
    Federal funds sold                                     3           (7 )         (4 )

    Total short term earning assets                 $     25     $    (15 )   $     10

    Investments securities
    Held to maturity                                  (1,296 )          -       (1,296 )
    Available for sale                                   333         (425 )        (92 )

    Total investments                               $   (963 )   $   (425 )   $ (1,388 )

    Loans
    Commercial demand loans                         $    175     $ (2,182 )   $ (2,007 )
    Commercial mortgages                                 427         (581 )       (154 )
    Residential and home equity                          (27 )        (42 )        (69 )
    Leases receivables                                   157          (87 )         70
    Tax certificates                                     768         (133 )        635
    Other loans                                            -           (8 )         (8 )
    Loan fees                                           (807 )          -         (807 )

    Total loans                                     $    693     $ (3,033 )   $ (2,340 )

    Total decrease in interest income               $   (245 )   $ (3,473 )   $ (3,718 )


    Interest expense
    Deposits
    NOW and money market                            $   (297 )   $   (833 )   $ (1,130 )
    Savings                                                -            1            1
    Time deposits                                      1,261         (814 )        447

    Total deposits                                  $    964     $ (1,646 )   $   (682 )
    Trust preferred                                        -          (77 )        (77 )
    Borrowings                                          (257 )        134         (123 )


    Total increase (decrease) in interest expense   $    707     $ (1,589 )   $   (882 )


    Total decrease in net interest income           $   (952 )   $ (1,884 )   $ (2,836 )

Credit Risk Management
The Company's loan and lease portfolio (the "credit portfolio") is subject to varying degrees of credit risk. The Company maintains an allowance for loan and lease losses (the "allowance") to absorb possible losses in the loan and lease portfolio. The allowance is based on the review and evaluation of the loan and lease portfolio, along with ongoing, quarterly assessments of the probable losses inherent in that portfolio. The allowance represents an

estimation made pursuant to SFAS No. 5, "Accounting for Contingencies," or SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." The adequacy of the allowance is determined through evaluation of the credit portfolio, and involves consideration of a number of factors, as outlined below, to establish a prudent level. Determination of the allowance is inherently subjective and requires significant estimates, including estimated losses on pools of homogeneous loans and leases based on historical loss experience and consideration of current economic trends, which may be susceptible to significant change. Loans and leases deemed uncollectible are charged against the allowance, while recoveries are credited to the allowance. Management adjusts the level of the allowance through the provision for loan and lease losses, which is recorded as a current period expense. The Company's systematic methodology for assessing the appropriateness of the allowance includes: (1) the formula allowance reflecting historical losses, as adjusted, by loan category, and (2) the specific allowance for risk-rated credits on an individual or portfolio basis.
The Company uses three major components in determining the appropriate value of the loan and lease loss allowance: standards required under SFAS No. 114, an historical loss factor, and an environmental factor. Utilizing standards required under SFAS No. 114, loans are evaluated for impairment on an individual basis considering current collateral values (current appraisals or rent rolls for income producing properties), all known relevant factors that may affect loan collectability, and risks inherent in different kinds of lending (such as source of repayment, quality of borrower and concentration of credit quality). Once a loan is determined to be impaired (or is classified) such loans will be deducted from the portfolio and the net remaining balance will used in the historical and environmental analysis.
The formula allowance, which is based upon historical loss factors, as adjusted, establishes allowances for the major loan and lease categories based upon a five year rolling average of the historical loss experienced. The factors used to adjust the historical loss experience address various risk characteristics of the Company's loan and lease portfolio including: (1) trends in delinquencies and other non-performing loans, (2) changes in the risk profile related to large loans in the portfolio, (3) changes in the growth trends of categories of loans comprising the loan and lease portfolio, (4) concentrations of loans and leases to specific industry segments, and (5) changes in economic conditions on both a local and national level.
Management recognizes the higher credit risk associated with commercial and construction loans. As a result of the higher credit risk related to commercial and construction loans, the Company computes its formula allowance (which is based upon historical loss factors, as adjusted) using higher quantitative risk weighting factors than used for its consumer related loans. As an example, the Company applies an internal quantitative risk-weighting factor for construction loans which is approximately three times higher than the quantitative risk-weighting factor used for multi-family real estate loans. These higher economic risk factors for commercial and construction loans are used to compensate for the higher volatility of commercial and construction loans to changes in the economy and various real estate markets.
A loan is considered impaired when it is probable that interest and principal will not be collected according to the contractual term of the loan agreement. Analysis resulting in specific allowances, including those on loans identified for evaluation of impairment, includes consideration of the borrower's overall financial condition, resources and payment record, support available from financial guarantors and the sufficiency of collateral. For such loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. These factors are combined to estimate the probability and severity of inherent losses. Then a specific allowance is established based on the Company's calculation of the potential loss in individual loans. Additional allowances may also be established in special circumstances involving a particular group of credits or portfolio when management becomes aware that losses incurred may exceed those determined by application of the risk factors.
The Company classifies its leases as capital leases, in accordance to SFAS . . .