Royal Financial, Inc. Announces Earnings for First Quarter of Fiscal Year 2021

CHICAGO, Oct. 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”), announced earnings for the first quarter end of fiscal year 2021.

Net Income for the first quarter of fiscal year 2021 was $785,000, or $0.31 per common share, compared to $797,000, or $0.31 per common share, in the same period of fiscal 2020.

The Company also reported total assets of $514.5 million and stockholders’ equity of $43.9 million as of September 30, 2020. As of the same date, the Company’s book value per share was $17.11 and tangible book value per share was $16.18.

Comparison of Results of Operation for the Three Months Ended September 30, 2020 and 2019

The Company reported net income of $785,000 for the first three months of fiscal 2021 compared to $797,000 in the same period of fiscal 2020, a decrease of $12,000 (2%). The decrease was caused by an increase in non-interest expense and the provision for loan losses, offset by an increase in interest income and a decrease in interest expense.

Total interest income for the quarter ended September 30, 2020, increased $101,000 (2%) from September 30, 2019. Total interest income from loans, including fees, increased $252,000 (6%), offset by decreases in interest income from securities of $72,000 (29%) and federal funds sold decreased $79,000 (88%) from the prior year.

Total interest expense decreased $391,000 (34%) due to lower cost of funds for borrowings and deposit account balances. Total deposit interest expense decreased $308,000 (31%) from the prior year due to the falling rate environment during fiscal year 2020. Total borrowing expense decreased $83,000 (58%) due to the decrease in rate for the notes payable and declining balances due to pre-payments.

Total non-interest income decreased $20,000 (8%) from September 30, 2019. This decrease was due to decreases in secondary mortgage market fees of $9,000 (100%) and a decrease of $11,000 (18%) in rental income.

Total non-interest expense increased $82,000 (3%) from September 30, 2019. This increase in non-interest expense is due to the increase in occupancy and equipment costs of $35,000 (7%), an increase in data processing costs of $32,000 (14%), an increase in Federal Deposit Insurance Company (“FDIC”) expenses of $74,000, and an increase in acquisition expenses of $59,000 (465%). The increase in the FDIC expense was a result of the FDIC assessment credits issued last year as the FDIC reserve requirement was met as of June 30, 2019. These increases were offset by decreases in salaries and employee benefits of $24,000 (2%) due to the expiration of expense for the 2005 Options program issued in 2015 and a decrease in deferred loan cost, a decrease in professional services of $47,000 (29%), and in other expenses of $40,000 (14%). During the first quarter of fiscal year 2020, the Company incurred a loss of $47,000 as a result of federal and state tax payments not being made by the Company’s former payroll provider. These taxes have since been paid and the Company has filed a claim to recover this loss. The Company estimates this to not be recoverable.

The Company funded the allowance for loan losses this quarter $500,000 to support the $69.5 million dollar whole adjustable rate mortgages (“ARM”) pool purchase in July 2020. The whole single family owner-occupied loans are primarily located in Illinois.

For quarter end September 30, 2020, the provision for income taxes was $261,000, a decrease of $99,000 (27%) from the prior year.

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

The Company’s total assets increased $80.4 million (19%), to $514.5 million at September 30, 2020, from $434.1 million at June 30, 2020.

Cash and cash equivalents increased $5.7 million (39%) to $20.5 million at September 30, 2020, from $14.8 million at June 30, 2020, due to the increase in deposits.

Securities available for sale increased $250,000 (1%), to $31.6 million at September 30, 2020 from $31.3 million at June 30, 2020. The unrealized gains in the municipal bond and corporate bond portfolios increased by $287,000 (34%) and $9,000 (10%), respectively, and were offset by the decrease in the unrealized loss in the agency portfolio of $26,000 (10%), and a net change in balances to the portfolios of $19,000 (8%).

Loans, net of allowance, increased $75.4 million (21%) to $432.2 million at September 30, 2020, from $356.7 million at June 30, 2020. Commercial loans increased $13.4 million from the previous quarter and mortgage loans increased $59.2 million from June 30, 2020, which was the result of the purchase of a $69.5 million single family, owner occupied ARM purchase, offset by $10.3 million in loan pay-offs.

The allowance for loan losses was $3.6 million, or 0.82% of total loans, at September 30, 2020, as compared to $3.2 million, or 0.88% of total loans, at June 30, 2020. In addition to the allowance for loan losses, net purchase discount on acquired loans was $469,000 at September 30, 2020 compared to $497,000 at June 30, 2020.  Individual loan discounts are being accreted into interest income over the life of the loans; however, they can offset loan losses upon loan default. Nonperforming loans totaled $1.9 million, or 0.45% of outstanding loans, at September 30, 2020 compared to $2.0 million or 0.56%, at June 30, 2020. 

Other real estate owned (“OREO”) did not change from $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 $318,000 (5%) to $6.4 million at September 30, 2020, from $6.7 million at June 30, 2020. The Bank has a $500,000 valuation allowance for the State of Illinois DTA as of September 30, 2020, as it is more likely than not that Company will be unable to utilize all of the $64.4 million in State Net Operating Losses (NOLs) that expire between 2021 and 2028. In fiscal years 2023 and 2024, the Company has NOLs of $17.0 million and $10.4 million, respectively, scheduled to expire. The DTA valuation allowance decreased $100,000 due to the expiration of NOLs that were unused in fiscal year 2020. In November, 2020, the Illinois voters will vote on Illinois Public Act 101-0008, which would raise the Corporate Income Tax for the State of Illinois to 7.99%, a 0.99% increase, with a 2.5% replacement tax, which will be effective January 1, 2021. If ratified, this 0.99% increase in tax would create an additional $500,000 value to the Company’s State DTA. A small portion of the $500,000 would be placed in the State DTA valuation allowance and the remainder would be recognized into income, if appropriate.

The Core Deposit Intangibles (“CDI”) held by the Company decreased $35,000 (5%) as of September 30, 2020. The decrease was the result of a full quarter of amortization of the CDI of $35,000.

Total deposits increased $81.1 million (22%) to $454.5 million at September 30, 2020, from $373.3 million at June 30, 2020. The increase was $50.0 million in brokered certificates of deposits and an increase of $23.6 million in deposit listing certificates of deposit, offset by $6.2 million in certificate of deposit maturities, and an increase in money market accounts of $9.3 million, and $3.0 million in non-interest checking accounts. The brokered deposits have $10.0 million blocked laddered maturities over the next five years and a weighted average rate of 0.44%; the first $10 million block will mature in July 2021.

As of September 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 increased $100,000 (1%) due to the Company borrowing on the line of credit. The Company currently has outstanding $100,000 on the line of credit of $500,000 and $7.75 million on the amortizing note payable. The Company made an interest only payment in August for the note. The note will amortize in full over 7.75 years with 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 $1.1 million (3%), to $43.9 million at September 30, 2020, from $42.8 million at June 30, 2020, which was primarily a result of the net income of $785,000 earned in the period and the increase in accumulated other comprehensive income of $213,000 (3%). The Bank paid no cash dividend to the Company in the quarter ended September 30, 2020.

The Bank is “well capitalized” under prompt corrective action regulations. This classification requires the Bank to maintain regulatory capital that meets or exceeds the following ratios: Tier 1 Capital leverage of 5.00%, Common Equity Tier 1 Capital of 6.50%, Tier 1 Capital of 8.00%, and Total Capital of 10.00%. At September 30, 2020, the Bank exceeded each of these requirements with ratios of 8.66%, 12.90%, 12.90% and 13.98%, respectively.

At September 30, 2020, the book value per common share was $17.11 compared to the book value per common share of $16.75 at June 30, 2020, for shares outstanding of 2,564,558 and 2,556,518, respectively.   The tangible book value per share was $16.18 at September 30, 2020, compared to tangible book value per share of $15.80 at June 30, 2020. Total treasury shares as of September 30, 2020 is 80,442 shares, compared to June 30, 2020, with treasury shares at 88,482. The Company issued 7,000 grants, to be vested over a two year period, to the Board of Directors and to Senior Management in July, 2020. In addition, Mr. Szwajkowski, the Company President and CEO, exercised 1,040 vested options from the 2005 Option plan. All of Mr. Szwajkowski’s available vested options have been exercised in full.

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 first quarter of fiscal year 2021. The Company repurchased a total of 7,633 shares during fiscal year 2020.

During fiscal year 2020, Mr. Szwajkowski purchased through the brokerage markets, a total of 5,900 shares at market value at a weighted average price of $15.94 per share and exercised 2,500 vested options from the 2018 Equity Plan. During the first quarter of fiscal year 2021, Mr. Szwajkowski purchased a total of 300 shares at market value of $11.80. Other insiders purchased a total of 87 shares at a weighted average price of $11.62.

The complete audited consolidated financial statements for fiscal years ended 2020 and 2019 are available at www.royalbankweb.com

The COVID-19 Pandemic Update on Business Operations.

In June, 2020, 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. The Company has expensed roughly $75,000 on COVID related safety measures and enhancements, not including added labor or benefits.

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 30, 2020, a total of 30 borrowers, totaling $5.8 million in loans, remain on the forbearance program; of which 18 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, 2020. The number of accommodation requests has decreased to 4 customers with balances of $12.6 million at September 30, 2020 as the environment has begun to stabilize. All commercial loan accommodations have resumed regular payments as of October 1, 2020 and there are no outstanding commercial loan accommodations as of October 13, 2020. 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 30, 2020, the Company funded 153 loans, totaling $11.7 million in SBA loans. The Company will accrete $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 received reimbursement for the repairs to the ATM machines and lobby damages. The Company continues to work closely with its insurance company to provide reimbursement for other costs incurred due to the civil unrest.

Update on Litigation Matters.

North Shore Bank, FSB Matter

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 a 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 year end 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 $639,000, 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 $639,000 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. Concurrently, since February 2020, the Company is a Plaintiff in DuPage County, Illinois, for the personal guarantees. Management is estimating and aware of a possible recovery of $400,000 during the next six month period. Further recoveries beyond the $400,000 are probable but unknown at this point.

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 Chicagoland area since 1887, and currently has nine branches 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