Royal Financial, Inc. Releases Third Quarter 2011 Earnings

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May 20, 2011, 01:00 ET

CHICAGO, May 20, 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 $41,000 for the quarter ended March 31, 2011, as compared to a net loss of $376,000 for the quarter ended March 31, 2010. For the nine months ended March 31, 2011, the Company recorded net income of $257,000, compared to a net loss of $1.8 million for the nine months ended March 31, 2010.

Comparison of Financial Condition at March 31, 2011 and June 30, 2010

The Company's total assets decreased $4.5 million, or 4.83%, to $87.6 million at March 31, 2011, from $92.1 million at June 30, 2010.

Investment securities available for sale increased $3.8 million, or 23.50%, to $19.9 million at March 31, 2011, from $16.1 million at June 30, 2010. The increase resulted from the purchase of $11.3 million of investment grade taxable municipal general obligation bonds, 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 $500,000.

Loans, net of allowance, decreased $11.1 million, or 16.79%, to $55.0 million at March 31, 2011, from $66.1 million at June 30, 2010. The decrease in loans was a result of loan pay downs of $5.8 million, net of originations, loan charge offs of $737,000 and the transfers of assets from the loan portfolio to other real estate owned of $4.6 million during the nine month period.

Other real estate owned increased $3.9 million to $5.1 million at March 31, 2011, from $1.2 million at June 30, 2010. An increase of $4.5 million was a result of property acquired through loan defaults, partially offset by sales of other real estate owned of approximately $600,000.

Total deposits decreased $675,000, or 1.05%, to $63.5 million at March 31, 2011, from $64.2 million at June 30, 2010. The decrease was primarily due to a decrease in certificates of deposits of $1.5 million, partially off set by an increase in savings deposits of approximately $900,000.

Federal Home Loan Bank advances and other borrowings decreased $3.2 million, or 30.84%, to $7.2 million at March 31, 2011, from $10.4 million at June 30, 2010, as pay downs on the loan portfolio were applied towards outstanding borrowings.

Total stockholders' equity remained level at $16.3 million at March 31, 2011, from June 30, 2010. Primary changes included a decrease in accumulated other comprehensive income of $484,000, partially offset by net income for the nine months of $257,000 and a change in the value of the unearned ESOP shares of $201,000.

Comparison of Results of Operations for the Three and Nine Months Ended March 31, 2011 and 2010

General. The net income for the three months ended March 31, 2011 was $41,000, an increase of $417,000, from the same period in 2010. The net income for the nine months ended March 31, 2011 was $257,000, an increase of $2.1 million, from the same period in 2010. The increase in the income for the three months ended March 31, 2011 resulted primarily from a decrease in the provision for loan losses of $660,000 and a slight increase in net interest income of $17,000, partially offset by an increase in non- interest expense of $260,000. The increase in net income for the nine months ended March 31, 2011 resulted primarily from a decrease in the provision for loan losses of $2.0 million and a decrease in non-interest expense of $177,000, partially offset by a decrease in interest income of $155,000.

Net Interest Income. Net interest income increased $17,000 for the three months ended March 31, 2011, compared to the same period in 2010. Net interest income decreased $155,000 for the nine months ended March 31, 2011, compared to the same period in 2010. The net interest rate spread increased to 4.51% from 4.11% for the three months ended March 31, 2011 and 2010, respectively, and increased to 4.31% from 4.23% for the nine months ended March 31, 2011 and 2010, respectively. The net interest margin increased to 4.63% from 4.34% for the three months ended March 31, 2011 and 2010, respectively, and decreased to 4.46% from 4.53% for the months ended March 31, 2011 and 2010, respectively. The increase in the net interest margin for the three month period was primarily due to a decrease in interest rates of interest bearing liabilities. The decline in the net interest margin for the nine month period was primarily due to the decrease in average earning assets and related interest rates.

Interest Income. Total interest income was $1.0 million for the three months ended March 31, 2011, a decrease of $40,000 from the same period in 2010. Total interest income was $3.2 million for the nine months ended March 31, 2011, a decrease of $360,000 from the same period in 2010. For the three and nine months ended March 31, 2011, average interest-earning assets decreased to $81.0 million and $84.2 million, respectively, from $84.8 million and $87.5 million for the same periods in 2010. 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 5.09% and 5.00% for the three and nine months ended March 31, 2011, respectively, compared to 5.05% and 5.36% for the same periods in 2010.

Interest Expense. Total interest expense was $94,000 for the three months ended March 31, 2011, a decrease of $57,000 from the same period in 2010. Total interest expense was $340,000 for the nine months ended March 31, 2011, a decrease of $205,000 for the nine months ended March 31, 2010. The average cost of funds decreased to 0.57% and 0.68% for the three and nine months ended March 31, 2011, respectively, compared to 0.95% and 1.13% for the same periods in 2010. 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 nine months ending March 31, 2011 and 2010, dollars presented in thousands. Average balances are derived from daily balances, and non-accrual loans are included as interest-bearing loans for purposes of these tables.



	Three months ended March 31,
	2011			2010
	Average		Average	Average		Average
	Balance	Interest	Yield/Rate⁽¹⁾	Balance	Interest	Yield/Rate⁽¹⁾
Interest- earning assets:
Loans receivable, net⁽²⁾	$ 60,227	$ 840	5.58%	$ 75,039	$ 990	5.28%
Securities available-for-sale	19,027	190	3.99%	8,656	81	3.75%
Interest-bearing balances in financial institutions⁽³⁾	1,170	1	0.17%	552	-	—%
Federal funds sold	64	-	—%	174	-	—%
Federal Home Loan Bank stock⁽⁴⁾	520	—	—%	381	—	—%
Total interest-earning assets	81,008	1,031	5.09%	84,802	1,071	5.05%
Noninterest-earning assets	7,215			3,323
Total assets	$ 88,223			$ 88,125
Interest-bearing liabilities:
Interest-bearing deposits	57,656	86	0.59%	59,362	147	0.99%
FHLB advances	7,372	8	0.42%	4,342	4	0.39%
Federal funds purchased	289	-	0.55%	69	-	0.62%
Total interest-bearing liabilities	65,317	94	0.68%	63,773	151	0.95%
Noninterest-bearing liabilities	6,787			7,451
Total equity capital⁽⁵⁾	16,119			16,901
Total liabilities and equity capital	$ 88,223			$ 88,125

Net average interest-earning assets	$ 15,692			$ 21,029
Net interest income; interest rate spread⁽⁶⁾		$ 937	4.51%		$ 920	4.11%
Net interest margin⁽⁷⁾			4.63%			4.34%


	Nine months ended March 31,
	2011			2010

	Average		Average	Average		Average
	Balance	Interest	Yield/Rate⁽¹⁾	Balance	Interest	Yield/Rate⁽¹⁾
Interest- earning assets:
Loans receivable, net⁽²⁾	$ 65,544	$ 2,728	5.55%	$ 80,560	$ 3,365	5.57%
Securities available-for-sale	16,464	424	3.44%	5,728	147	3.43%
Interest-bearing balances in financial institutions⁽³⁾	1,254	1	0.12%	535	1	.17%
Federal funds sold	369	1	0.17%	248	-	—%
Federal Home Loan Bank stock⁽⁴⁾	520	—	—%	381	—	—%
Total interest-earning assets	84,151	3,154	5.00%	87,452	3,513	5.36%
Noninterest-earning assets	5,542			2,712
Total assets	$ 89,693			$ 90,164
Interest-bearing liabilities:
Interest-bearing deposits	58,296	313	0.72%	61,707	536	1.16%
FHLB advances	7,676	26	0.45%	2,674	9	0.44%
Federal funds purchased	237	1	0.53%	37	-	—%
Total interest-bearing liabilities	66,209	340	0.68%	64,418	545	1.13%
Noninterest-bearing liabilities	7,003			8,906
Total equity capital⁽⁵⁾	16,481			16,840
Total liabilities and equity capital	$ 89,693			$ 90,164

Net average interest-earning assets	$ 17,941			$ 23,034
Net interest income; interest rate spread⁽⁶⁾		$ 2,814	4.31%		$ 2,968	4.23%
Net interest margin⁽⁷⁾			4.46%			4.53%

(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 paid a cash dividend in the February 2011.
(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 $3.1 million, or 5.29% of total loans, at March 31, 2011, as compared to $3.9 million, or 5.52% of total loans, at June 30, 2010. The Company believes, as of March 31, 2011, its allowance for loan losses was adequate to cover probable incurred losses.

A credit provision for loan losses of $300,000 was recorded during the three and nine months ended March 31, 2011, as the Company determined the allowance for loan losses was in excess based on a thorough analysis of declining charge offs and the reduction in the non performing loans. Gross charge offs recorded were $293,000 and $737,000, for the three and nine months ended March 31, 2011, respectively. The Company recorded a provision for loan losses of $360,000 and recognized loan charge offs of $735,000 for the three months ended March 31, 2010. The provision for loan losses was $1.8 million and charge offs were $2.9 million for the nine months ended March 31, 2010.

Impaired Loans. As of March 31, 2011, total impaired loans were $4.8 million. Non-accrual impaired loans were $4.1 million and troubled debt restructured loans, still accruing interest, were $742,000. 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 increased slightly by $1,000 to $62,000 for the three month period ended March 31, 2011, compared to $61,000 for the same period in 2010. Non-interest income decreased $1,000 to $200,000 for the nine month period ended March 31, 2011, compared to $201,000 for the same period in 2010.

Non-interest Expense. Non-interest expense increased $261,000 to $1.3 million for the three month period ended March 31, 2011, compared to $1.0 million for the same period in 2010. Non-interest expense decreased $177,000 to $3.1 million for the nine month period ended March 31, 2011, compared to $3.2 million for the same period in 2010.

The increase in non-interest expense for the three month period was primarily due to increases in foreclosed asset expense, property impairment valuations, occupancy and equipment, data processing and professional services, partially offset by a decrease in salaries and employee benefits. Foreclosed asset expense/property impairment increased $254,000 to $296,000 for the three month period ended March 31, 2011 from $42,000 for the same period in 2010. The increase was primarily related to an increase of foreclosure expense of $56,000, an increase in impairment valuations of $84,000 related to bank owned properties acquired through foreclosure and a valuation impairment of $114,000 related to the Company's property in Frankfort, Illinois, based on a current appraisal. Occupancy and equipment increased $20,000 to $189,000 for the three month period ended March 31, 2011 from $169,000 for the same period in 2010. Data processing increased $15,000 to $78,000 for the three month period ended March 31, 2011 from $63,000 for the same period in 2010. The increase in data processing costs was directly related to a system upgrade necessary to initiate paperless item processing. Professional services increased $14,000 to $93,000 for the three month period ended March 31, 2011 from $79,000 for the same period in 2010. The increase in professional fees was related to annual report costs and trustee fees incurred in the period. Salaries and employee benefits decreased $63,000 to $444,000 for the three month period ended March 31, 2011 from $507,000 for the same period in 2010. The reduction in salaries and employee benefits was primarily due to the roll-off of previously awarded stock based compensation benefits.

The decrease in non-interest expense for the nine month period was primarily due to cost savings in salaries and employee benefits, professional services and a reversal of the estimated impairment expense related to June 2009 branch closures, partially offset by increases in foreclosed asset expense/property impairment, data processing and FDIC insurance. Salaries and employee benefits decreased $193,000 to $1,380,000 for the nine month period ended March 31, 2011 from $1,573,000 for the same period in 2010. The reduction in salaries and employee benefits was primarily due to the roll-off of previously awarded stock based compensation benefits. Professional services decreased $147,000 to $272,000 for the nine month period ended March 31, 2011 from $419,000 for the same period in 2010. 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 nine month period ended March 31, 2011, as the contracts were satisfied. Foreclosed asset expense and property impairment valuations increased $211,000 to $331,000 for the nine month period ended March 31, 2011 from $120,000 for the same period in 2010. The increase was primarily related to an increase of foreclosure expense of $55,000, an increase in impairment valuations of $42,000 related to bank owned properties acquired through foreclosure and a valuation impairment of $114,000 related to the Company's property in Frankfort, Illinois, based on a current appraisal. Data processing increased $41,000 to $242,000 for the nine month period ended March 31, 2011 from $201,000 for the same period in 2010. The increase in data processing costs was directly related to a system upgrade necessary to initiate paperless item processing. FDIC insurance increased $19,000 to $105,000 for the nine month period ended March 31, 2011 from $86,000 for the same period in 2010. FDIC insurance increased due to the impact of higher deposit assessment rates.

Provision for Income Taxes. At March 31, 2011, the Company had 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 nine months ended March 31, 2011. The Company continues to evaluate its deferred tax position and intends to make any necessary adjustments on June 30, 2011.

Liquidity and Capital Resources

At March 31, 2011, the Bank had $6.7 million in outstanding advances with the Federal Home Loan Bank. The Bank had $11.0 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 March 31, 2011, the Bank had $5.9 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 March 31, 2011, the Bank exceeded each of its capital requirements with ratios of 16.02%, 25.33%, and 26.63%, 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 March 31, 2011 (unaudited)	At June 30, 2010	At June 30, 2009
	(In thousands, except per share data)
Selected Financial Condition Data:
Total assets	$87,636	$92,079	$94,848
Cash and cash equivalents	2,188	3,030	3,172
Securities available for sale	19,863	16,084	3,996
Loans receivable, net	55,024	66,124	82,222
Deposits	63,522	64,197	70,487
FHLB advances and other borrowings	7,192	10,400	3,900
Total stockholders' equity	16,273	16,341	18,763
Book value per common share⁽¹⁾	$6.57	$6.59	$7.74



	For the nine months ended March 31, 2011 (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	$3,154	$4,611		$5,568
Total interest expense	340	684		1,140
Net interest income	2,814	3,927		4,428
Provision for loan losses	(300)	2,653		10,263
Net interest income after provision for loan losses	3,114	1,274		(5,835)
Total non-interest income	200	271		538
Total non-interest expense	3,057	4,428		6,612
Income/(loss) before provision for income taxes	257	(2,883)		(11,909)
Provision (benefit) for income taxes	—	—		277
Net income/(loss)	257	(2,883)		(12,186)
Basic earnings/(loss) per share	.10	(1.18)		(5.08)

	At, or for the nine months ended March 31, 2011 (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	0.29%		(3.22)%	(11.25)%
Return on average equity	1.58		(18.28)	(41.70)
Interest rate spread⁽²⁾	4.31		4.26	4.19
Net interest margin⁽³⁾	4.46		4.53	4.49
Total non-interest expense to average total assets	3.41		4.94	6.11
Efficiency ratio⁽⁴⁾	98.77		105.48	111.56
*Asset Quality Ratios:*
Non-performing loans to total loans at end of period⁽⁵⁾	8.33%		13.24%	11.76%
Non-performing assets to total assets at end of period⁽⁶⁾	11.31		11.38	10.88
Allowance for loan losses to total loans at end of period	5.29		5.52	5.98
Allowance for loan losses to total nonperforming loans at end of period	63.52		41.73	50.83
*Capital Ratios:*
Total risk-based capital ratio⁽⁷⁾	26.63%		22.22%	21.50%
Tier 1 risk-based capital ratio⁽⁷⁾	25.33		20.91	20.18
Tier 1 leverage ratio⁽⁷⁾	16.02		15.15	15.10
Equity to assets at end of period	18.57		17.75	19.78

(1)	Outstanding common shares as of March 31, 2011 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.

Consolidated Statements of Operations
Three and Six months ended March 31, 2011 and 2010
(Dollars In Thousands, Unaudited)

	Three Months Ended		Nine Months Ended
	March 31,		March 31,

	2011	2010	2011	2010

Interest income
Loans	$840	$990	$2,728	$3,365
Securities	190	81	424	148
Federal funds sold and other	1	-	2	1
Total interest income	1,031	1,071	3,154	3,514

Interest expense
Deposits	86	147	313	536
Borrowings	8	4	27	9
Total interest expense	94	151	340	545

Net interest income	937	920	2,814	2,969

Provision for loan losses	(300)	360	(300)	1,746
Net interest income/(loss) after provision for loan loss	1,237	560	3,114	1,223

Non-interest income
Service charges on deposit accounts	43	51	159	173
Other	19	10	41	28
Total non-interest income	62	61	200	201

Non-interest expense
Salaries and employee benefits	444	507	1,380	1,573
Occupancy and equipment	189	169	470	457
Reversal of excess lease impairment	-	-	(106)	-
Data processing	78	63	242	201
Professional services	93	79	272	419
Director fees	34	34	102	108
Marketing	2	8	26	30
FDIC insurance expense	39	40	105	86
Insurance premiums	15	15	49	47
Foreclosed asset expense/ Property impairment	296	42	331	120
Other	68	40	186	192
Total non-interest expense	1,258	997	3,057	3,233

Income/(loss) before income taxes	41	(376)	257	(1,809)
Provision for income taxes	-	-	-	-

Net income/(loss)	$41	($376)	$257	($1,809)

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
March 31, 2011 and June 30, 2010
(Dollars In Thousands, Unaudited)

	March 31, 2011	June 30, 2010

Assets
Cash and non-interest bearing balances in financial institutions	$1,324	$1,745
Interest bearing balances in financial institutions	864	1,247
Federal funds sold	-	37
Total cash and cash equivalents	2,188	3,029

Securities available for sale	19,863	16,084
Loans receivable, net of allowance for loan losses of $3,075
at March 31, 2011 and $3,864 at June 30, 2010	55,024	66,124
Federal Home Loan Bank stock	520	520
Premises & equipment, net	3,606	3,747
Land available for sale	576	690
Accrued interest receivable	451	282
Other real estate owned	5,070	1,218
Other assets	338	385
Total assets	$87,636	$92,079

Liabilities & Stockholders' Equity
Deposits	$63,522	$64,197
Advances from borrowers for taxes and insurance	233	403
Federal Home Loan Bank advances and other borrowings	7,192	10,400
Accrued interest payable and other liabilities	416	738
Total liabilities	71,363	75,738

Stockholders' equity
Preferred stock
Common stock	26	26
Additional paid-in capital	24,723	24,826
Retained deficit	(6,052)	(6,309)
Treasury stock	(1,158)	(1,220)
Accumulated other comprehensive income (loss) net of tax	(397)	88
Unearned ESOP shares	(869)	(1,070)
Total stockholders' equity	16,273	16,341

Total liabilities and stockholders' equity	$87,636	$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.