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Royal Financial, Inc. (RYFL) Terminates Employee Stock Ownership Plan

|Includes: Royal Financial, Inc. (RYFL)

Royal Financial, Inc. and Royal Savings Bank, a wholly owned subsidiary of the Company, announced the end to their employee stock ownership plan (ESOP).

According to Royal CEO Leonard Szwajkowski, the company “determined that the benefits of the ESOP were not sufficient to justify the ongoing annual expense incurred to maintain the plan. The costs savings we will achieve in future periods will more than compensate for the one-time charges incurred to terminate the ESOP.”

Company estimates of savings due to the change range from $40,000 to $45,000 per year. The cost of terminating the ESOP plan, says the company, will be $47,000, principally in legal and professional fees. Before the end of the 2011 company fiscal year, no further contributions were made on the outstanding plan loan. As a substitute benefit for employees, Royal intends implementing a 401(k) plan starting January 1, 2012.

As part of the ESOP termination, the plan trustee transferred 84,640 shares to the Company to satisfy the ESOP loan. The returned shares were treated as treasury stock, and 91,356 allocated and previously earned shares were disbursed to plan participants. According to plan participant preferences, the trustee rolled over about 90% of the distributed ESOP shares to participant IRAs, with the remainder being distributed as cash. As of this Tuesday, Royal had 2,477,966 shares of stock outstanding.

Royal Financial, Inc. acts as the holding company for Royal Savings Bank. The institution offers checking and savings accounts, home loans, as well as doing some commercial lending. It has served the southeast area of Chicago since 1887.

Though the company did not specify its reasons for ESOP termination in detail, beyond the above quote, a study by the Oakland-based National Center for Employee Ownership (NCEO) observed that “two overall trends do seem fairly clear. First, the most common reason for termination is being acquired, usually because there is an offer too good to turn down. The second most common reason is an inability to handle the repurchase obligation.” NCEO emphasizes that this is only part of a very preliminary finding.

Royal’s press release made no mention of a suitor in the wings, but it’s well-known that buying an ESOP company can result in a large tax and other liability overhang for the buyer if not handled correctly, making the simpler avenue liquidation of the ESOP before any sale of the company, as discussed at length in this article by Michael A. Hart at

Whether Royal’s move is in preparation for a sale remains to be seen.

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