Royal Financial, Inc. Announces Audited Fiscal Year 2020 Fourth Quarter and Year End Earnings Results

CHICAGO, Sept. 14, 2020 (GLOBE NEWSWIRE) -- Royal Financial, Inc. (the “Company”) (OTCQX: RYFL), incorporated under the laws of Delaware on December 15, 2004, for the purpose of serving as the holding company of Royal Savings Bank (the “Bank”), announces the audited earnings results and statement of condition for the fiscal year ended 2020.

Net income for the fourth quarter of fiscal 2020 was $1.0 million or $0.41 per share, compared to $874,000, or $0.34 per share, for the same period in fiscal 2019.  Net income for the year ended June 30, 2020, was $2.0 million, or $0.80 per share, compared to $3.7 million, or $1.46 per share in 2019.

The Company also reported total assets of $434.1 million and stockholders’ equity of $42.8 million as of June 30, 2020. 

At June 30, 2020, the book value per common share, shares outstanding of 2,556,518, was $16.75 compared to the book value per common share of $15.65 at June 30, 2019, for shares outstanding of 2,545,052.  The tangible book value per share was $15.80 at June 30, 2020, compared to tangible book value per share of $14.64 at June 30, 2019.  Total treasury shares as of June 30, 2020 is 88,482 shares, compared to 2019, with treasury shares at 99,948.

Comparison of Results of Operations for the Quarters Ended June 30, 2020 and June 30, 2019

Net income for the quarter ended June 30, 2020 was $1.0 million or $0.41 per share, an increase in net income of $164,000 (19%) from June 30, 2019. 

Net interest income was $3.5 million, an increase of $49,000 (1%) from the quarter ended June 30, 2019.  The increase in net interest income was the result of the decrease in interest expense by $457,000 (39%) due to lower cost of funds and was offset by a decrease in total interest income of $408,000 (9%). 

The Company funded the allowance for loan losses (“ALLL”) $471,000 for the quarter ended June 30, 2020 to provide for the increased growth in the loan portfolio due to the purchase of one-to-four family whole loans and as a replenishment of the ALLL for a single customer loan charge-off from the March 31, 2020 quarter end, that was in the ALLL as a specific reserve.

Total non-interest income increased $759,000 (323%) to $994,000, from the same period last year. The increase is the result of a gain on the sale of investment securities of $814,000, offset by decreases in service charges on deposit accounts of $26,000 (16%), secondary mortgage market fees of $23,000 (98%), and rental income of $6,000 (12%).

Total non-interest expense increased $247,000 (11%) compared to the same period last year. The increase in non-interest expense was driven by increases in acquisition expense of $141,000 (871%), occupancy and equipment of $131,000 (33%), salaries and employee benefits of $20,000 (2%), and marketing of $19,000 (196%).  These increases were offset by decreases in data processing of $17,000 (7%) and professional services of $38,000 (23%).

Comparison of Results of Operations for the Fiscal Years Ended June 30, 2020 and 2019

Net income for the fiscal year ended June 30, 2020 was $2.0 million, a decrease of $1.7 million (45%) from June 30, 2019. Net interest income for the fiscal year ended 2020 decreased $457,000 (3%) to $13.6 million.  The primary driver for the decrease in net interest income was the $793,000 (4%) net decrease in total interest income.  The decrease in interest income was offset by a decrease of $368,000 (47%) in interest expense on borrowings, offset by a $32,000 (1%) increase in interest expense on deposits due to the increase in certificate of deposit accounts.  

The provision for loan losses in 2020 was $1.8 million, an increase of $1.5 million (683%) from the prior year. In fiscal year 2020, the Company increased the provision for the ALLL in response to the COVID-19 pandemic, to provide for the increased growth in the loan portfolio due to the purchase of one-to-four family whole loans, and due to the replenishment of the ALLL for a single customer loan charge-off.

Non-interest income for the year ended 2020 was $1.6 million, an increase of $651,000 (66%) from the previous year.  The increase is the result of a gain on the sale of investment securities of $814,000 and an increase in rental income of $51,000 (24%), offset by decreases in service charges on deposit accounts of $79,000 (12%) and in secondary mortgage market fees of $127,000 (82%).

Non-interest expense increased $748,000 (8%) during fiscal year 2020.  The increase in non-interest expense is due to an increase of $305,000 (613%) in acquisition expenses and an increase of $77,000 in professional services due to increased legal expenses. During the fiscal year, there was also an increase in salaries and employee benefits of $176,000 (4%), an increase in occupancy and equipment of $96,000 (5%) as a result of an increase in real estate taxes and depreciation expense, an increase of $76,000 in data processing costs, and an increase in marketing costs of $69,000 due to the Company’s increased advertisements of certificates of deposit rates. These increases were offset by decreases of $16,800 in director fees due to the reduction of director fees, and a decrease of $96,000 in FDIC insurance expense due to the assessment credit refund. 

For the fiscal year ended 2020, the provision for income taxes was $1.2 million compared to $1.7 million for the same period in 2019.  

Comparison of Financial Condition at June 30, 2020 and June 30, 2019

The Company’s total assets increased $29.1 million (7%), to $434.1 million at June 30, 2020, from $404.9 million at June 30, 2019.

Total cash and cash equivalents increased $158,000 (1%) to $14.8 million from the prior year.

Securities available for sale decreased $8.0 million (20%), to $31.3 million at June 30, 2020 from $39.3 million at June 30, 2019.  The decrease is the result of a $5.0 million agency bond maturing and the sale of $17.8 million in municipal bonds and $1.1 million in corporate bonds, offset by the purchase of $11.5 million in municipal bonds and $3.9 million in corporate bonds and the increase of $716,000 of the unrealized gain in the portfolio.

Loans, net of allowance for loan losses, increased $37.4 million (12%), to $356.7 million at June 30, 2020, from $319.3 million at June 30, 2019. The increase is the result of an increase of $7.5 million in commercial loans and the purchase of a $50 million 1-4 family mortgage loan purchase, offset by a decrease of $22.0 million in the portfolio due to pay-offs.

The allowance for loan losses was $3.2 million, or 0.88% of total loans, at June 30, 2020, as compared to $2.6 million, or 0.82% of total loans, at June 30, 2018.  In addition to the allowance for loan losses, net purchase discount on acquired loans was $497,000 at June 30, 2020 compared to $774,000 at June 30, 2019.  Individual loan discounts are being accreted into interest income over the life of the loan; however, they can offset loan losses upon loan default. Nonperforming loans totaled $2.4 million, or 0.56% of outstanding loans, at June 30, 2020 compared to $1.2 million, or 0.37%, at June 30, 2019.  

Other real estate owned (“OREO”) is $297,000 at June 30, 2020. The property is under contract for sale and is expected to close by December, 2020. A small gain is expected.  

The Deferred Tax Asset (“DTA”) decreased by $1.4 million (17%) from $8.1 million on June 30, 2019, to $6.7 million on June 30, 2020.  The Company increased the valuation allowance for State of Illinois DTA during the fiscal year an additional $300,000 based on the fiscal 2020 performance and updated forecasting. The valuation allowance as of June 30, 2020 is $600,000.

The Core Deposit Intangibles (“CDI”) held by the Company decreased $141,000 (17%) as of June 30, 2020. The decrease was the result of a full year of amortization of the CDI of $141,000.

Total deposits increased $25.4 million (7%), to $373.3 million at June 30, 2020 from $347.9 million at June 30, 2019. The increase was primarily due to the increase in money market accounts, offset by a decrease in time deposits.

As of June 30, 2020, the Company had $4.0 million Federal Home Loan Bank advances outstanding. The advance is 0% interest and has a maturity of May 3, 2021.

Notes payable decreased by $3.5 million (31%) to $7.5 million as of June 30, 2020. Throughout the fiscal year, the Company made two special payments totaling $2.0 million in principal reductions, and a reduction of $1.5 million with quarterly payments of $375,000. In June, the loan and line of credit was renewed. The note will amortize in full over 7.75 years with an interest only payment to be made on August 1, 2020, followed by quarterly payments of $250,000 in principal reduction and interest at the rate of 0.25% below the Wall Street Journal Prime Rate; however, the interest rate will not be below 3% per annum.

Total stockholders’ equity increased $3.0 million (7%), to $42.8 million at June 30, 2020 from $39.8 million at June 30, 2019. The increase is primarily a result of net income of $2.0 million (13%) and an increase in unrealized gain in equity of $715,000 (292%) and an increase in additional paid in capital of $249,000 (1%).

For the fiscal year ended June 30, 2020, the Bank paid cash dividends of $3.1 million to the Company. The upstream of funds enabled the Company to make debt and interest payments on its notes payable, as well as pay general business expenses and retain cash for fiscal 2021.

To meet the minimum requirement to be well capitalized under prompt corrective action regulations, the Bank is required to maintain regulatory capital sufficient to meet Tier 1 capital leverage ratio, and risk-based ratios for Common Equity Tier 1 capital, Tier 1 capital and Total capital of at least 5.0%, 6.5%, 8.0% and 10.0%, respectively.  At June 30, 2020, the Bank exceeded each of its capital requirements with ratios of 9.94%, 14.39%, 14.39% and 15.50%, respectively.

In August, 2019, the Board of Directors authorized a stock repurchase program for up to 76,849 shares of its outstanding common stock. The Company did not repurchase any shares during the fourth quarter of fiscal year 2020. The Company repurchased a total of 7,633 shares during the fiscal year.

The audited consolidated financial statements for 2020 and 2019 are available at www.royal-bank.us.

The COVID-19 Pandemic Update on Business Operations.

In June, the Company re-opened all branch lobbies and continues to implement social distancing measures as advised by the Centers for Disease Control and Prevention (“CDC”) and continues to follow guidance from all local, state, and federal authorities.

Lending operations and accommodations to borrowers

In response to the pandemic, the Company is offering fee waivers, payment deferrals for up to 120 days, and other expanded assistance for mortgage, commercial real estate, small business and personal lending customers. Secondary payment deferral assistance is limited to 60 days requiring a hardship letter and payment of any required escrows. The Bank’s forbearance program as of June 30, 2020, assisted 8.8% of borrowers for a total of $42.2 million in loans. As of September 9, 2020, a total of 60 borrowers, totaling $11.6 million in loans, remain on the forbearance program; of which 16 borrowers have requested extension relief for an additional 60 days, totaling $3.1 million in loans.  Additionally, the Company made accommodations to 21 commercial loan customers with balances of $38.5 million in March. The number of accommodation requests has decreased to 4 customers with balances of $12.6 million at September 9, 2020 as the environment has begun to stabilize. The Company has also identified and continues to monitor certain performing retail industry segment concentrations. 

The Company has designated staff to assist customers to access funding provided by the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act passed at the end of the first quarter, including the Paycheck Protection Program (“PPP”), for which the Bank received SBA approval for 153 loans totaling approximately $11.7 million. As of September 3, 2020, the Company funded 139 loans, totaling $11.5 million in SBA loans. The Company will amortize $496,000 in fee income over the life of the loans, or until forgiveness is received.

Asset valuation

The COVID-19 pandemic has caused material economic weakness and declines in the market value of bank equity.  However, the Company’s market value premium above tangible book value and the current outlook of the Company’s financial performance indicate that the Goodwill intangible assets are not impaired at June 30, 2020.  Economic conditions will continue to be monitored and financial projections will be updated as the impacts of the pandemic and the fiscal and monetary stimulus are realized through the remainder of the year.  Management’s assessment is that the Goodwill of $1.8 million is not impaired at June 30, 2020.

Civil Unrest

In late May and early June, 2020, the Company’s property and business was affected by civil disturbances that occurred at some of its Chicagoland market area offices. The events led to a full Bank closure on June 1, 2020. On June 2, 2020, all locations opened with the exception of two locations that experienced the most damage and posed the highest employee risk. The Bank Disaster Recovery Team made the decision to return the Bank to full operation on June 3, 2020. Damages to the locations affected, including ATM machines, are estimated at $250,000. The Company continues to work closely with its insurance company to provide reimbursement. The damages are currently classified as receivables. 

In early August the Company once again actively prepared to protect its employees, branches, and customers by adding 24-hour manned security. Fortunately, the Company did not sustain any property damage.

Update on Litigation Matters.

North Shore Bank, FSB Matter

As previously announced, in October, 2019, the Company announced that the Bank entered a definitive purchase and assumption agreement to acquire two Illinois State Bank branch banking centers located in Lake in the Hills, Illinois and McHenry, Illinois. The Bank terminated the purchase and assumption agreement in April, 2020. North Shore Bank, FSB subsequently filed suit against the Bank, alleging such termination was in breach of the agreement. In June, 2020, the Bank filed its Answer to the Complaint along with its Counterclaim against North Shore Bank FSB, alleging multiple material violations of the purchase and assumption agreement, which ultimately led to the April, 2020 termination. The Bank continues to work with Howard and Howard Attorneys, PLLC, to steadfastly represent the Company in this matter and seek breach damages  of $500,000, legal fees, along with other monetary damages to the Bank and Company in the mid to high seven figure range.  

The Bank is currently in the initial discovery phase of the claim and believes that the likelihood of an adverse event occurring is remote. As result of the limited knowledge of the facts and circumstances of the situation to date and that a loss is neither considered probable or estimable at this point, a loss contingency does not need to be recorded, nor disclosed, in the financial statements.  Accounting guidance supports the accrual of probable and reasonably estimable legal fees that relate to loss contingencies. Management concludes that it is probable that legal fees will be incurred, and those fees are reasonably estimable (based on communications from the attorney’s handing the matter). The Bank has been receiving updated estimates monthly from Howard and Howard and continues to accrue for those expenses on a monthly basis. As of June 30, 2020, the Bank has met its $50,000 deductible and the expense has been recorded with the yearend June 30, 2020 financial statements. Any future legal costs for defense expense are expected to be reimbursed by the Company bond.

Fraudulent Loan Matter

From the March 31, 2020 quarter, the Company continues to monitor and work through a $1.7 million dollar commercial relationship that filed for Chapter 11 bankruptcy protection early in June. Prior to this Chapter 11 bankruptcy, collection efforts included the use of the courts in DuPage County, IL. The case was converted by the court to a full Chapter 7 whereby the Bank continues to hold senior priority lien rights on remaining assets. In addition, the Bank holds personal guarantees of the three principals. Through discovery the Company believes its collateral position was diluted through misappropriated acts by the borrower, which was identified in the first 30 days by the Bank, and is now being investigated by the US Trustee. As a result, the Company has taken $1.1 million in write downs and made the appropriate provisions to the ALLL. The Company believes there will be some level of recovery in the future as the situation continues resolution through the court process. The remaining $600,000, which the Bank holds, is guaranteed by the Small Business Administration (“SBA”). The Bank is in the process of a SBA buyback of that remaining $600,000 balance. The SBA has been cooperative, has approved their portion of legal fees, and is seeking a referral to the SBA Office of Inspector General for further criminal investigation.

About Royal Financial, Inc.

Royal Savings Bank offers a range of checking and savings products and a full line of home and commercial lending solutions.  Royal Savings Bank has been operating continuously in the south and southeast communities of Chicago since 1887, and currently has nine branches in Chicagoland and lending centers in Homewood and St. Charles, Illinois. Visit Royal Financial, Inc. and Royal Savings Bank at www.royalbankweb.com.

Safe–Harbor

Forward Looking Statements: This press release may include forward-looking statements.  These forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, can generally be identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar expressions.  Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain and actual results may differ materially from those predicted in such forward-looking statements.  Factors that could have a material adverse effect on the operations and future prospects of the Company and the Bank include, but are not limited to, changes in interest rates; the economic health of the local real estate market; general economic conditions, including but not limited to the coronavirus outbreak; continued credit deterioration in our loan portfolio that would cause us to further increase our allowance for loan losses; legislative/regulatory changes; monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board; the quality or composition of the loan and securities portfolios; demand for loan products in our market areas; deposit flows; competition; demand for financial services in our market areas; and changes in accounting principles, policies, and guidelines.  These risks and uncertainties should be considered in evaluating forward-looking statements, and undue reliance should not be placed on such statements.

Contact:  Mr. Leonard Szwajkowski
President and CEO
Telephone:  (773) 382-2111
E-mail:  lszwajkowski@royal-bank.us