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Royal Financial, Inc. Announces Record Earnings for Second Quarter of Fiscal Year 2021, a $42MM drop in COVID-19 loan deferrals, and the 2020 Annual Meeting Results

CHICAGO, Jan. 14, 2021 (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 record earnings for the second quarter end of fiscal year 2021, an update on loan deferrals, and annual meeting results.

Net Income for the second quarter of fiscal year 2021 was $1.3 million, or $0.50 per common share, compared to $782,000, or $0.31 per common share, in the same period of fiscal 2020.

The Company also reported total assets of $518.3 million and stockholders’ equity of $45.2 million as of December 31, 2020. As of the same date, the Company’s book value per share was $17.63 and tangible book value per share was $16.71.

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

The Company reported net income of $1.3 million for the second quarter of fiscal 2021 compared to $782,000 in the same period of fiscal 2020, an increase of $511,000 (65%). The increase was caused by an increase in total interest income, a decrease in total interest expense, offset by an increase in non-interest expense and an increase in provision for income taxes.

Total interest income for the quarter ended December 31, 2020, increased $407,000 (9%) from December 31, 2019. Total interest income from loans, including fees, increased $549,000 (14%), offset by decreases in interest income from securities of $70,000 (28%) and federal funds sold decreased $72,000 (87%) from the prior year. The increase in interest income was the result of an increase in mortgage loan interest income of $643,000, offset by an increase in the mortgage loan premium expense of $352,000, which is from the purchase of the two loan pools, and the increase of $100,000 in commercial loan interest income, as well as the recognition of $227,000 of fee income from the forgiveness of the Paycheck Protection Program (“PPP”) loans for the second quarter of fiscal year 2021.

Total interest expense decreased $394,000 (39%) due to lower cost of funds for borrowings and deposit account balances. Total deposit interest expense decreased $336,000 (37%) from the prior year due to the falling rate environment. Total borrowing expense decreased $59,000 (50%) due to the decrease in rate for the notes payable.

Total non-interest income decreased $12,000 (6%) from December 31, 2019. This decrease was due to decreases in secondary mortgage market fees of $13,000 (97%) and a decrease of $7,000 (14%) in rental income, offset by the one-time loss in the sale of fixed assets of $8,000 last fiscal year.

Total non-interest expense increased $30,000 (1%) from December 31, 2019. This increase in non-interest expense is due to the increase in occupancy and equipment costs of $12,000 (2%), an increase in data processing costs of $10,000 (4%), an increase in professional services of $15,000 (12%), an increase in Federal Deposit Insurance Company (“FDIC”) expenses of $87,000, and an increase in acquisition expenses of $13,000 (12%). The increase in the FDIC expense was a result of the FDIC assessment credits issued last fiscal 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 $52,000 (5%) due to the expiration of expense for the 2005 Options program issued in 2015 and a decrease in vacation and employee compensation, a gain in the sale of other real estate (“OREO”) of $13,000, offset by expenses of $3,000, and in other expenses of $34,000 (16%). 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 total provision to the allowance for loan losses this quarter was $60,000.

For quarter end December 31, 2020, the provision for income taxes was $568,000, an increase of $189,000 (50%) from the prior year.

Comparison of Financial Condition at December 31, 2020 and June 30, 2020

The Company’s total assets increased $84.2 million (19%), to $518.3 million at December 31, 2020, from $434.1 million at June 30, 2020.

Cash and cash equivalents increased $7.8 million (53%) to $22.5 million at December 31, 2020, from $14.8 million at June 30, 2020, due to the increase in deposits.

Securities available for sale increased $377,000 (1%), to $31.7 million at December 31, 2020 from $31.3 million at June 30, 2020. The unrealized gains in the municipal bond and corporate bond portfolios increased by $300,000 (35%) and $9,000 (10%), respectively, and were offset by the decrease in the unrealized loss in the agency portfolio of $72,000 (26%), and a net change in balances to the portfolios of $140,000.

Loans, net of allowance, increased $78.6 million (22%) to $435.3 million at December 31, 2020, from $356.7 million at June 30, 2020. Commercial loans increased $29.5 million and mortgage loans increased $45.5 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 $24.1 million in loan pay-offs.

The allowance for loan losses was $3.6 million, or 0.82% of total loans, at December 31, 2020, as compared to $3.2 million, or 0.87% of total loans, at June 30, 2020. In addition to the allowance for loan losses, net purchase discount on acquired loans was $409,000 at December 31, 2020 compared to $478,000 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 $2.0 million, or 0.47% of outstanding loans, at December 31, 2020 compared to $2.0 million or 0.56%, at June 30, 2020. 

Other real estate owned (“OREO”) decreased $289,000 (97%) from June 30, 2020 to $9,000. The Company sold the property for a small gain of $13,000.

The Deferred Tax Asset (“DTA”) decreased $1.7 million (25%) to $5.1 million at December 31, 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 December 31, 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 Bank paid $800,000 in taxes to the Holding Company as of December 31, 2020. The Bank has no remaining Federal DTA.

The Core Deposit Intangibles (“CDI”) held by the Company decreased $70,000 (10%) as of December 31, 2020. The decrease was the result of two quarters of amortization.

Other assets decreased $880,000 (31%) to $1.9 million as of December 31, 2020. The decrease was caused by a decrease in the purchased loan principal and interest payments in process of $1.4 million, offset by an increase in the reserve for taxes of $800,000.

Total deposits increased $81.4 million (22%) to $454.7 million at December 31, 2020, from $373.3 million at June 30, 2020. The increase was $60.0 million in brokered certificates of deposits and an increase of $16.8 million in deposit listing certificates of deposit, an increase in money market accounts of $5.4 million, an increase of $6.0 million in savings accounts, and an increase of $3.7 million in non-interest checking accounts, offset by $10.3 million in certificate of deposit maturities. The brokered deposits have $10.0 million blocked laddered maturities over the next five years and a weighted average rate of 0.47%; the first $10 million block will mature in July 2021.

As of December 31, 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 $250,000 (3%) due to the Company’s quarterly payment. The Company currently has outstanding $7.5 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 $2.4 million (6%), to $45.2 million at December 31, 2020, from $42.8 million at June 30, 2020, which was primarily a result of the net income of $2.1 million earned in the period, an increase in accumulated other comprehensive income of $187,000 (19%), an increase in additional paid in capital of $124,000 (1%), and a decrease in treasury stock of $23,000 (5%). The Bank paid a cash dividend of $91,000 to the Company in the quarter ended December 31, 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 December 31, 2020, the Bank exceeded each of these requirements with ratios of 8.80%, 12.94%, 12.94% and 13.99%, respectively.

At December 31, 2020, the book value per common share was $17.63 compared to the book value per common share of $16.75 at June 30, 2020, for shares outstanding of 2,565,663 and 2,556,518, respectively. The tangible book value per share was $16.71 at December 31, 2020, compared to tangible book value per share of $15.80 at June 30, 2020. Total treasury shares as of December 31, 2020 is 79,337 shares, compared to June 30, 2020, with treasury shares at 88,482. During the first quarter of fiscal year 2021, 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. During the second quarter of fiscal year 2021, Andrew Morua, Senior Vice President and Chief Lending Officer, exercised 455 vested options from the 2005 Option Plan; Richard Nichols, Senior Vice President and Commercial Loan Officer, exercised 325 vested options from the 2005 Option Plan; and Toni Gonzalez, Senior Vice President and Chief Operations Officer, exercised 325 vested options from the 2005 Option Plan. All of the vested options of the 2005 Option plan for the management team have been exercised.

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 repurchased a total of 7,633 shares during fiscal year 2020. The Company repurchased 75 shares during the third quarter of fiscal year 2021 at a weighted cost of $14.15 per share.

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. During the second quarter of fiscal year 2021, Mr. Szwajkowski purchased a total of 300 shares at a weighted average price of $13.56.

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.

As of November 18, 2020, the Company has temporarily closed 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 December 31, 2020, a total of 3 borrowers, totaling $497,000 in loans, remain on the forbearance program. As of January 14, 2021, a total of 2 borrowers, totaling $242,000 in loans, remain on the forbearance program. Additionally, the Company made accommodations to 21 commercial loan customers with balances of $38.5 million in March, 2020. The Company has no outstanding accommodation requests at December 31, 2020.

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 PPP, for which the Bank received SBA approval and has funded 153 loans totaling approximately $11.7 million. As of December 31, 2020, the Company has received forgiveness for 51 loans, totaling $5.3 million in SBA loans. The Company has booked $288,000 in fee income for the current fiscal year. The remaining $185,000 will be accreted over the life of the remaining PPP loans. The Company will participate in the next round of PPP loan funding.

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 December 31, 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 December 31, 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, lobby damages, and additional security expense incurred. This will be the final update.

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. The Company expects that a recovery from the insurance bond, for previous period accruals, is estimated during the next quarter, in the low six figure range.

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 recovery of $400,000 during the next six month period, as the funds are currently with the Trustee. Furthermore, management is aware of two small recoveries, $79,000 and $59,000, that will occur in the third quarter of fiscal 2021.

The 2020 Annual Meeting of Shareholder Results

The 2020 Annual Meeting of Stockholders was held on October 20, 2020, at the Company’s main location on 9226 S. Commercial Avenue. Mr. Fitch, Chairman of the Board of Directors, led the meeting and highlighted the financial operating results of fiscal year 2020 and the first quarter of fiscal year 2021.

Submission of Matters to a Vote of Security Holders

At the Company’s Annual Meeting of Stockholders, the following matters were submitted to and approved by a vote of the stockholders:

1)   The election of three Class I directors for a three-year term expiring at the Annual Meeting of Stockholders to be held in 2023:

Directors C. Michael McLaren Philip J. Timyan Robert W. Youman
Total votes for 1,718,709 1,705,166 1,718,709
Total votes withheld 2,723 16,266 2,723

The following directors continue to serve after the Annual Meeting:

Continuing Director Term Expires
James A. Fitch, Jr. 2021
Roger L. Hupe 2021
Leonard Szwajkowski 2022
John T. Dempsey 2022

2)   Ratification of the appointment of Crowe, LLP as the Company’s independent accountants for the fiscal year ending June 30, 2021:

Total votes for 1,950,840
Total votes against 95,011
Total votes abstaining  109,034

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.

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

Royal Financial, Inc. and Subsidiary
Consolidated Statements of Operations
Three and Six months ended December 31, 2020 and 2019
(Unaudited)
               
  Three Months Ended December 31,   Six Months Ended December 31,
   
    2020       2019       2020       2019  
               
Interest income              
Loans, including fees $ 4,609,384     $ 4,060,435     $ 9,072,329     $ 8,271,812  
Securities   175,452       245,387       354,023       496,371  
Federal funds sold and other   10,271       82,156       20,919       171,453  
Total interest income   4,795,107       4,387,978       9,447,272       8,939,636  
               
Interest expense              
Deposits   569,152       904,666       1,254,040       1,896,943  
Borrowings   57,604       116,258       117,197       259,182  
Total interest expense   626,756       1,020,924       1,371,237       2,156,125  
               
Net interest income   4,168,350       3,367,054       8,076,035       6,783,511  
               
Provision for loan losses   60,000             560,000        
               
Net interest income after provision for loan losses   4,108,350       3,367,054       7,516,035       6,783,511  
               
Non-interest income              
Service charges on deposit accounts   154,583       153,730       321,735       320,991  
Secondary mortgage market fees   348       13,598       348       22,620  
Rental Income   44,536       51,900       92,761       111,035  
Loss on sale of fixed assets         (8,185 )           (8,185 )
Other   237       304       451       466  
Total non-interest income   199,703       211,347       415,294       446,927  
               
Non-interest expense              
Salaries and employee benefits   1,048,379       1,100,559       2,207,755       2,283,636  
Occupancy and equipment   524,012       512,225       1,061,627       1,015,225  
Data processing   238,602       228,770       489,125       447,642  
Professional services   138,699       123,551       255,429       286,865  
Director fees   42,000       42,000       84,000       84,000  
Marketing   27,346       29,059       53,075       53,294  
FDIC insurance expense (income)   79,534       (7,508 )     149,934       (10,695 )
Insurance premiums   24,643       23,093       48,937       45,641  
Other Real Estate Owned Expense (income), net   (9,551 )     11,390       (11,707 )     19,269  
Acquisition Expense   119,472       106,571       191,726       119,456  
Core Deposit Intangibles Amortization   35,207       35,207       70,413       70,413  
Other   178,331       211,699       423,582       497,380  
Total non-interest expense   2,446,673       2,416,616       5,023,894       4,912,127  
               
Income before income taxes   1,861,380       1,161,785       2,907,435       2,318,312  
               
Provision for income taxes   568,000       379,500       829,000       739,000  
Net Income $ 1,293,380     $ 782,285     $ 2,078,435     $ 1,579,312  
               
Basic earnings per share $ 0.50     $ 0.31     $ 0.81     $ 0.62  
Diluted earnings per share $ 0.50     $ 0.30     $ 0.80     $ 0.61  
               
               
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  
 December 31, 2020 and June 30, 2020  
(Unaudited)  
       
  December 31, 2020 June 30, 2020  
       
Assets      
       
Cash and non-interest bearing balances in financial institutions $ 3,567,577   $ 3,757,301    
Interest bearing balances in financial institutions   18,859,652     10,872,461    
Federal funds sold   101,555     133,515    
Total cash and cash equivalents $ 22,528,783   $ 14,763,277    
       
Investment certificates of deposit $ 672,000   $ 672,000    
Securities available for sale   31,732,751     31,355,841    
Loans Receivable, net of Allowance for loan losses   435,347,590     356,735,349    
of $3,622,766 at December 31, 2020, $3,150,808 at June 30, 2020    
Federal Home Loan Bank Stock, at cost   836,300     836,300    
Premises and equipment, net   15,563,208     15,694,976    
Accrued interest receivable   2,239,710     1,788,867    
Other real estate owned   8,544     297,544    
Deferred tax asset   5,058,209     6,736,969    
Core deposit intangibles   608,593     679,006    
Goodwill   1,755,189     1,755,189    
Other assets   1,919,486     2,799,407    
Total Assets $ 518,270,363   $ 434,114,725    
       
       
Liabilities & Stockholders Equity      
Deposits $ 454,768,647   $ 373,340,219    
Advances from borrowers for taxes and insurance   5,354,218     4,876,363    
Federal Home Loan Bank advances   4,000,000     4,000,000    
Notes payable   7,500,000     7,750,000    
Accrued interest payable and other Liabilities   1,420,815     1,333,685    
Total Liabilities $ 473,043,679   $ 391,300,267    
       
Stockholder’s Equity      
Preferred Stock, $0.01 par value per share, authorized      
1,000,000 shares, no issues are outstanding $   $    
Common Stock, $0.01 par value per share, authorized 5,000,000    
shares, 2,645,000 shares issued at June 30, 2020 and 2019   26,450     26,450    
Additional Paid-In Capital   24,048,727     23,924,787    
Retained Earnings   20,431,375     18,352,940    
Treasury Stock, 79,337 shares as of December 31, 2020 and      
88,482 shares as of June 30, 2020, at cost   (427,712 )   (450,370 )  
Accumulated other comprehensive income   1,147,842     960,651    
Total Capital $ 45,226,683   $ 42,814,458    
       
Total Liabilities and Stockholder’s Equity $ 518,270,363   $ 434,114,725    
       
       
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.    

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