It's a good sign for Royal Bancshares in Narberth, Pa., when profitability is no longer in doubt.

The $725 million-asset company, which lost $105 million from 2007 to mid-2013, has since righted the ship. Royal has been in the black for seven straight quarters, earning $1.6 million in its most-recent period.

Asset quality is a different story. Royal's ratio of nonperforming loans to total loans was 1.99% at March 31. Though higher than that of most banks of Royal's size, the ratio is below 2% for the first time in six years.

Royal could be more aggressive with nonperforming loans, but management is determined to take its time working through those problems, opting for what Kevin Tylus, the company's chief executive, calls "purposeful downsizing." The plan is to gradually divest bad loans while also letting loans tied to a pair of now-shuttered businesses roll off naturally.

An improved economy around Royal's home turf in Philadelphia has given Tylus and his team the "luxury" of taking their time. "We didn't find ourselves having to take a large discount" on divested assets, he said.

About 10% of Royal's $8.4 million in nonperforming loans are tied to its defunct tax-lien business. Excluding those credits, as well as loans from its discontinued activity in shared national credits, would produce a nonperforming loan ratio of 0.87%, Tylus said.

Royal's course of action represents a safer way to address credit compared to electing to take big chargeoffs after exiting a business line, said Ted Peters, retired chairman and chief executive of Bryn Mawr Bank.

"Your capital gets dinged any time you sell in bulk," added Peters, who is now president and chief executive of Bluestone Financial Institutions Fund. The optimal route with distressed assets "is to work them off yourself."

The "ding" that Peters mentioned could have been significant in Royal's case. Investors in distressed assets have demonstrated little appetite for tax liens or shared national credits, said Thomas Lane, a retired bank executive and former director at Mission Capital.

While banks selling core assets can usually get 40% to 60% of a loan's value, Royal's loans may have sold for even less, Lane said. "It would have been a one-off, negotiated deal, and they would have been sitting across the table from vultures," he said.

In any event, the majority of Royal's tax-lien and shared-national-credit assets continues to perform and generates income as they roll off, giving Tylus more leeway to hold onto the loans. Still, Royal has reduced the level of legacy assets on its books from more than $73 million at the end of 2009 to $20 million on March 31.

If there is a downside to Royal's strategy, it is that the continued presence of tax-lien assets and shared national credits tends to obscure the gathering momentum of the company's core community banking business. Despite the recovery, Royal's stock, which peaked at $27.14 a share in 2004, has languished below $2 since early August.

Tylus, however, is content with Royal's prospects.

Regulators earlier this year terminated a 2011 memorandum of understanding with Royal.

"Our retail strategy is taking strong hold," Tylus said, noting that a branch Royal opened in Philadelphia's Northern Liberties neighborhood in September is now the company's third-busiest location. Tylus said he is hoping for similar success with a branch in Willow Grove, Pa., that is set to open in June.

"If you choose the right locations, branch banking can still be effective and profitable," Tylus said.

Peters also believes Royal is headed in the right direction.

"I've got a lot of respect for Kevin," Peters said. "I think he's doing all the right things. Personally, I think they're going to do well and be a survivor. It's a nice story."

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