Royal Financial, Inc. Announces Third Quarter Loss and Year to Date Earnings for Fiscal Year 2020

CHICAGO, June 22, 2020 (GLOBE NEWSWIRE) -- Royal Financial, Inc. (the “Company”) (OTCQX: RYFL), incorporated under the laws of Delaware on March 15, 2004, for the purpose of serving as the holding company of Royal Savings Bank (the “Bank”), announced a loss for the third quarter of fiscal year 2020.

The Company reported net loss of ($578,000), or ($0.23) per common share, for the quarter and $1.0 million or $0.39 per common share, for the nine-month year-to-date (“YTD”) period, respectively, ended March 31, 2020. 

The Company also reported total assets of $394.9 million and stockholders’ equity of $41.8 million as of March 31, 2020.  As of the same date, the Company’s book value per share was $16.35 and tangible book value per share was $15.39.

The COVID-19 Pandemic Creates Significant Risks and Uncertainties for Our Business.

The World Health Organization (“WHO”) declared novel coronavirus disease 2019 (COVID-19) as a global pandemic in March 2020 and on March 21, 2020, the Governor issued a shelter-in-place order for the State of Illinois. The COVID-19 pandemic has negatively impacted the global economy and created significant volatility and disruption in financial markets, and increased unemployment levels with the closure of businesses.

Processes, controls and business continuity plan

The Company implemented its business continuity plan in March as we monitored the spread of the novel coronavirus in the Chicago-land metropolitan areas to ensure the safety of the Bank’s employees and customers. As a result, we made specific improvements to the way we conduct business which allowed for the switch to a remote workforce for as many employees as possible, early implementation of social distancing measures, and an expansion of customer service resources with extended call center hours and the creation of additional outdoor walk-ups due to lobby closures.

Lending operations and accommodations to borrowers

In response to the pandemic, the Company, has suspended residential property foreclosure sales, evictions, and 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. These programs, as well as certain accommodations made to commercial customers, may negatively impact revenue and other results of operations of the Company in the near term.

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 134 loans totaling approximately $11.0 million. As of June 22, 2020, 96% of the Company’s applicants were approved for funding.

Capital and liquidity

While the Company believes that it has sufficient capital to withstand an extended economic recession brought about by COVID-19, its reported and regulatory capital ratios could be adversely impacted by further credit losses.  The Company maintains a strong liquidity position which includes approximately $23.7 million in cash and $40.9 million investment securities, which is approximately 16.4% of total assets, and approximately $204.7 million in unused availability on lines of credit, at March 31, 2020. In additional, the Company was approved for additional funding sources through the Federal Reserve (“PPPLF”) program and the Federal Home Loan Bank Relief Advance of $4.0MM in April. The Company can also utilize wholesale funding markets as needed for additional liquidity.

The Company relies on cash on hand as well as dividends from its subsidiary bank to service its debt.  If the Company’s capital deteriorates such that its subsidiary bank is unable to pay dividends to it for an extended period of time, the Company may not be able to service its debt.

Asset valuation

While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such as widening credit spreads, the Company does not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.

COVID-19 could cause a further and sustained decline in the Company’s stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform a goodwill impairment test and result in an impairment charge being recorded in the upcoming periods. In the event that the Company concludes that all or a portion of its goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital.

Comparison of Results of Operation for the Three and Nine Months Ended March 31, 2020 and 2019

The Company’s recorded a net loss of ($578,000), a decrease of $1.4 million from the prior year, which the Company recorded net income of $857,000 for the quarter end. The Company recorded YTD net income of $1.0 million, which decreased by $1.8 million during the same period of last year. The loss in income recorded for March, 2020 quarter end is a result of increased provisions to the Allowance for Loan Losses (“ALLL”) as a result of the COVID-19 pandemic, a replenishment to the ALLL for a single customer loan charge-off and an increase to the valuation reserve for the State Deferred Tax Asset due to the net loss incurred for the quarter.

Net interest income for the quarter decreased by $115,000 (3%) to $3.3 million from the same period last year resulting from a decrease in interest income on loans (including fees) by $347,000 (8%) to $3.9 million, decreases in interest income on investment securities by $23,000 (9%), offset by increases in federal funds sold and other sources by $50,000 (169%), and a decrease in interest expense by $205,000 (19%). The decrease in loan interest income and fees resulted from loan payoffs. The decrease in interest income on investment securities was the result of taxable agency securities and municipals maturing. The decrease in interest expense resulted from a decreased cost of funds for customer deposits and other liabilities.

Non-interest income for the quarter increased by $28,000 (13%) to $195,000 from the same period last year resulting from a decrease in income from service charges on deposit accounts of $19,000 (12%) to $142,000 a decrease in secondary mortgage market fees of $19,000 (78%) to $5,000, offset by an increase in rental income of $9,000 (25%) to $47,000 from $38,000.

The Company provided $1.3 million to the ALLL in response to the COVID-19 pandemic and a replenishment of the ALLL for a single customer loan charge-off.

Non-interest expense for the quarter increased by $263,000 (11%) to $2.7 million from the same period last year resulting from an increase in professional services by $138,000 (96%) to $280,000, an increase in salaries and employee benefits of $76,000 (6%) to $1.2 million, an increase in data processing expenses of $17,000 (9%) to $222,000, and an increase in acquisition expense of $71,000 to $78,000 during the quarter. These expenses were offset by decreases in FDIC insurance expense of $16,000 (39%) and in other miscellaneous expenses of $39,000 (16%). Increases in salaries and employee benefits from the prior year was the result of the new salary structure for the fiscal year and the additional hiring two new commercial loan officers during the quarter ended March 31, 2020. The increase in professional services was the result of increased legal fees during the quarter.

Comparison of Financial Condition at March 31, 2020 and June 30, 2019

The Company’s total assets decreased by $10.0 million (2%) from $404.9 million on June 30, 2019, to $394.9 million on March 31, 2020.

Cash and cash equivalents increased by $9.1 million (62%) from $14.6 million on June 30, 2019, to $23.7 million on March 31, 2019.

Securities available for sale increased by $1.5 million (4%) $39.3 million at June 30, 2019, to $40.9 million at March 31, 2020, resulting from the maturity of a $5.0 million taxable agency and a $275,000 maturity of a taxable municipal bond, offset by purchases of $4.7 million in municipal bonds and $1.1 million in corporate bonds, and an increase in the valuation reserves of $1.0 million.  

Loans, net of allowance for loan losses, decreased $19.5 million (6%), to $299.8 million at March 31, 2020 from $319.3 million at June 30, 2019, of which the decrease of $16.2 million in mortgage loans, $14.9 million were participation loans, and commercial loans decreased $2.6 million, and consumer loans decreased $316,000.

The allowance for loan losses was $3.2 million, or 1.05% of total loans, at March 31, 2020, as compared to $2.6 million, or 0.82% of total loans, at June 30, 2019.  The ALLL was funded an additional $1.3 million during the quarter ended March 31, 2020. The Company sustained a large charge off of $550K for a single customer loan charge off which is presently in the courts and determined to be a fraud. The Company funded the ALLL with additional funds for the charge-off, future potential losses related to the loan, and due to the COVID-19 pandemic. In addition to the allowance for loan losses, net purchase discount on acquired loans was $566,000 at March 31, 2020 compared to $772,000 at June 30, 2019.  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 $2.7 million, or 0.88% of outstanding loans, at March 31, 2020 compared to $1.2 million or 0.37%, at June 30, 2019.

Other real estate owned (“OREO”) did not change from $297,000 at June 30, 2019. The property is recorded at fair value, less estimated costs to sell. 

The Deferred Tax Asset (“DTA”) decreased $1.0 million (13%) to $7.1 million at March 31, 2020, from $8.2 million at June 30, 2019. The Bank has a $600,000 valuation allowance for the State of Illinois DTA as of March 31, 2020. The Company increased the DTA valuation allowance an additional $198,000 during the quarter as a result of net loss and updated modeling for the impact of COVID-19.

The Core Deposit Intangibles (“CDI”) held by the Company decreased $106,000 (13%) to $714,000 as of March 31, 2020.

Total deposits increased $7.9 million (2%) to $339.9 million at March 31, 2020, from $347.9 million at June 30, 2019. The increase was primarily due to the increase in certificate of deposits of $14.6 million as a result of the Company’s new certificate product, an increase of $1.83 million in savings accounts, and an increase of $4.2 million in non-interest checking accounts offset by a decrease of $25.8 million in money market accounts. The decrease in money markets was $28.0 million in brokered deposits.   

Notes payable decreased $3.1 million (28%) due to a special $1.0 million principal payment during the first quarter of the fiscal year and a $1.0 million principal payment during the third quarter of the fiscal year, and normal principal repayments on holding company debt, which totaled $8.1 million at quarter end. The note is amortizing in full over eight years with quarterly payments of $375,000 in principal reduction and interest at the rate of 0.15% below the Wall Street Journal Prime Rate.

Total stockholders’ equity increased $2.0 million, to $41.8 million at March 31, 2020 from $39.8 million at June 30, 2019, which was primarily the result of an increase of $1.0 million in retained earnings and an increase of $818,000 in unrealized gain in equity.

For the nine months ended December 2019, the Bank paid cash dividends of $3.1 million.  The upstream of funds enabled the Company to make debt and interest payments on its notes payable, as well as pay general business expenses for fiscal 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 March 31, 2020, the Bank exceeded each of these requirements with ratios of 10.09%, 14.57%, 14.57% and 15.76%, 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 third quarter of fiscal year 2020.  

In October, 2019, the Company announced 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 Company terminated the purchase and assumption agreement in April, 2020; North Shore Bank, FSB subsequently filed suit against the Company alleging that such termination was in breach of the purchase and assumption agreement. The Bank has hired Howard and Howard Attorneys PLLC to aggressively defend the suit.

At March 31, 2020, the book value per common share, shares outstanding of 2,556,518, was $16.35 compared to the book value per common share of $15.65 at June 30, 2019, for shares outstanding of 2,507,112.  The tangible book value per share was $15.39 at March 31, 2020, compared to tangible book value per share of $14.64 at June 30, 2019. 

The preliminary fourth quarter and year-end earnings release is anticipated for release on or around July 13, 2020. The complete audited consolidated financial statements for 2019 and 2018 are available at www.royalbankweb.com.

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
Royal Financial, Inc.
Telephone:  [phone]
E-mail:  [e-mail]

Royal Financial, Inc. and Subsidiary
Consolidated Statements of Operations
Three and Nine Months Ended March 31, 2020 and 2019
(Unaudited)
	Three Months Ended March 31,								Nine Months Ended March 31,
		2020				2019				2020				2019
Interest income
Loans, including fees	$	3,908,286			$	4,255,243			$	12,180,098			$	12,681,659
Securities		235,452				258,455				731,824				802,113
Federal funds sold and other		79,931				29,712				251,384				64,313
Total interest income		4,223,669				4,543,409				13,163,306				13,548,085
Interest expense
Deposits		807,916				911,178				2,704,859				2,306,141
Borrowings		93,579				195,024				352,761				630,826
Total interest expense		901,495				1,106,202				3,057,620				2,936,966
Net interest income		3,322,175				3,437,207				10,105,686				10,611,118
Provision for loan losses		1,290,000				-				1,290,000				225,000
Net interest income after provision for loan losses		2,032,175				3,437,207				8,815,686				10,386,118
Non-interest income
Service charges on deposit accounts		141,903				160,625				462,894				515,388
Secondary mortgage market fees		5,365				24,382				27,985				131,979
Income on other real estate owned, net		47,044				37,641				158,079				100,739
Loss on sale of premises and equipment		-				-				(8,185	)			-
Other		249				268				715				815
Total non-interest income		194,560				222,917				641,488				748,921
Non-interest expense
Salaries and employee benefits		1,246,268				1,170,566				3,529,904				3,374,184
Occupancy and equipment		512,967				519,287				1,497,075				1,531,672
Data processing		221,648				204,235				669,291				575,500
Professional services		280,198				142,574				567,062				451,787
Director fees		42,000				46,200				126,000				138,600
Marketing		29,747				9,766				83,041				33,342
FDIC insurance expense		25,000				40,950				14,305				115,637
Insurance premiums		31,887				27,750				77,528				76,089
Foreclosed Asset expense		9,847				6,775				29,117				19,746
Acquisition Expense		77,547				6,617				197,004				33,530
Amortization on Core Deposit Intangibles		35,207				35,207				105,620				105,620
Other		212,026				251,492				740,522				679,784
Total non-interest expense		2,724,343				2,461,419				7,636,470				7,135,491
Income (loss) before income taxes		(497,608	)			1,198,705				1,820,704				3,999,548
Provision for income taxes		80,000				342,000				819,000				1,169,530
Net Income (Loss)	$	(577,608	)		$	856,705			$	1,001,704			$	2,830,018
Basic earnings (loss) per share	$	(0.23	)		$	0.34			$	0.39			$	1.11
Diluted earnings (loss) per share	$	(0.23	)		$	0.33			$	0.39			$	1.10
This report has not been prepared in accordance with Securities and Exchange Commission ("SEC") rules applicable to SEC registrant companies and is not intended to comply with such rules.

 

Royal Financial, Inc. and Subsidiary
Consolidated Statements of Financial Condition
March 31, 2020 and June 30, 2019
(Unaudited)
	March 31, 2020			June 30, 2019
Assets
Cash and non-interest bearing balances in financial institutions	$	5,642,517		$	3,092,057
Interest Bearing Financial Institutions		15,819,995			11,242,481
Federal Funds Sold		2,241,657			271,189
Total Cash and Cash Equivalents	$	23,704,169		$	14,605,727
Investment Certificates of Deposit	$	672,000		$	1,840,000
Securities available for sale		40,886,667			39,310,395
Loans Receivable, net of Allowance for loan losses		299,830,419			319,325,977
of $3,198,027 at March 31, 2020, $2,654,045 at June 30, 2019
Federal Home Loan Bank Stock		836,300			836,300
Premises & Equipment, net		15,836,660			14,856,772
Accrued Interest Receivable		1,446,042			1,464,514
Other Real Estate Owned		297,544			297,544
Deferred Tax Asset		7,123,384			8,159,750
Core Deposit Intangible		714,213			819,833
Goodwill		1,755,189			1,755,189
Other Assets		1,873,934			1,715,633
Total Assets	$	394,976,520		$	404,987,634
Liabilities & Stockholders Equity
Total Deposits	$	339,956,448		$	347,897,715
Advances from Borrowers for Taxes and Insurance		3,446,215			4,777,979
Notes Payable		8,125,000			11,250,000
Accrued Interest Payable and Other Liabilities		1,643,777			1,225,537
Total Liabilities	$	353,171,440		$	365,151,231
Stockholder's Equity
Common Stock	$	26,450		$	26,450
Additional Paid-In Capital		23,851,476			23,676,229
Retained Earnings		17,314,982			16,313,278
Treasury Stock		(450,370	)		(424,384	)
Unrealized Gain in Equity		1,062,542			244,830
Total Capital	$	41,805,080		$	39,836,403
Total Liabilities and Stockholder's Equity	$	394,976,520		$	404,987,634
This report has not been prepared in accordance with Securities and Exchange Commission ("SEC") rules applicable to SEC registrant companies and is not intended to comply with such rules.