Royal in Pa. Turns to Retail Banking, Millennials to Complete Comeback

Royal Bancshares of Pennsylvania in Narberth is back on offense after addressing issues that brought it alarmingly close to failure a few years ago.

The $723 million-asset company is all but done winding down the tax-lien and syndicated-lending businesses that landed it in hot water during the financial crisis, and management is aiming to replace those loans by beefing up its commitment to retail banking.

Royal complemented its back-to-basics approach in the past two years by redesigning its website, revisiting its logo, and refurbishing and modernizing five of its 13 branches. The company has also expanded its consumer platform to include unsecured loans of $500 to $15,000.

Management plans to take things a step further next year by opening a branch in Willow Grove, Pa., in January, remodeling its flagship Narberth branch in June and revving up Small Business Administration lending. Still, the underlying premise is that local banking is the best, and safest, way to grow.

"The most important thing about that revenue is that it is all in-market," Kevin Tylus, the company's president and chief executive, said in a recent interview. "For the first time in the company's history, we invested in retail banking. … We really modernized how we go to market on the retail side."

Though commercial real estate lending remains at the core of Royal's business, Tylus said he is looking to retail to add lower-cost funding while increasing the granularity of the company's loan book.

So far, the results are encouraging. Royal earned $1.4 million in the third quarter and $4.3 million for the first nine months of 2014. Tylus said Royal is opening three times as many checking accounts as it did a year earlier and, at Sept. 30, consumer lending, which includes home equity lines, totaled about $9 million.

Small consumer loans are playing an increasingly large role in Royal's new look. As a line item on the company's earnings report, they are relatively modest, totaling $2.3 million at Sept. 30, though it is up from $844,000 at the end of 2012, according to the Federal Deposit Insurance Corp.

Royal is using small loans to help reach younger, entrepreneurial customers, said Lars Eller, the company's chief retail banking officer. "What we're trying to do is get to the millennial market, which doesn't necessarily own a home yet or have a business," he said.

Royal's return on assets at the end of the third quarter was 0.78%, a far cry from the 3.65% it recorded at the apex of its pre-financial-crisis success in 2005. Tylus, however, said he isn't disturbed by the comparison, noting that most of the precrisis profit came from the tax-lien and loan syndication businesses, both of which blew up. (Most of the syndicated loans soured during the recession, while the tax lien unit became ensnared in a bid-rigging scandal.)

Royal did not fully think through the hazards involved with those business, said Michael Thompson, the company's chief financial officer. "There wasn't a real enterprise risk management program that focused on what [might result] if things went wrong," he said.

Such issues, combined with the economic downturn, made 2007 to 2012 a particularly trying time for Royal, which lost $102.6 million over that period. Tylus, hired in December 2012 to lead Royal's turnaround, quickly went about right sizing the company in a process that included deep spending cuts.

Tylus sold Royal's fleet of company-owned cars and terminated a number of country club memberships. And there were plenty of painful cuts, as Tylus suspended Royal's 401(k) program and slashed the workforce by 22%. Noninterest expense for 2013 fell 28% from a year earlier, to $26.3 million.

Royal has been reinvesting the savings this year, adding branches and hiring people such as Eller, Chief Credit Officer Kathryn McDonald and a number of high-powered commercial lenders.

Behind the scenes, Tylus engineered a $14 million private placement and $6 million shareholder rights offering. The private placement included Royal's first-ever institutional investors, including Emerald Asset Advisors in Lancaster, Pa., and Wellington Management in Wayne, Pa.

Neither firm returned calls seeking comment, though Tylus said Royal was "ecstatic" about the investment. "They're very sophisticated in their understanding of community banks," he said. "It was obviously a good message to the marketplace of how Royal is being perceived."

The capital helped Royal exit the Trouble Asset Relief Program in July and lifted its ratio of tangible common equity to assets to 6% at Sept. 30.

The tangible common equity level was "really important level to get to," Tylus said, adding that reaching that mark just two years into the turnaround "is really a significant milestone for the company."