Royal Bancshares Of Pennsylvania Shakes Off The Tarp

| About: Royal Bancshares (RBPAA)

Summary

A recent exit from TARP.

Growing earnings.

An improving business climate.

This isn't my first relationship with Royal Bancshares of Pennsylvania (NASDAQ:RBPAA). A decade or so ago, I bought shares in this regional bank when it paid a 4% dividend and churned out steady, if not spectacular earnings. For a number of years, I was content to toss my dividends back to Royal in return for more shares. My share count grew as did my comfort level with this cozy little investment. Well, the line between contentment and complacency is a fine one that's easily crossed and once it is, things can become shall we say, interesting, if not downright dangerous. Without even realizing it, I had traversed that line and was about to pay the price.

I had warnings in 2006 and 2007 but if contentment is that warm glass of milk before bedtime, then complacency is a narcotic that no one, much less an investor, should ever ingest. By the time I finally came to my senses it was 2008, and we all know what happened in that wretched year; I sold my shares at a loss.

For the next couple of years, I busied myself with pursuits more rewarding than stock investing. You know, things like sorting my sock drawer, cleaning the garage, mowing the lawn and washing the car. As enthralling as these endeavors were, I couldn't get Royal Bancshares out of my mind. The bank was like a favorite child to me; a child that had gone wrong. I decided to keep informed on this small regional bank to see where the drama might lead me. And this, dear reader, is where my sob story ends and the real story begins.

In early 2007, shares of RBPAA were worth around $23 a piece and paid a 4% dividend. A year later, the dividend had evaporated and shares of the bank were changing hands in the neighborhood of $4 a share. A recession, coupled with the fact that Royal had joined many of its brethren in making shaky loans, had obliterated both earnings and the stock price. The stock market was in freefall, big boys like Lehman Brothers were staggering to oblivion, business was bad, people were scared, and those aforementioned shaky loans were now glowing in the dark. Before it was all over, you could pick up a share of Royal for less than a buck. The bank had no choice but to hunker down and try to survive. Stormy times indeed. Doom and gloom abounded.

Then, in February of 2009, a morsel of hope. The Troubled Assets Relief Program (TARP) was created. That program, with over $430 billion in reserves, saw fit to throw Royal a $30 million lifeline. Many were not in favor of what they considered the squandering of taxpayer money. Be that as it may, this infusion of capital into the veins of Royal gave it the means to survive. The road back to even meager profitability would be long and rough, but at least now Royal had the strength to make the journey.

And what a journey it has been. For the next four years, Royal continued to lose money. In 2009, the bank suffered a loss of $2.64 a share. The years of 2010 through 2012 produced red numbers of $1.78, $.80 and $1.33, respectively. During those years, a pencil, paper and a ruler were all that was needed to illustrate the RBPAA stock chart.

Then, in late 2012, a fellow by the name of F. Kevin Tylus was brought in by Royal to assume the positions of President and CEO. Mr. Tylus had a daunting task confronting him; Royal hadn't turned a profit in 17 quarters. Mr. Tylus was up to the challenge. 2013 saw Royal breakeven. Mr. Tylus stayed busy in 2014. That year, Royal repurchased 11,000 of the 30,000 shares of the preferred stock it had issued to the United States Treasury in 2009 in accordance with the TARP arrangement. Also, 2014 was the first profitable year for Royal in many moons. The bank earned $.15 a share.

In 2015, Royal's earnings doubled to $.31 a share.

This year, the picture has brightened even more. Royal completed the repurchase of the remaining preferreds issued in 2009. With the completion of this buyback, Royal has eliminated $40 million of debt from its balance sheet and also rid itself of a knee-cracking 9% dividend payment. This year also brought some recognition from the investment community with an analyst upgrade.

A few comparisons of Royal and its peers are rather eye-opening.

Royal is trading at a PE of around 9 while the industry average is about 14. A reconciliation of these two numbers today would give Royal a stock price of $5 a share.

The earnings per share growth of Royal this latest quarter over the same quarter a year ago was 50% while its competitors averaged around 7.5%. Also, Royal has grown earnings 216% on a TTM to prior TTM basis while its peers have chalked up a 25% gain.

The situation looked very bleak for Royal a few years ago. Today, things look quite different. Here are a few points that led me to that conclusion.

Interest rates are on the rise. A steepening yield curve is beneficial to the banking industry. After all, banks can raise rates faster on money lent than money deposited, which in turn fattens margins.

The recent election, as contentious as it was surprising, has given us a new administration that has promised much. Among these vows are the repatriation of trillions of dollars held overseas by U.S. corporations, a massive rebuilding of this country's tottering infrastructure, a reduction in the regulations that are choking businesses, and a plan to make the United States energy-independent. The gap between these pledges and reality might look very wide in a couple of years, but even a partial realization of these undertakings would boost employment, spending, and investment activity.

The strong economic growth that I believe we will experience in the coming years will spur demand from both businesses and consumers for loans, adding to the profitability of banks.

It's my belief that Royal Bancshares of Pennsylvania, an institution that has proven itself a survivor through bad times, will prosper in good times.

Disclosure: I am/we are long RBPAA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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Tagged: , , , Regional - Northeast Banks
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