Royal Financial, Inc. Releases Second Quarter 2011 Earnings and Annual Meeting Results

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Mar 16, 2011, 05:23 ET

CHICAGO, March 16, 2011 /PRNewswire/ -- Royal Financial, Inc. (the "Company") (OTC Bulletin Board: RYFL), incorporated under the laws of Delaware on September 15, 2004, for the purpose of serving as the holding company of Royal Savings Bank (the "Bank"), announced the Company's net income of $167,000 for the quarter ended December 31, 2010 as compared to a loss of $1.5 million for the quarter ended December 31, 2009. For the six months ended December 31, 2010, the Company recorded net income of $216,000 compared to a loss of $1.4 million for the six months ended December 31, 2009.

Comparison of Financial Condition at December 31, 2010 and June 30, 2010

The Company's total assets decreased $2.3 million, or 2.50%, to $89.8 million at December 31, 2010, from $92.1 million at June 30, 2010.

Securities available for sale increased $1.8 million, or 11.49%, to $17.9 million at December 31, 2010 from $16.1 million at June 30, 2010. The increase resulted from the purchase of $9.5 million of investment grade taxable municipal general obligation bonds, a majority of which are "Build America Bonds" in the second quarter, offset by a decrease of $7.0 million in securities issued by U.S. government sponsored entities, which were called in the second quarter, along with a decrease in market valuation of approximately $600,000.

Loans, net of allowance, decreased $6.4 million, or 9.71%, to $59.7 million at December 31, 2010, from $66.1 million at June 30, 2010. The decrease in loans was a result of loan pay downs of $3.4 million, net of originations, loan charge offs of $444,000 and the transfers of assets from the loan portfolio to other real estate owned of $2.6 million during the six month period.

Other real estate owned increased $2.4 million to $3.6 million at December 31, 2010, from $1.2 million at June 30, 2010. An increase of $2.6 million was a result of property acquired through loan defaults, partially offset by sales of other real estate owned of $200,000.

Total deposits reflect an increase of $672,000, or 1.05%, to $64.9 million at December 31, 2010 from $64.2 million at June 30, 2010. The increase was primarily due to an increase in noninterest bearing transaction accounts of $2.0 million, partially off set by a decrease in certificates of deposits of $1.6 million.

Federal Home Loan Bank advances decreased $2.4 million, or 23.08%, to $8.0 million at December 31, 2010 from $10.4 million at June 30, 2010, as pay downs on the loan portfolio were applied towards outstanding borrowings.

Total stockholders' equity decreased $256,000, or 1.57%, to $16.1 million at December 31, 2010 from $16.3 million at June 30, 2010. The decrease is primarily a result of the decrease in accumulated other comprehensive income of $602,000, partially offset by net income for the six months of $216,000 and a change in the value of the unearned ESOP shares of $134,000.

Comparison of Results of Operations for the Three and Six Months Ended December 31, 2010 and 2009

General. The net income for the three months ended December 31, 2010 was $167,000, an increase of $1.6 million, from the same period in 2009. The net income for the six months ended December 31, 2010 was $216,000, an increase of $1.6 million, from the same period in 2009. The increase in the income for the three months ended December 31, 2010 resulted primarily from a decrease in the provision for loan losses of $1.4 million, a decrease in non interest expense of $292,000, partially offset by a slight decrease in net interest income of $29,000. The increase in net income for the six months ended December 31, 2010 resulted primarily from a decrease in the provision for loan losses of $1.4 million, a decrease in non interest expense of $438,000, partially offset by a decrease in net interest income of $171,000.

Net Interest Income. Net interest income decreased $29,000 for the three months ended December 31, 2010, compared to the same period in 2009. Net interest income decreased $171,000 for the six months ended December 31, 2010 compared to the same period in 2009. The net interest rate spread increased to 4.30% from 4.17% for the three months ended December 31, 2010 and 2009, respectively, and decreased to 4.22% from 4.28% for the six months ended December 31, 2010 and 2009, respectively. The net interest margin decreased to 4.45% and 4.38% for the three and six months ended December 31, 2010, respectively, from 4.50% and 4.62% for the same periods in 2009. The decline in the net interest margin was primarily due to the decrease in average earning assets and related interest rates.

Interest Income. Total interest income was $1.1 million for the three months ended December 31, 2010, a decrease of $97,000 from the same period in 2009. Total interest income was $2.1 million for the six months ended December 31, 2010, a decrease of $319,000 from the same period in 2009. For the three and six months ended December 31, 2010, average interest-earning assets decreased to $84.6 million and $85.7 million, respectively, from $86.3 million and $88.7 million for the same periods in 2009. The decrease in interest income was primarily the result of the decrease in the average balances of the loan portfolio, partially offset by the increase in the average balances of the investment security portfolio which reflects a lower average yield. The yield on interest-earning assets was 4.98% and 4.96% for the three and six months ended December 31, 2010, respectively, compared to 5.33% and 5.50% for the same periods in 2009.

Interest Expense. Total interest expense decreased $68,000 to $112,000 for the three months ended December 31, 2010 as compared to $180,000 for the three months ended December 31, 2009. Interest expense decreased $148,000 to $246,000 for the six months ended December 31, 2010 as compared to $394,000 for the six months ended December 31, 2009. The average cost of funds decreased to 0.68% and 0.74% for the three and six months ended December 31, 2010, respectively, compared to 1.16% and 1.22% for the same periods in 2009. The reduction in interest expense is a direct result of the decreasing rate environment and the continued maturity of higher yielding certificates of deposits.

The following tables show average balances with corresponding interest income and interest expense as well as average yield and cost information for the three and six months ending December 31, 2010 and 2009, dollars presented in thousands. Average balances are derived from daily balances, and nonaccrual loans are included as interest-bearing loans for purposes of these tables.



	Three months ended December 31,
	2010			2009
	Average		Average	Average		Average
	Balance	Interest	Yield/Rate(1)	Balance	Interest	Yield/Rate(1)
Interest- earning assets:
Loans receivable, net(2)	$ 66,510	$ 930	5.59%	$ 80,285	$ 1,115	5.55%
Securities available-for-sale	15,146	123	3.25%	4,571	36	3.14%
Interest-bearing balances in financial institutions(3)	1,468	1	0.11%	645	1	0.17%
Federal funds sold	953	-	0.16%	417	_	0.26%
Federal Home Loan Bank stock(4)	520	—	—%	381	—	—%
Total interest-earning assets	84,597	1,054	4.98%	86,299	1,151	5.33%
Noninterest-earning assets	5,955			2,494
Total assets	$ 90,553			$ 88,794
Interest-bearing liabilities:
Interest-bearing deposits	58,222	103	0.71%	61,060	179	1.17%
FHLB advances	8,009	9	0.45%	958	1	0.40%
Federal funds purchased	129	-	0.56%	27	-	0.70%
Total interest-bearing liabilities	66,360	112	0.68%	62,045	180	1.16%
Noninterest-bearing liabilities	7,551			8,636
Total equity capital(5)	16,642			18,113
Total liabilities and equity capital	$ 90,553			$ 88,794

Net average interest-earning assets	$ 18,237			$ 24,255
Net interest income; interest rate spread(6)		$ 942	4.30%		$ 971	4.17%
Net interest margin(7)			4.45%			4.50%


	Six months ended December 31,
	2010			2009

	Average		Average	Average		Average
	Balance	Interest	Yield/Rate(1)	Balance	Interest	Yield/Rate(1)
Interest- earning assets:
Loans receivable, net(2)	$ 68,145	$ 1,887	5.54%	$ 83,261	$ 2,375	5.71%
Securities available-for-sale	15,210	235	3.09%	4,285	66	3.10%
Interest-bearing balances in financial institutions(3)	1,294	1	0.11%	526	1	0.17%
Federal funds sold	518	-	0.17%	285	-	0.23%
Federal Home Loan Bank stock(4)	520	—	—%	381	—	—%
Total interest-earning assets	85,687	2,123	4.96%	88,738	2,442	5.50%
Noninterest-earning assets	4,724			2,429
Total assets	$ 90,411			$ 91,167
Interest-bearing liabilities:
Interest-bearing deposits	58,609	228	0.78%	62,854	389	1.24%
FHLB advances	7,825	18	0.46%	1,858	5	0.49%
Federal funds purchased	211	-	0.51%	21	-	0.68%
Total interest-bearing liabilities	66,645	246	0.74%	64,733	394	1.22%
Noninterest-bearing liabilities	7,233			8,114
Total equity capital(5)	16,533			18,320
Total liabilities and equity capital	$ 90,411			$ 91,167

Net average interest-earning assets	$ 19,042			$ 24,005
Net interest income; interest rate spread(6)		$ 1,877	4.22%		$ 2,048	4.28%
Net interest margin(7)			4.38%			4.62%

(1) Yields and rates have been annualized where appropriate. (2) Includes non accrual loans. (3) Includes interest-bearing demand deposits and repurchase agreements. (4) The FHLB Chicago discontinued the payment of dividends on its stock in the third quarter of 2007. The FHLB Chicago has declared a cash dividend for the fourth quarter 2010. (5) Includes retained earnings (deficit) and accumulated other comprehensive income. (6) Interest rate spread represents the differences between the weighted average yield on interest-earning assets and the weighted average rate on interest-bearing liabilities. (7) Net interest margin is net interest income divided by average interest-earning assets.

Allowance for Loan Loss. The allowance for loan losses was $3.6 million, or 5.68% of total loans, at December 31, 2010, as compared to $3.9 million, or 5.52% of total loans, at June 30, 2010. The Company believes, as of December 31, 2010, its allowance for loan losses was adequate to cover probable incurred losses.

No additional loan loss provisions were recorded during the three and six months ended December 31, 2010. Gross charge-offs recorded were $163,000 and $444,000, for the three and six months ended December 31, 2010, respectively. A provision for loan loss of $1.4 million was recorded during the three and six months ended December 31, 2009 and gross charge-offs were $2.1 million and $2.2 million, respectively.

Impaired Loans. As of December 31, 2010, total impaired loans were $6.9 million. Non accrual impaired loans were $6.0 million and troubled debt restructured loans, still accruing interest, were $874,000. As of June 30, 2010, total impaired loans were $9.0 million. Non accrual impaired loans were $8.7 million and troubled debt restructured loans, still accruing interest, were $325,000.

Non-interest Income. Non-interest income decreased $3,000 to $66,000 for the three month period ended December 31, 2010 compared to $69,000 for the same period in 2009. Non-interest income decreased $2,000 to $138,000 for the six month period ended December 31, 2010 compared to $140,000 for the same period in 2009.

Non-interest Expense. Non-interest expense decreased $292,000 to $841,000 for the three month period ended December 31, 2010 compared to $1.1 million for the same period in 2009. Non-interest expense decreased $438,000 to $1.8 million for the six month period ended December 31, 2010 compared to $2.2 million for the same period in 2009. The decrease was primarily due to cost savings in salaries and employee benefits, professional services, a reversal of the estimated impairment expense related to June 2009 branch closures and foreclosed asset expense, partially offset by an increase in data processing. Salaries and employee benefits decreased $85,000 to $447,000 for the three month period ended December 31, 2010 from $532,000 for the same period in 2009. Salaries and employee benefits decreased $131,000 to $935,000 for the six month period ended December 31, 2010 from $1,066,000 for the same period in 2009. The reduction in salaries and employee benefits was primarily due to the roll-off of stock based compensation benefits. Professional services decreased $76,000 to $79,000 for the three month period ended December 31, 2010 from $155,000 for the same period in 2009. Professional services decreased $161,000 to $179,000 for the six month period ended December 31, 2010 from $340,000 for the same period in 2009. The decrease in professional services was primarily a result of the Company deregistering its common stock in July 2010. A reversal of $106,000 of the estimated impairment expense, related to the liability established in June 2009 in anticipation of lease termination expenses, was recognized during the three month period ended December 31, 2010, as the contracts were satisfied. Foreclosed asset expense decreased $14,000 to $59,000 for the three month period ended December 31, 2010 from $73,000 for the same period in 2009. Foreclosed asset expense decreased $44,000 to $35,000 for the six month period ended December 31, 2010 from $79,000 for the same period in 2009. A gain on the sale of other real estate owned of $15,000 was recognized in the first quarter. Data processing increased $16,000 to $84,000 for the three month period ended December 31, 2010 from $68,000 for the same period in 2009. Data processing increased $26,000 to $164,000 for the six month period ended December 31, 2010 from $138,000 for the same period in 2009. The increase in data processing costs was directly related to a system upgrade necessary to initiate paperless item processing.

Provision for Income Taxes. At December 31, 2010 the Company has a valuation allowance on 100% of the deferred tax asset as the Company believes it is more likely than not that the deferred tax asset will not be recognized. The Company recognized no income tax provision or benefit for the three and six months ended December 31, 2010. The Company will continue to evaluate its deferred tax position and make adjustments as necessary.

Liquidity and Capital Resources

At December 31, 2010 the Bank had $8.0 million in outstanding advances with the Federal Home Loan Bank. The Bank had $11.1 million in additional available credit with the FHLB based on parameters set by the FHLB. Additional stock and collateral may be purchased or provided to increase overall potential advance availability. At June 30, 2010, the outstanding advances from the Federal Home Loan Bank were $10.4 million.

At December 31, 2010, the Bank had $4.6 million available to borrow through the Federal Reserve Bank of Chicago's Discount Window. The funding capacity is calculated on the value of the collateral pledged for borrowing. This relationship was established to provide an additional source for short-term funding needs to maintain adequate liquidity.

Capital. The Bank is required to maintain regulatory capital sufficient to meet Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios of at least 4.0%, 4.0%, and 8.0%, respectively. At December 31, 2010, the Bank exceeded each of its capital requirements with ratios of 15.31%, 23.74%, and 25.05%, respectively.

Selected Financial Data

The following tables set forth selected historical financial and other data of the Company for the periods and at the dates indicated.



	At December 31, 2010 (unaudited)	At June 30, 2010	At June 30, 2009
	(In thousands, except per share data)
Selected Financial Condition Data:
Total assets	$89,774	$92,079	$94,848
Cash and cash equivalents	3,043	3,030	3,172
Securities available for sale	17,932	16,084	3,996
Loans receivable, net	59,702	66,124	82,222
Deposits	64,869	64,197	70,487
FHLB advances and other borrowings	8,000	10,400	3,900
Total stockholders' equity	16,085	16,341	18,763
Book value per common share(1)	$6.49	$6.59	$7.74



	For the six months ended December 31, 2010 (unaudited)	For the year ended June 30, 2010	For the year ended June 30, 2009
	(In thousands, except per share data)
Selected Operating Data:
Total interest income	$2,123	$4,611	$5,568
Total interest expense	246	684	1,140
Net interest income	1,877	3,927	4,428
Provision for loan losses	-	2,653	10,263
Net interest income after provision for loan losses	1,877	1,274	(5,835)
Total non-interest income	138	271	538
Total non-interest expense	1,799	4,428	6,612
Income/(loss) before provision for income taxes	216	(2,883)	(11,909)
Provision (benefit) for income taxes	—	—	277
Net income/(loss)	216	(2,883)	(12,186)
Basic earnings/(loss) per share	.09	(1.18)	(5.08)


	At, or for the six months ended December 31, 2010 (unaudited)	At, or for the year ended June 30, 2010 (unaudited)	At, or for the year ended June 30, 2009 (unaudited)
Key Financial Ratios:
*Performance Ratios:*
Return on average assets	0.24%	(3.22)%	(11.25)%
Return on average equity	1.33	(18.28)	(41.70)
Interest rate spread(2)	4.22	4.26	4.19
Net interest margin(3)	4.38	4.53	4.49
Total non-interest expense to average total assets	1.99	4.94	6.11
Efficiency ratio(4)	89.28	105.48	111.56
*Asset Quality Ratios:*
Non-performing loans to total loans at end of period(5)	11.67%	13.24%	11.76%
Non-performing assets to total assets at end of period(6)	12.22	11.38	10.88
Allowance for loan losses to total loans at end of period	5.68	5.52	5.98
Allowance for loan losses to total nonperforming loans at end of period	48.65	41.73	50.83
*Capital Ratios:*
Total risk-based capital ratio(7)	25.05%	22.22%	21.50%
Tier 1 risk-based capital ratio(7)	23.74	20.91	20.18
Tier 1 leverage ratio(7)	15.31	15.15	15.10
Equity to assets at end of period	17.92	17.75	19.78
(1) Outstanding common shares as of December 31, 2010 and June 30, 2010 were 2,477,966 and as of June 30, 2009 were 2,422,556. (2) Yield on average interest-earning assets less rate on average interest-bearing liabilities. (3) Net interest income divided by average interest-earning assets. (4) Non-interest expense, excluding the expenses related to impairment charges, divided by the sum of net interest income, plus non-interest income, excluding net gain on sales of securities. (5) Non-performing loans include impaired loans, accruing and non-accruing loans, and loans past due 90 days or more (6) Non-performing assets include non-performing loans and other real estate owned. (7) Regulatory capital ratios are disclosed at the Bank level

Submission of Matters to a Vote of Security Holders

At the Company's Annual Meeting of Stockholders held on January 11, 2011, the following matters were submitted to and approved by a vote of stockholders:

(1) The election of three Class III directors for a three-year term ending at the Annual Meeting of Stockholders to be held in 2013:
Directors	Votes For	Votes Withheld
John T. Dempsey	1,242,148	278,066
Leonard Szwajkowski	1,242,148	278,066

The following directors continue to serve after the Annual Meeting:
Continuing Director	Term Expires
C. Michael McLaren	2011
Rodolfo Serna	2011
Alan W. Bird	2012
James A. Fitch, Jr.	2012
Roger L. Hupe	2012

(2) Ratification of the appointment of Crowe Horwath LLP as the Company's independent accountants for the fiscal year ending June 30, 2011.
Total votes for	1,473,664
Total votes against	44,350
Total votes abstaining	2,200

Consolidated Statements of Operations
Three and Six months ended December 31, 2010 and 2009
(Dollars In Thousands, Unaudited)

	Three Months Ended		Six Months Ended
	December 31,		December 31,

	2010	2009	2010	2009

Interest income
Loans	$930	$1,114	$1,887	$2,375
Securities	123	36	235	66
Federal funds sold and other	1	1	1	1
Total interest income	1,054	1,151	2,123	2,442

Interest expense
Deposits	103	179	228	389
Borrowings	9	1	18	5
Total interest expense	112	180	246	394

Net interest income	942	971	1,877	2,048

Provision for loan losses	-	1,385	-	1,385
Net interest income/(loss) after provision for loan loss	942	(414)	1,877	663

Non-interest income
Service charges on deposit accounts	55	60	116	122
Other	11	9	22	18
Total non-interest income	66	69	138	140

Non-interest expense
Salaries and employee benefits	447	532	935	1,066
Occupancy and equipment	116	141	280	288
Reversal of excess lease impairment	(106)	-	(106)	-
Data processing	84	68	164	138
Professional services	79	155	179	340
Director fees	34	36	68	74
Marketing	18	10	24	22
FDIC insurance expense	33	22	66	46
Insurance premiums	17	16	34	32
Foreclosed asset expense	59	73	35	79
Other	60	80	120	152
Total non-interest expense	841	1,133	1,799	2,237

Income/(loss) before income taxes	167	(1,478)	216	(1,434)
Provision for income taxes	-	-	-	-

Net income/(loss)	$167	($1,478)	$216	($1,434)

This report has not been prepared in accordance with Securities and Exchange Commission rules applicable to public companies and is not intended to comply with such rules.

Consolidated Statements of Financial Condition
December 31, 2010 and June 30, 2010
(Dollars In Thousands, Unaudited)

	December 31, 2010	June 30, 2010

Assets
Cash and non-interest bearing balances in financial institutions	$1,340	$1,745
Interest bearing balances in financial institutions	762	1,247
Federal funds sold	941	37
Total cash and cash equivalents	3,043	3,029

Securities available for sale	17,932	16,084
Loans receivable, net of allowance for loan losses of $3,595
at December 31, 2010 and $3,864 at June 30, 2010	59,702	66,124
Federal Home Loan Bank stock	520	520
Premises & equipment, net	3,652	3,747
Land available for sale	690	690
Accrued interest receivable	320	282
Other real estate owned	3,585	1,218
Other assets	330	385
Total assets	$89,774	$92,079

Liabilities & Stockholders' Equity
Deposits	$64,869	$64,197
Advances from borrowers for taxes and insurance	372	403
Federal Home Loan Bank advances and other borrowings	8,000	10,400
Accrued interest payable and other liabilities	448	738
Total liabilities	73,689	75,738

Stockholders' equity
Preferred stock
Common stock	26	26
Additional paid-in capital	24,790	24,826
Retained deficit	(6,093)	(6,309)
Treasury stock	(1,188)	(1,220)
Accumulated other comprehensive income (loss) net of tax	(514)	88
Unearned ESOP shares	(936)	(1,070)
Total stockholders' equity	16,085	16,341

Total liabilities and stockholders' equity	$89,774	$92,079

This report has not been prepared in accordance with Securities and Exchange Commission rules applicable to
public companies and is not intended to comply with such rules.