Royal Financial, Inc. Announces Potential Impact of Tax Reform to DTA Value

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| Source: Royal Financial, Inc.

CHICAGO, Dec. 05, 2016 (GLOBE NEWSWIRE) -- Royal Financial, Inc. (the “Company”) (OTCQX:RYFL), the bank holding company for Royal Savings Bank (the “Bank”), has performed an analysis to project the potential impact of hypothetical changes in the Federal Income Tax rate on the value of the Company’s Deferred Tax Asset (“DTA”).

The DTA is the unused value of accumulated Net Operating Losses (“NOLs”) from operations in previous years.  NOLs enable the Company to reduce or eliminate the putative income tax liability for earnings by applying the NOLs against those earnings.  As the Company produces positive operating results (which create income tax liabilities), it applies the NOL against the liabilities and reduces the value of its DTA.  The DTA has two major components:  NOLs applicable to the State of Illinois (“State NOLs”); and NOLs applicable to the Federal Government (“Federal NOLs”). 

The Company evaluates and adjusts (if necessary) on a regular basis its valuation of the DTA based on changes (if any) in business plans, projected operating results, tax rates, and other considerations.  As part of the annual certified audit of financial statements, the Company’s Independent Accountant evaluates the Company’s assumptions, projections, and valuation of the DTA.

As of June 30, 2016, the Company’s most recent fiscal year-end, the Company reported the value of its DTA at $12,206,928.  Among other assumptions, the Company used an effective State Income Tax Rate of 5.115% and Federal Income Tax Rate of 34.00%.  The following table summarizes the valuation:

DTA Component for State NOLs 5.115%$4,126,488 
Valuation Allowance for State NOLs ($1,000,000)
Net DTA Component for State NOLs $3,126,488 
DTA Component for Federal NOLs 34.00%$8,621,093 
Sub-total $11,747,581 
Adjustment for Timing Differences $459,347 
Deferred Tax Asset (DTA) $12,206,928 

President-elect Donald J. Trump has announced his intent to recommend to Congress significant changes in the Federal tax code, including a reduction in the corporate income tax rate from 34% to 15%-20%.  Congressional leaders have indicated general support for the as-yet-unspecified proposal, which increases the possibility that it may be enacted into law. 

The Company has received several requests from shareholders regarding the impact of potential tax code changes on the Company’s DTA valuation.  In response to those requests, the Company has decided to release its analysis of hypothetical changes in the Federal and State income tax rates.  The following table summarizes that analysis:

Scenario CurrentScenario 1Scenario 2
Federal Income Tax Rate  34% 20% 15%
Effective State Income Tax Rate  5.115% 6.200% 6.588%
DTA Component for State NOLs $4,126,488 $5,001,840 $5,314,868 
Valuation Allowance for State NOLs ($1,000,000)($1,000,000)($1,000,000)
Net DTA Component for State NOLs $3,126,488 $4,001,840 $4,314,868 
DTA Component for Federal NOLs $8,621,093 $5,070,910 $3,802,987 
Sub-total $11,747,581 $9,072,750 $8,117,855 
Adjustment for Timing Differences $459,347 $295,347 $237,347 
Deferred Tax Asset (DTA) $12,206,928 $9,368,097 $8,355,202 

The Company estimates the pro-forma impact of each of the hypothetical scenarios on Tangible Book Value (“TBV”) as shown below:

Scenario Current Scenario 1 Scenario 2
Tangible Book Value as of 06/30/16 $12.40 $11.27 $10.86 

As of September 30, 2016, the Company estimates its TBV at $12.55 per share.

The Company estimates that the pro-forma impact on the Company’s and Bank’s regulatory capital (including Tier 1 Capital) for each of the hypothetical scenarios will be minimal because the calculation of regulatory capital excludes the value of DTAs attributed to NOLs.

“I would like to emphasize that the analysis that we have released is speculative and based on hypothetical changes to Federal tax code,” said Leonard Szwajkowski, the Company’s President and CEO.  “We performed our analysis on only one factor – the Federal corporate income tax rate.  The incoming Administration has announced that it intends to propose a major restructure of the Federal tax code, of which the corporate income tax rate is only one element.  After the Administration finalizes its proposal, the legislative process may enact a law that differs from the proposal.

“Until the specifics of tax code changes are known, we urge caution by shareholders and investors in their use of this information.  We can reasonably expect that a reduction in corporate income tax rates (if enacted into law) may reduce the Company’s DTA value (depending on other changes that may also be enacted).  However, we should also remember that the direct and indirect effects of lower corporate income tax rates on the Company, its customers, the financial services industry, and the general economy may also enhance the Company’s ability to increase shareholder value.”

About Royal Financial, Inc.

Royal Savings Bank is a federally-insured financial institution that 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 since 1887, and currently has seven branches in Chicagoland 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; 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:  (773) 382-2111

E-mail:  lszwajkowski@royal-bank.us