CHICAGO, July 20, 2017 (GLOBE NEWSWIRE) -- Royal Financial, Inc. (the “Company”) (OTCQX:RYFL), the bank holding company for Royal Savings Bank (the “Bank”), announces the impact of recent changes to the Illinois state tax code on its 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 earnings (which create income tax liability), it applies the NOL against the income tax liabilities created by the earnings and reduces the value of its DTA. For financial statement purposes, the Company reports a tax liability, no cash payments are made to taxing authorities, and the cash is retained for internal use. The Company’s 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 periodic basis its valuation of the DTA based on changes (if any) to 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, 2017, the Company’s most recent fiscal year-end, the Company reported the value of its DTA at $11,950,581 which resulted in part from a partial reversal of $500,000 of state tax NOLs. Among other assumptions, the Company used an effective State Income Tax Rate of 5.115% and Federal Income Tax Rate of 34.000%. The following table summarizes the existing Federal and State DTA valuation:
| DTA Component for State NOLs | 5.115 | % | $ | 3,975,612 | |
| Valuation Allowance for State NOLs | ($ | 500,000 | ) | ||
| Net DTA Component for State NOLs | $ | 3,475,612 | |||
| DTA Component for Federal NOLs | 34.000 | % | $ | 7,978,814 | |
| Sub-total | $ | 11,454,426 | |||
| Plus: Timing Differences DTA | $ | 496,155 | |||
| Total Deferred Tax Asset (DTA) | $ | 11,950,581 | |||
On July 6, 2017, the State of Illinois enacted its first budget since 2015, which increased the corporate income tax rate from 5.25% to 7.00%. The Illinois replacement tax remains unchanged at 2.50%. Therefore, effective July 1, 2017, the combined corporate tax rate in Illinois increased from 7.75% to 9.50%. Based on a Federal tax rate of 34.00%, the effective state income tax rate is 6.27%.
The Company analyzed the impact of the State’s income tax rate changes on its DTA. The following table summarizes that analysis:
| Scenario | June 30, 2017 | July 1, 2017 | Variance | ||||||
| Federal Income Tax Rate | 34.000 | % | 34.000 | % | |||||
| Effective State Income Tax Rate | 5.115 | % | 6.270 | % | |||||
| DTA Component for State NOLs | $ | 3,975,612 | $ | 4,885,109 | $ | 909,497 | |||
| Valuation Allowance for State NOLs | ($ | 500,000 | ) | ($ | 600,000 | ) | ($ | 100,000 | ) |
| Net DTA Component for State NOLs | $ | 3,475,612 | $ | 4,285,109 | $ | 809,497 | |||
| DTA Component for Federal NOLs | $ | 7,978,814 | $ | 7,978,814 | - | ||||
| Sub-total | $ | 11,454,426 | $ | 12,263,923 | $ | 809,497 | |||
| Plus: Timing Differences DTA | $ | 496,155 | $ | 496,155 | - | ||||
| Total Deferred Tax Asset (DTA) | $ | 11,950,581 | $ | 12,760,078 | $ | 809,497 | |||
The Company’s GAAP equity is $33,716,585 and $34,526,082 at June 30, 2017, and July 1, 2017, respectively. The Company’s tangible equity is $32,797,970 and $33,607,467 for June 30, 2017, and July 1, 2017, respectively, which reflects the reduction in stockholders’ equity of intangible assets. There are 2,507,112 shares outstanding.
The change in income tax rate has a corresponding favorable impact on the Company’s equity and Tangible Book Value (“TBV”) as summarized in the following table:
| Scenario | June 30, 2017 | July 1, 2017 | Variance | |||
| GAAP Equity | $ | 33,716,585 | $ | 34,526,082 | ||
| Tangible Equity | $ | 32,797,970 | $ | 33,607,467 | ||
| Tangible Book Value | $ | 13.08 | $ | 13.40 | $ | 0.32 |
“The Company continues to focus its efforts to maximize shareholder value through all available avenues, not only through management of the DTA but also (and more importantly) growth and profitability,” said Leonard Szwajkowski, President and CEO. “Applying the NOLs against Federal and State tax liabilities allows the Company to retain the cash normally paid to taxing authorities for reinvestment in earning assets. Further, the DTAs related to NOLs are not includable in Bank regulatory capital and reducing the DTA balance further enhances the Bank’s regulatory capital position.”
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.