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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-KSB



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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2006

Commission File Number 000-51123



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ROYAL FINANCIAL, INC.

(Exact name of small business issuer as specified in its charter)



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|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Delaware                                                       |  | 20-1636029                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)

9226 S. Commercial Avenue

Chicago, Illinois 60617

(Address of principal executive offices)

(773) 768-4800

(Issuers telephone number)



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Securities registered pursuant to Section 12(b) of the Act: None

Securities registered
pursuant to Section 12(g) of the Act:

Common Stock, $0.01 Par Value



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Check whether the issuer
(1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.    Yes  x    No ̈

Check if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is
contained herein, and no disclosure will be contained, to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form
10-KSB.  x

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).    Yes ̈No  x

The registrants revenues for its most recent fiscal year were $6,963,789.

As of September 27, 2006, the aggregate market value of the voting common equity held by non-affiliates of the registrant was approximately
$32,620,875 (based on the last sale price of the common stock on the OTC Bulletin Board of $15.00 per share on that date).

The number of
shares of Common Stock of the registrant outstanding as of September 27, 2006 was 2,592,100.

Documents Incorporated by
Reference: Portions of the registrants definitive proxy statement for its 2006 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to SEC Regulation 14A are incorporated by reference into
Part III, Items 9-12 and Item 14.

Transitional Small Business Disclosure Format (check
one):    Yes ̈No  x



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##### Table of Contents

ROYAL FINANCIAL, INC.

Form 10-KSB for Fiscal Year Ended

June 30, 2006

TABLE OF
CONTENTS



|                              |  |                                                                                                                 |  |   
|----------------------------- |  | --------------------------------------------------------------------------------------------------------------- |  | --
|                              |  | Page                                                                                                           
|PART I                        |  |                                                                                                                 |  | 1 
|Item 1.                       |  | Description of Business                                                                                         |  | 1 
|Item 2.                       |  | Description of Property                                                                                         |  | 23
|Item 3.                       |  | Legal Proceedings                                                                                               |  | 23
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                             |  | 23
|                              |  |                                                                                                                
|PART II                       |  |                                                                                                                 |  | 24
|Item 5.                       |  | Market for Common Equity and Related Stockholder Matters                                                        |  | 24
|Item 6.                       |  | Managements Discussion and Analysis or Plan of Operation                                                       |  | 25
|Item 7.                       |  | Financial Statements                                                                                            |  | 37
|Item 8.                       |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                            |  | 37
|Item 8A.                      |  | Controls and Procedures                                                                                         |  | 37
|Item 8B.                      |  | Other Information                                                                                               |  | 37
|                              |  |                                                                                                                
|PART III                      |  |                                                                                                                 |  | 37
|Item 9.                       |  | Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act |  | 37
|Item 10.                      |  | Executive Compensation                                                                                          |  | 37
|Item 11.                      |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                  |  | 38
|Item 12.                      |  | Certain Relationships and Related Transactions                                                                  |  | 38
|Item 13.                      |  | Exhibits                                                                                                        |  | 38
|Item 14.                      |  | Principal Accountant Fees and Services                                                                          |  | 38
|                              | 
|INDEX TO FINANCIAL STATEMENTS |  | F-1                                                                                                            
|                              | 
|SIGNATURES                    |  | S-1                                                                                                            
|                             
|EXHIBIT INDEX                



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PART I

ITEM 1. DESCRIPTION OF BUSINESS

General

Royal Financial, Inc. (the Company) was 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) as part of the Banks conversion from a mutual to stock form of organization, which was completed on January 20, 2005. The Bank was founded in 1887 as Royal Savings and Loan
Association, and is a community and customer-oriented stock savings bank organized under the laws of the State of Illinois. The Bank is engaged in the business of retail banking, with operations conducted through its main office located in Chicago,
Illinois and four branch offices located in Chicago, Frankfort and Lansing, Illinois and Schererville, Indiana.

The Banks business
has historically consisted of attracting deposits from the general public and using those funds to originate one- to four-family residential loans, consumer loans and other loans. In 2003 with the addition of new management with commercial banking
experience, the Bank began to offer commercial loan products, such as commercial real estate loans, multi-family real estate loans, and to a lesser extent, commercial loans and other services, in an effort to transition the Bank into a more
diversified financial institution from a traditional savings bank.

Business Strategy

The Companys business strategy is to operate as a well-capitalized and profitable community savings bank dedicated to providing quality customer
service. As mentioned above, historically the Banks business strategy had been to emphasize one- to four-family residential mortgage lending, and it continues to focus on this type of lending. In 2003, we broadened the range of our products
and services by expanding our loan portfolio to include commercial real estate lending, multi-family real estate lending, and to a lesser extent commercial lending. We intend over time to continue to introduce additional products and services that
we believe will benefit our customers.

Highlights of our business strategy are as follows:



| |  |  | Remaining a Community-Oriented Institution. We were established in Chicago, Illinois in 1887 and have been operating continuously since that time. We have been, and continue
to be, committed to meeting the financial needs of the communities in which we operate, and we are dedicated to providing quality personal service to our customers.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Diversification of Loan Portfolio. In 2003, we began to shift our efforts to diversify our loan portfolio to loans other than one- to four-family residential loans and began
to make (or purchase participations in) commercial real estate loans, multi-family loans and commercial loans. At June 30, 2006, our $77.7 million loan portfolio consisted primarily of $31.6 million of one- to four-family residential
loans, $30.0 million of commercial real estate loans, $5.3 million of multi-family loans, and $10.2 million of commercial loans.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Offering New Commercial Products and Services. We continue to develop new products for our customers, such as internet banking and business checking accounts. We expect that
these new products will increase our deposit base and our fee income. In the last year, we have experienced, and anticipate to continue to experience, significant growth in commercial real estate and commercial lending. This shift from a
predominately one- to four-family
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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residential mortgage loan portfolio to a predominately commercial real estate loan portfolio is
emphasized through our loan officer call program and by continuing to develop new and further strengthening existing relationships. The loan officer call program identifies certain individuals and companies as potential customers and assigns them to
loan officers of the Bank, who contact the potential customer regarding loan opportunities. Such officers are also responsible for monitoring these relationships on an ongoing basis.



| |  |  | Increasing our Lending Capacity. The additional capital raised in our initial public offering in 2005 increased our lending capacity and has enabled us to originate more
loans and loans with larger balances. This will permit us to serve borrowers with larger lending needs and to originate larger loans than we have in the past.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Maintaining High Levels of Earning Assets. Our earning assets were approximately 88.35% of average assets at June 30, 2006.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | Growth in Hispanic Market. We intend to continue to solidify our niche as one of the last community banks in the neighborhoods we serve. Special business development efforts
are concentrated in heavily populated Hispanic communities that surround our three branch locations, including, but not limited to, southeast Chicago communities such as South Chicago and the East Side, and in strategic south suburban and northwest
Indiana neighborhoods. Our primary objective is to concentrate efforts in attracting commercial and commercial real estate loans from underserved small businesses. The Bank is in the process of becoming an approved lender with the Small Business
Administration, and may become an approved lender with other government and municipality insured lending programs in the future, as a means of mitigating certain inherent risks associated with lending to these underserved small businesses.
Additionally, we continue to capitalize on retail banking opportunities with a strong emphasis on mortgage lending.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Market Area and
Competition

The Bank is a community-oriented savings bank. The Banks primary deposit gathering efforts and lending activities are
concentrated primarily in the communities surrounding its offices, which include southeastern Cook County, Illinois and northwest Indiana.

The Banks market area is both an urban and suburban area with the manufacturing industry as the major industrial group, followed by the services sector, and then the wholesale/retail sector. The Banks Chicago offices are located
in diverse communities, which have a high percentage of customers of various ethnic backgrounds, particularly Hispanic. Management of the Bank believes that its urban communities are stable, residential neighborhoods of predominantly
one-to-four-family residences and low to middle income families. The Banks Lansing and Frankfort offices are located in south suburban Chicago, which consist predominantly of middle income families. The Schererville office, located in a
suburban area of northwest Indiana, also consists primarily of middle to upper-middle income families.

The Bank faces significant
competition in its market areas, both in attracting deposits and in making loans. Its most direct competition for deposits has come historically from commercial banks, credit unions and other savings institutions located in its primary market area,
including many large financial institutions which have significantly greater financial and marketing resources available to them. In addition, the Bank faces significant competition for investors funds from short-term money market securities,
mutual funds and other corporate and government securities. The Bank does not rely upon any individual group or entity for a material portion of its deposits. The ability of the Bank to attract and retain deposits depends on its ability to generally
provide a rate of return, liquidity and risk comparable to that offered by competing investment opportunities.



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Competition for loans comes principally from financial institutions and mortgage companies in our primary
market area. The Bank competes for loan originations primarily through the interest rates and loan fees it charges, and the efficiency and quality of services it provides borrowers. Factors that affect competition include general and local economic
conditions, current interest rate levels and volatility in the mortgage markets. Competition may increase as a result of the continuing reduction of restrictions on the interstate operations of financial institutions and the slowing of refinancing
activity.

Lending Activities

General. At June 30, 2006, our net loan portfolio totaled $77.3 million, representing approximately 67.7% of total assets at that date. Historically, one of the principal lending activities of the Bank was the origination
of one-to four family residential loans. Since 2003, the Bank has begun to diversify its loan portfolio to include commercial real estate and commercial lending. Our overall lending philosophy is to:



| |  |  | originate commercial real estate loans in our market areas,
| | - |  | -----------------------------------------------------------



| |  |  | originate and sell one- to four-family residential, fixed rate loans, and
| | - |  | -------------------------------------------------------------------------



| |  |  | to a lesser extent, originate multi-family and nonresidential mortgage loans, commercial loans, construction loans and consumer loans in our market area.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

At June 30, 2006, one- to four-family residential loans amounted to $31.6 million, or 40.7% of the total loan portfolio. At June 30,
2006, commercial real estate loans and multi-family loans amounted to $30.0 million and $5.3 million, or 38.7% and 6.8% of the total loan portfolio, respectively. At June 30, 2006, commercial loans amounted to $10.2 million, or 13.1% of the
total loan portfolio.

The types of loans that the Bank may originate or purchase are subject to federal and state laws and regulations.
Interest rates charged on loans are affected principally by the demand for such loans and the supply of money available for lending purposes and the rates offered by its competitors. These factors are, in turn, affected by general and economic
conditions, the monetary policy of the federal government, including the Board of Governors of the Federal Reserve System, or the Federal Reserve Board, legislative and tax policies and governmental budgetary matters. A savings institution generally
may not make loans to any one borrower in an amount that exceeds 25% of its unimpaired capital and surplus. At June 30, 2006, the Banks regulatory limit on loans to one borrower was $5.8 million and its five largest loans or groups
of loans to one borrower, including related entities, aggregated $4.0 million, $2.9 million, $2.4 million, $2.3 million and $2.3 million. Each of the Banks five largest loans or groups of loans was performing in accordance with its terms
at June 30, 2006.



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Loan Portfolio Composition. The following table sets forth the composition of the loan portfolio
by type of loan at the dates indicated.



|                                  |        |                        |        |            |  |        |        |  |   |            |   |  |        |   |  |            |        |   |  |        |  
|--------------------------------- | ------ | ---------------------- | ------ | ---------- |  | ------ | ------ |  | - | ---------- | - |  | ------ | - |  | ---------- | ------ | - |  | ------ | -
|                                  |        | June 30,               |       
|                                  | 2006   |                        |        | 2005       |  |        | 2004   | 
|                                  | Amount |                        |        | Percentage |  |        | Amount |  |   | Percentage |   |  | Amount |   |  | Percentage |       
|                                  |        | (Dollars in thousands) |       
|Real estate loans:                |        |                        |        |            |  |        |        |  |   |            |   |  |        |   |  |            |        |   |  |        |  
|One- to four-family loans         |        | $                      | 31,646 |            |  | 40.73  | %      |  | $ | 21,913     |   |  | 41.65  | % |  | $          | 20,119 |   |  | 57.60  | %
|Commercial real estate loans      |        |                        | 30,025 |            |  | 38.65  |        |  |   | 24,372     |   |  | 46.33  |   |  |            | 10,538 |   |  | 30.17  |  
|Multi-family loans                |        |                        | 5,287  |            |  | 6.81   |        |  |   | 778        |   |  | 1.48   |   |  |            | 957    |   |  | 2.74   |  
|                                  |        |                        |        |            |  |        |        |  |   |            |   |  |        |   |  |            |        |   |  |        |  
|Total real estate loans           |        |                        | 66,958 |            |  | 86.19  |        |  |   | 47,063     |   |  | 89.46  |   |  |            | 31,614 |   |  | 90.51  |  
|Commercial loans                  |        |                        | 10,174 |            |  | 13.10  |        |  |   | 5,267      |   |  | 10.01  |   |  |            | 3,041  |   |  | 8.71   |  
|Consumer loans:                   |        |                        |        |            |  |        |        |  |   |            |   |  |        |   |  |            |        |   |  |        |  
|Home Equity loans                 |        |                        | 363    |            |  | 0.47   |        |  |   | 117        |   |  | 0.22   |   |  |            | 89     |   |  | 0.26   |  
|Share loans                       |        |                        | 192    |            |  | 0.24   |        |  |   | 164        |   |  | 0.31   |   |  |            | 183    |   |  | 0.52   |  
|                                  |        |                        |        |            |  |        |        |  |   |            |   |  |        |   |  |            |        |   |  |        |  
|Total consumer loans              |        |                        | 555    |            |  | 0.71   |        |  |   | 281        |   |  | 0.53   |   |  |            | 272    |   |  | 0.78   |  
|                                  |        |                        |        |            |  |        |        |  |   |            |   |  |        |   |  |            |        |   |  |        |  
|Total Loans                       |        | $                      | 77,687 |            |  | 100.00 | %      |  | $ | 52,611     |   |  | 100.00 | % |  | $          | 34,927 |   |  | 100.00 | %
|                                  |        |                        |        |            |  |        |        |  |   |            |   |  |        |   |  |            |        |   |  |        |  
|Less:                             |        |                        |        |            |  |        |        |  |   |            |   |  |        |   |  |            |        |   |  |        |  
|Deferred loan fees and costs, net |        |                        | (39    | )          |  |        |        |  |   | (1         | ) |  |        |   |  |            | (6     | ) |  |        |  
|Allowance for loan losses         |        |                        | 400    |            |  |        |        |  |   | 286        |   |  |        |   |  |            | 236    |   |  |        |  
|                                  |        |                        |        |            |  |        |        |  |   |            |   |  |        |   |  |            |        |   |  |        |  
|Loans receivable, net             |        | $                      | 77,326 |            |  |        |        |  | $ | 52,326     |   |  |        |   |  | $          | 34,697 |   |  |        |  
|                                  |        |                        |        |            |  |        |        |  |   |            |   |  |        |   |  |            |        |   |  |        |  

Origination of Loans. The Companys lending activities are subject to the written
underwriting standards and loan origination procedures established by the Board of Directors and management. Loan originations are obtained through a variety of sources, including referrals from real estate brokers, builders, existing customers and
loan officers of the Bank. Written loan applications are taken by loan officers. The loan officers also supervise the procurement of credit reports, appraisals and other documentation involved with originating a loan. Property valuations are
performed by independent outside appraisers approved by the Board of Directors of the Bank.

Under the Banks real estate lending
policy, a title opinion or a title insurance policy must be obtained for each real estate loan. The Bank also requires fire and extended coverage casualty insurance, in order to protect the properties securing its real estate loans. Borrowers must
also obtain flood insurance policies when the property is in a flood hazard area as designated by the Department of Housing and Urban Development. The Bank frequently requires borrowers to advance funds to an escrow account for the payment of real
estate taxes or hazard insurance premiums. The Banks loan approval process is intended to assess the borrowers ability to repay the loan, the viability of the loan and the adequacy of the value of the property that will secure the loan.
The Banks loan policy authorizes senior vice presidents to approve aggregate extensions of credit up to $250,000 and the President/Chief Executive Officer to approve aggregate extensions of credit up to $500,000. The Loan Committee is
authorized to approve aggregate extensions of credit up to $1 million. Any aggregate extension of credit over $1 million requires approval of the entire Board of Directors.

Maturity of Loan Portfolio. The following table presents certain information at June 30, 2006, regarding the dollar amount of loans maturing
in the portfolio based on their contractual terms to maturity or scheduled amortization, but does not include potential prepayments. Scheduled contractual maturities of loans do not necessarily reflect the actual expected term of the loan portfolio.
The average life of mortgage loans is substantially less than their average contractual terms because of prepayments. The average life of mortgage loans tends to increase when current mortgage loan rates are higher than rates on existing mortgage
loans and, conversely, decrease when rates on current mortgage loans are lower than existing mortgage loan rates (due to prepayments as a result of the refinancing of adjustable-rate and fixed-rate loans at lower rates). Loan balances do not include
undisbursed loan proceeds, net deferred loan origination costs or the allowance for loan losses.



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|                                 |  |                    |        |                       |   |              |  |            |       |          |   |             |  |   |     |  |   |       
|-------------------------------- |  | ------------------ | ------ | --------------------- | - | ------------ |  | ---------- | ----- | -------- | - | ----------- |  | - | --- |  | - | ------
|                                 |  | At June 30, 2006  
|                                 |  | One- toFour-Family |        | CommercialReal Estate |   | Multi-family |  | Commercial |       | Consumer |   | Total Loans
|                                 |  | (In thousands)    
|Amounts Due In:                  |  |                    |        |                       |   |              |  |            |       |          |   |             |  |   |     |  |   |       
|One year or less                 |  | $                  | 3,128  |                       | $ | 3,089        |  | $          | 2,048 |          | $ | 9,329       |  | $ | 37  |  | $ | 17,631
|More than one year to five years |  |                    | 4,643  |                       |   | 23,833       |  |            | 2,508 |          |   | 845         |  |   | 206 |  |   | 32,035
|More than five years             |  |                    | 23,875 |                       |   | 3,103        |  |            | 731   |          |   |            |  |   | 312 |  |   | 28,021
|                                 |  |                    |        |                       |   |              |  |            |       |          |   |             |  |   |     |  |   |       
|Total amount due                 |  | $                  | 31,646 |                       | $ | 30,025       |  | $          | 5,287 |          | $ | 10,174      |  | $ | 555 |  | $ | 77,687
|                                 |  |                    |        |                       |   |              |  |            |       |          |   |             |  |   |     |  |   |       

The following table sets forth the dollar amount of gross loans due after June 30, 2007 that
have fixed interest rates or that have floating or adjustable interest rates.



|                             |  |                |        |                             |   |       |  |   |       
|---------------------------- |  | -------------- | ------ | --------------------------- | - | ----- |  | - | ------
|                             |  | Fixed-Rates    |        | Floating orAdjustable-Rates |   | Total
|                             |  | (In thousands)
|Real estate loans:           |  |                |        |                             |   |       |  |   |       
|One- to four-family loans    |  | $              | 28,324 |                             | $ | 194   |  | $ | 28,518
|Commercial real estate loans |  |                | 22,990 |                             |   | 3,946 |  |   | 26,936
|Multi-family loans           |  |                | 1,239  |                             |   | 2,000 |  |   | 3,239 
|Commercial loans             |  |                | 461    |                             |   | 384   |  |   | 845   
|Consumer loans:              |  |                |        |                             |   |       |  |   |       
|Home Equity loans            |  |                | 363    |                             |   |      |  |   | 363   
|Share loans                  |  |                | 33     |                             |   | 122   |  |   | 155   
|                             |  |                |        |                             |   |       |  |   |       
|Total loans                  |  | $              | 53,410 |                             | $ | 6,646 |  | $ | 60,056
|                             |  |                |        |                             |   |       |  |   |       

One- to Four-Family Residential Real Estate Loans. One of the Banks primary lending
activities is the origination of loans secured by one- to four-family residences. At June 30, 2006, $31.6 million, or 40.7%, of gross loans consisted of one- to four-family residential loans.

The loan-to-value ratio, maturity and other provisions of the loans made by the Bank generally have reflected the policy of making less than the maximum
loan permissible under applicable regulations, in accordance with sound lending practices, market conditions and underwriting standards established by the Bank. The Banks present lending policies on one- to four-family residential mortgage
loans generally limit the maximum loan-to-value ratio to 80% of the lesser of the appraised value or purchase price of the property. If the Bank originates a residential mortgage loan with a loan-to-value in excess of 80%, the Bank typically
requires the borrower to obtain private mortgage insurance. Residential mortgage loans are amortized on a monthly basis with principal and interest due each month. The loans generally include due-on-sale clauses.

The Bank offers residential mortgage loans with either fixed rates of interest or interest rates which adjust periodically during the term of the loan.
Fixed rate loans generally have maturities ranging from 10 to 30 years and are fully amortizing with monthly loan payments sufficient to repay the total amount of the loan with interest by the end of the loan term. The Banks fixed rate loans
generally are originated under terms, conditions and documentation that permit them to be sold to U.S. Government-sponsored agencies, such as the Federal Home Loan Mortgage Corporation, and other investors that purchase mortgages in the secondary
market. At June 30, 2006, all but one of the Banks one- to four-family residential mortgage loans were fixed rate loans.



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Occasionally, the Bank sells a portion of the newly originated one- to four-family residential loans to
third-party private investors, consistent with our interest rate risk policy. All loans are sold servicing released. The Bank collects origination fees in connection with these sales.

The following table shows total loans originated, sold, purchased and repaid during the periods indicated.



|                                          |      |                     |         |      |  |   |         |   |  |   |         |  
|----------------------------------------- | ---- | ------------------- | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                          |      | Year Ended June 30, |        
|                                          | 2006 |                     |         | 2005 |  |   | 2004    |  
|                                          |      | (In thousands)      |        
|Loan Originations:                        |      |                     |         |      |  |   |         |  
|Real estate loans:                        |      |                     |         |      |  |   |         |   |  |   |         |  
|One- to four-family loans                 |      | $                   | 11,079  |      |  | $ | 5,912   |   |  | $ | 7,840   |  
|Commercial real estate loans              |      |                     | 10,485  |      |  |   | 15,739  |   |  |   | 3,606   |  
|Multi-family loans                        |      |                     | 953     |      |  |   |        |   |  |   | 232     |  
|Commercial loans                          |      |                     | 2,211   |      |  |   | 5,842   |   |  |   | 3,147   |  
|Consumer loans:                           |      |                     |         |      |  |   |         |   |  |   |         |  
|Home Equity loans                         |      |                     | 286     |      |  |   |        |   |  |   | 80      |  
|Share loans                               |      |                     | 32      |      |  |   | 71      |   |  |   | 98      |  
|                                          |      |                     |         |      |  |   |         |   |  |   |         |  
|Total Loan Originations                   |      |                     | 25,046  |      |  |   | 27,564  |   |  |   | 15,003  |  
|Participations Purchased(1)               |      |                     | 18,915  |      |  |   | 6,384   |   |  |   | 9,234   |  
|Sales and Loan Principal Reductions:      |      |                     |         |      |  |   |         |   |  |   |         |  
|Loans sold(2)                             |      |                     |        |      |  |   | (2,166  | ) |  |   | (3,380  | )
|Loan principal reductions                 |      |                     | (18,885 | )    |  |   | (14,099 | ) |  |   | (9,991  | )
|                                          |      |                     |         |      |  |   |         |   |  |   |         |  
|Total loans sold and principal reductions |      |                     | (18,885 | )    |  | $ | (16,265 | ) |  | $ | (13,371 | )
|Decrease due to other items, net(3)       |      |                     | (76     | )    |  |   | (55     | ) |  |   | (31     | )
|                                          |      |                     |         |      |  |   |         |   |  |   |         |  
|Increase in loan portfolio                |      | $                   | 25,000  |      |  | $ | 17,628  |   |  | $ | 10,835  |  
|                                          |      |                     |         |      |  |   |         |   |  |   |         |  

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|(1) | Participations purchased consist of commercial real estate loans.
|--- | -----------------------------------------------------------------

|(2) | Loans sold consist of one- to four-family real estate loans.
|--- | ------------------------------------------------------------

|(3) | Other items consist of net deferred fees and costs and allowance for loan losses. Although federal laws and regulations permit savings institutions to originate and purchase loans
secured by real estate located throughout the United States, the Bank concentrates its lending activity to its primary market areas in Cook County, Illinois and Northwest Indiana. The Bank may invest up to 15% of its total assets in secured and
unsecured loans for commercial, corporate, business or agricultural purposes.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Bank offers, but historically has not
originated, adjustable-rate one- to four-family residential mortgage loans due to lack of demand.

At June 30, 2006, home equity loans
amounted to $363,000, or 0.5% of the total loan portfolio. These loans are secured by the underlying equity in the borrowers residence. As a result, the Bank generally requires loan-to-value ratios of 90% or less after taking into
consideration the first mortgage loan held by the Bank. If the Bank does not own or service the first mortgage, it will limit the total loan-to-value ratio to 80%. These loans typically have 10-year terms and may have either floating rates of
interest tied to the Banks internal prime rate or fixed rates of interest.

Multi-Family Residential Loans. The Bank also
offers multi-family (over four units) residential loans. The multi-family residential mortgage loans are underwritten on substantially the same basis as its commercial real estate loans, with loan-to-value ratios of up to 80%. At June 30, 2006,
the Bank had $5.3 million in multi-family residential mortgage loans which amounted to 6.8% of the total portfolio.

Commercial Real
Estate Loans. The Banks commercial real estate loan portfolio primarily consists of loans secured by office buildings, warehouses, production facilities, retail stores and restaurants generally located within the Chicago MSA and Northwest
Indiana. In addition, the Bank has purchased participation interests in commercial real estate loans from various financial institutions in the Midwest. Some of the collateral securing such loans is outside the Chicago MSA, but is still in the



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Midwest. Commercial real estate loans amounted to $30.0 million or 38.7% of the total loan portfolio at June 30,
2006. Participation interest in commercial real estate loans purchased amounted to $18.1 million, or 60.3% of the commercial real estate portfolio at June 30, 2006. Before purchasing such loans, the Bank utilizes the same underwriting standards
and criteria as it would if it originated the loans.

Commercial real estate loans typically have a loan-to-value ratio of 80% or less and
generally have shorter maturities than one- to four-family residential mortgage loans. The maximum term of the commercial real estate loans is from 5 to 10 years based on up to a 25-year amortization schedule. Most have fixed rates, but some have
floating rates tied to the Banks internal prime rate. Otherwise, the commercial real estate loans have terms that are substantially similar to its one- to four-family residential mortgage loans.

Commercial real estate lending is generally considered to involve a higher degree of risk than one- to four-family residential lending. Such lending
typically involves large loan balances concentrated in a single borrower or groups of related borrowers for rental or business properties. In addition, the payment experience on loans secured by income-producing properties is typically dependent on
the success of the operation of the related project and thus is typically affected by adverse conditions in the real estate market and in the economy. The Bank generally attempts to mitigate the risks associated with its commercial real estate
lending by, among other things, lending primarily in its market area and using lower loan-to-value ratios in the underwriting process.

Commercial Loans. At June 30, 2006, commercial loans amounted to $10.2 million, or 13.1% of the loan portfolio. Commercial loans generally have a term of up to five years and may have either floating rates tied to the
Banks internal prime rate or fixed rates of interest. Commercial loans are made to small to medium-size businesses within the Banks market area. A substantial portion of the Banks small business loans are secured by real estate,
equipment and other corporate assets. The Bank also generally obtains personal guarantees from the principals of the borrower with respect to all commercial loans. In addition, the Bank may extend loans for a commercial business purpose, which are
secured by a mortgage on the proprietors home or the business property. Commercial loans generally are deemed to involve a greater degree of risk than one- to four-family residential mortgage loans.

Consumer Loans. The Bank originates consumer loans in order to provide a full range of financial services to its customers and because such loans
generally have shorter terms and higher interest rates than residential mortgage loans. At June 30, 2006, $555,000, or 0.7% of the total loan portfolio, consisted of consumer loans. The consumer loans offered include home equity loans and loans
secured by deposit accounts in the Bank, which are sometimes referred to as share loans. Loans secured by deposit accounts in the Bank amounted to $192,000, or 0.2% of the total loan portfolio at June 30, 2006. Such deposit account loans are
originated for up to 90% of the account balance, with a hold placed on the account restricting the withdrawal of the account balance. The interest rate on the loan is equal to the interest rate paid on the account plus 2%. These loans mature on or
before the maturity date of the underlying savings account and have three year maximum terms.

Loan Origination and Other Fees. In
addition to interest earned on loans, the Bank receives loan origination fees or points for originating loans in most cases. Loan points are a percentage of the principal amount of the mortgage loan and are charged to the borrower in
connection with the origination of the loan.

Asset Quality General. The Bank mails delinquency notices to borrowers when a borrower
fails to make a required payment within 15 days of the date due. Additional notices are sent out when a loan becomes 30 days or 60 days past due. If a loan becomes 90 days past due, the Bank mails a notice indicating that the Bank will refer it to
an attorney within 30 days to commence foreclosure. In most



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cases, deficiencies are cured promptly. While the Bank generally prefers to work with borrowers to resolve such problems,
the Bank will institute foreclosure or other collection proceedings when necessary to minimize any potential loss.

Loans are placed on
non-accrual status when management believes the probability of collection of interest is insufficient to warrant further accrual. When a loan is placed on non-accrual status, previously accrued but unpaid interest is deducted from interest income.
As a matter of policy, the Bank generally discontinues the accrual of interest income when the loan becomes 90 days past due as to principal or interest.

Real estate and other assets acquired by the Company as a result of foreclosure or by deed-in-lieu of foreclosure are classified as real estate owned until sold. The Company did not have any real estate owned at
June 30, 2006.

Delinquent Loans. At June 30, 2006 there was one loan totaling $57,000 that was 30 days or more past due.

Nonperforming Assets. The following table presents information with respect to the nonperforming assets at the dates indicated.



|                                                                                            |  |                        |      |   |      |   |      |      |  |   |      |  
|------------------------------------------------------------------------------------------- |  | ---------------------- | ---- | - | ---- | - | ---- | ---- |  | - | ---- | -
|                                                                                            |  | At June 30,            |     
|                                                                                            |  | 2006                   |      |   | 2005 |   |      | 2004 | 
|                                                                                            |  | (Dollars in thousands) |     
|Nonaccruing Loans:                                                                          |  |                        |      |   |      |   |      |      |  |   |      |  
|Real estate loans:                                                                          |  |                        |      |   |      |   |      |      |  |   |      |  
|One- to four-family loans                                                                   |  | $                      |     |   |      | $ |     |      |  | $ |     |  
|Commercial real estate loans                                                                |  |                        |     |   |      |   |     |      |  |   |     |  
|Multi-family loans                                                                          |  |                        |     |   |      |   |     |      |  |   | 111  |  
|Commercial loans                                                                            |  |                        |     |   |      |   |     |      |  |   |     |  
|Consumer loans:                                                                             |  |                        |      |   |      |   |      |      |  |   |      |  
|Home Equity loans                                                                           |  |                        |     |   |      |   |     |      |  |   |     |  
|Share loans                                                                                 |  |                        |     |   |      |   |     |      |  |   |     |  
|                                                                                            |  |                        |      |   |      |   |      |      |  |   |      |  
|Total nonaccruing loans                                                                     |  |                        |     |   |      |   |     |      |  |   | 111  |  
|Loans past due over 90 days still on accrual                                                |  |                        |     |   |      |   |     |      |  |   | 17   |  
|                                                                                            |  |                        |      |   |      |   |      |      |  |   |      |  
|Real estate owned(1)                                                                        |  |                        |     |   |      |   |     |      |  |   |     |  
|                                                                                            |  |                        |      |   |      |   |      |      |  |   |      |  
|Total nonperforming assets(2)                                                               |  |                        |     |   |      |   |     |      |  |   | 128  |  
|Troubled debt restructurings                                                                |  |                        |     |   |      |   |     |      |  |   |     |  
|                                                                                            |  |                        |      |   |      |   |      |      |  |   |      |  
|Troubled debt restructurings and total nonperforming assets                                 |  | $                      |     |   |      | $ |     |      |  | $ | 128  |  
|                                                                                            |  |                        |      |   |      |   |      |      |  |   |      |  
|Total nonperforming loans and troubled debt restructurings as a percentage of total loans   |  |                        | 0.00 | % |      |   | 0.00 | %    |  |   | 0.37 | %
|                                                                                            |  |                        |      |   |      |   |      |      |  |   |      |  
|Total nonperforming assets and troubled debt restructurings as a percentage of total assets |  |                        | 0.00 | % |      |   | 0.00 | %    |  |   | 0.14 | %
|                                                                                            |  |                        |      |   |      |   |      |      |  |   |      |  

---

|(1) | Real estate owned typically includes other repossessed assets and the balances are shown net of related loss allowances.
|--- | ------------------------------------------------------------------------------------------------------------------------

|(2) | Nonperforming assets consist of nonperforming loans, impaired loans, other repossessed assets and real estate owned.
|--- | --------------------------------------------------------------------------------------------------------------------

For the years ended June 30, 2006, 2005 and 2004, the amount of interest income that would have been recorded on non-accrual loans was $0, $0, and
$9,000, respectively.

Classified Assets. Federal regulations and the Illinois Savings Bank Act require that each insured savings
institution classify its assets on a regular basis. In addition, in connection with examinations of



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insured institutions, federal examiners have authority to identify problem assets and, if appropriate, classify them.
There are three classifications for problem assets: substandard, doubtful and loss. Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured
institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of
currently existing facts, conditions and values questionable, and there is a higher possibility of loss. An asset classified loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted.
Another category designated special mention also must be established and maintained for assets that do not currently expose an insured institution to a sufficient degree of risk to warrant classification as substandard, doubtful or loss.
Assets classified as substandard or doubtful require the institution to establish general allowances for loan losses. If all or a portion of an asset is classified loss, the insured institution must either establish specific allowances for loan
losses in the amount of 100% of the portion of the asset classified loss, or charge-off such amount. General loss allowances established to cover inherent losses related to assets classified substandard or doubtful may be included in determining an
institutions regulatory capital, while specific valuation allowances for loan losses do not qualify as regulatory capital. Federal examiners may disagree with an insured institutions classifications and amounts reserved.

There were no classified assets at June 30, 2006, and no significant loans for which the terms had been renegotiated or restructured, or for which
there were serious doubts as to the ability of the borrower to comply with repayment terms.

Allowance for Loan Losses. At
June 30, 2006, the allowance for loan losses was $400,000, or 0.52% of the total loan portfolio. The loan loss allowance is maintained by management at a level considered adequate to cover probable incurred losses inherent in the existing
portfolio based on prior loan loss experience, known and probable risks in the portfolio, adverse situations that may affect the borrowers ability to repay, the estimated value of any underlying collateral, general economic conditions, and
other factors and estimates that are subject to change over time.

The Bank relies, among other things, on its experienced senior
management in determining the appropriate allowance for loan losses on the commercial and commercial real estate loan portfolio, as the Bank does not have a seasoned portfolio of commercial and commercial real estate loans. Management reviews the
composition of the commercial and commercial real estate loan portfolio on a quarterly basis. This includes reviewing delinquency trends, impaired loans, loan to value ratios and types of collateral. Management then compared this data to peer group
data and the FDIC state profile for Illinois banks as a means of additional analysis. Based on these factors, including the fact that the Bank did not have any significant delinquencies and no impaired credits within the commercial or commercial
real estate loan portfolio, we determined that the allocation of the allowance for loan losses for these types of loans was appropriate at June 30, 2006.

While management believes that it determines the amount of the allowance based on the best information available at the time, the allowance will need to be adjusted as circumstances change and assumptions are updated.
Future adjustments to the allowance could significantly affect net income.



9



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The following table sets forth information concerning the allocation of the allowance for loan losses by
loan category at the dates indicated.



|                             |      |                        |     |                                               |        |   |        |   |                                               |  |        |        |  |                                               |     |  |        |  
|---------------------------- | ---- | ---------------------- | --- | --------------------------------------------- | ------ | - | ------ | - | --------------------------------------------- |  | ------ | ------ |  | --------------------------------------------- | --- |  | ------ | -
|                             |      | At June 30,            |    
|                             | 2006 |                        |     | 2005                                          |        |   | 2004   |  
|                             |      | Amount                 |     | Percent ofLoans in EachCategory toTotal Loans |        |   | Amount |   | Percent ofLoans in EachCategory toTotal Loans |  |        | Amount |  | Percent ofLoans in EachCategory toTotal Loans |    
|                             |      | (Dollars in thousands) |    
|Real estate loans:           |      |                        |     |                                               |        |   |        |   |                                               |  |        |        |  |                                               |     |  |        |  
|One- to four-family loans    |      | $                      | 46  |                                               | 40.73  | % |        | $ | 42                                            |  | 41.65  | %      |  | $                                             | 102 |  | 57.60  | %
|Commercial real estate loans |      |                        | 257 |                                               | 38.65  |   |        |   | 146                                           |  | 46.33  |        |  |                                               | 78  |  | 30.17  |  
|Multi-family loans           |      |                        | 12  |                                               | 6.81   |   |        |   | 3                                             |  | 1.48   |        |  |                                               | 5   |  | 2.74   |  
|Commercial loans             |      |                        | 84  |                                               | 13.10  |   |        |   | 95                                            |  | 10.01  |        |  |                                               | 44  |  | 8.71   |  
|Consumer loans:              |      |                        |     |                                               |        |   |        |   |                                               |  |        |        |  |                                               |     |  |        |  
|Home equity loans            |      |                        | 1   |                                               | 0.47   |   |        |   |                                              |  | 0.22   |        |  |                                               | 2   |  | 0.26   |  
|Share loans                  |      |                        |    |                                               | 0.24   |   |        |   |                                              |  | 0.31   |        |  |                                               | 5   |  | 0.52   |  
|                             |      |                        |     |                                               |        |   |        |   |                                               |  |        |        |  |                                               |     |  |        |  
|Total                        |      | $                      | 400 |                                               | 100.00 | % |        | $ | 286                                           |  | 100.00 | %      |  | $                                             | 236 |  | 100.00 | %
|                             |      |                        |     |                                               |        |   |        |   |                                               |  |        |        |  |                                               |     |  |        |  

The following table sets forth an analysis of the Banks allowance for loan losses during the
periods indicated.



|                                                                    |  |                        |      |   |      |   |      |      |  |   |        |  
|------------------------------------------------------------------- |  | ---------------------- | ---- | - | ---- | - | ---- | ---- |  | - | ------ | -
|                                                                    |  | Year Ended June 30,    |     
|                                                                    |  | 2006                   |      |   | 2005 |   |      | 2004 | 
|                                                                    |  | (Dollars in thousands) |     
|Balance at beginning of period                                      |  | $                      | 286  |   |      | $ | 236  |      |  | $ | 233    |  
|Charge-offs                                                         |  |                        | (13  | ) |      |   |     |      |  |   |       |  
|Provision for loan losses                                           |  |                        | 127  |   |      |   | 50   |      |  |   | 3      |  
|                                                                    |  |                        |      |   |      |   |      |      |  |   |        |  
|Balance at end of period                                            |  | $                      | 400  |   |      | $ | 286  |      |  | $ | 236    |  
|                                                                    |  |                        |      |   |      |   |      |      |  |   |        |  
|Allowance for loan losses as a percent of total loans outstanding   |  |                        | 0.52 | % |      |   | 0.54 | %    |  |   | 0.68   | %
|Allowance for loan losses as a percent of total nonperforming loans |  |                        | 0.00 | % |      |   | 0.00 | %    |  |   | 184.38 | %
|Ratio of net charge-offs to average loans outstanding               |  |                        | 0.00 | % |      |   | 0.00 | %    |  |   | 0.00   | %

Investment Securities

The Bank has authority to invest in various types of securities, including mortgage-backed securities, United States Treasury obligations, securities of various federal agencies, government sponsored entities, and of
state and municipal governments, certificates of deposit at federally-insured banks and savings institutions, certain bankers acceptances and federal funds. The Banks investment strategy is established by the Investment Committee which
presently consists of Alan Bird, Chairman of the Company and the Bank, Donald Moll, the Companys and the Banks President and CEO, and John Dempsey, a director of the Company and the Bank and Chairman of the Companys Audit
Committee. The Investment Committee meets on a monthly basis and the strategy established by the committee is implemented by the Banks President and Chief Financial Officer. Any material deviation from the investment strategy requires approval
by the Investment Committee. At June 30, 2006, the Company did not hold any investment with an aggregate book value in excess of 10% of stockholders equity.

The following table sets forth information relating to the amortized cost and fair value of the securities portfolio, all of which are classified as available-for-sale.



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|                                    |               |                |           |  |               |        |           |   |               |  |           |        |  |   |        |  |   |       
|----------------------------------- | ------------- | -------------- | --------- |  | ------------- | ------ | --------- | - | ------------- |  | --------- | ------ |  | - | ------ |  | - | ------
|                                    |               | At June 30,   
|                                    | 2006          |                | 2005      |  | 2004         
|                                    | AmortizedCost |                | FairValue |  | AmortizedCost |        | FairValue |   | AmortizedCost |  | FairValue
|                                    |               | (In thousands)
|U.S. Government sponsored entities  |               | $              | 11,996    |  | $             | 11,717 |           | $ | 16,311        |  | $         | 16,185 |  | $ | 17,732 |  | $ | 17,446
|State and municipal                 |               |                |          |  |               |       |           |   |              |  |           |       |  |   | 715    |  |   | 734   
|Mortgage-backed                     |               |                | 1,148     |  |               | 1,101  |           |   | 2,011         |  |           | 2,038  |  |   | 2,655  |  |   | 2,691 
|Collateralized mortgage obligations |               |                | 8,470     |  |               | 8,245  |           |   | 14,591        |  |           | 14,523 |  |   | 16,113 |  |   | 15,884
|Corporate                           |               |                | 500       |  |               | 455    |           |   | 500           |  |           | 496    |  |   | 7,634  |  |   | 7,771 
|                                    |               |                |           |  |               |        |           |   |               |  |           |        |  |   |        |  |   |       
|Total                               |               | $              | 22,114    |  | $             | 21,518 |           | $ | 33,413        |  | $         | 33,242 |  | $ | 44,849 |  | $ | 44,526
|                                    |               |                |           |  |               |        |           |   |               |  |           |        |  |   |        |  |   |       

The following table sets forth the amount of securities which mature during each of the periods
indicated and the weighted average yields for each range of maturities at June 30, 2006. The amounts reflect fair value of the securities at June 30, 2006.



|                                    |  |                        |       |                      |      |   |          |   |                      |  |      |           |  |                      |       |  |              |   |                      |   |       |       |      |   |  |   |       
|----------------------------------- |  | ---------------------- | ----- | -------------------- | ---- | - | -------- | - | -------------------- |  | ---- | --------- |  | -------------------- | ----- |  | ------------ | - | -------------------- | - | ----- | ----- | ---- | - |  | - | ------
|                                    |  | Contractually Maturing
|                                    |  | Under 1 Year           |       | WeightedAverageYield |      |   | 1-5Years |   | WeightedAverageYield |  |      | 6-10Years |  | WeightedAverageYield |       |  | Over 10Years |   | WeightedAverageYield |   |       | Total
|                                    |  | (Dollars in thousands)
|U.S. Government sponsored entities  |  | $                      | 1,985 |                      | 2.71 | % |          | $ | 9,731                |  | 3.56 | %         |  | $                    |      |  |             | % |                      | $ |      |       |     | % |  | $ | 11,717
|Mortgage-backed                     |  |                        |      |                      |     |   |          |   | 212                  |  | 5.09 |           |  |                      | 435   |  | 5.12         |   |                      |   | 454   |       | 5.86 |   |  |   | 1,101 
|Collateralized mortgage obligations |  |                        |      |                      |     |   |          |   | 103                  |  | 6.01 |           |  |                      | 2,254 |  | 4.77         |   |                      |   | 5,887 |       | 6.93 |   |  |   | 8,245 
|Corporate                           |  |                        |      |                      |     |   |          |   |                     |  |     |           |  |                      | 455   |  | 5.76         |   |                      |   |      |       |     |   |  |   | 455   
|                                    |  |                        |       |                      |      |   |          |   |                      |  |      |           |  |                      |       |  |              |   |                      |   |       |       |      |   |  |   |       
|Total                               |  | $                      | 1,985 |                      | 2.71 | % |          | $ | 10,046               |  | 3.62 | %         |  | $                    | 3,144 |  | 4.96         |   |                      | $ | 6,341 |       | 6.85 |   |  | $ | 21,518
|                                    |  |                        |       |                      |      |   |          |   |                      |  |      |           |  |                      |       |  |              |   |                      |   |       |       |      |   |  |   |       

Mortgage-backed securities represent a participation interest in a pool of one- to four-family or
multi-family mortgages. The mortgage originators use intermediaries (generally U.S. Government agencies and government-sponsored enterprises) to pool and repackage the participation interests in the form of securities, with investors receiving the
principal and interest payments on the mortgages. Such U.S. Government agencies and government-sponsored enterprises guarantee the payment of principal and interest to investors.

Mortgage-backed securities are typically issued with stated principal amounts, and the securities are backed by pools of mortgages that have loans with
interest rates that are within a range and have varying maturities. The underlying pool of mortgages, i.e., fixed-rate or adjustable-rate, as well as prepayment risk, are passed on to the certificate holder. The life of a mortgage-backed
pass-through security approximates the life of the underlying mortgages.

The mortgage-backed securities consist of Government National
Mortgage Association securities, Federal Home Loan Mortgage Corporation securities and Federal National Mortgage Association securities. The Government National Mortgage Association is a government agency within the Department of Housing and Urban
Development that is intended to help finance government-assisted housing programs. Government National Mortgage Association securities are backed by loans insured by the Federal Housing Administration, or guaranteed by the Veterans Administration,
and the timely payment of principal and interest on Government National Mortgage Association securities is guaranteed by the Government National Mortgage Association and backed by the full faith and credit of the U.S. Government. The Federal Home
Loan Mortgage Corporation is a corporation chartered by the U.S. Government that issues participation certificates backed principally by conventional mortgage loans. The Federal Home Loan Mortgage Corporation guarantees the timely payment of
interest and the ultimate return of principal on participation certificates. The Federal National Mortgage Association is a corporation chartered by the U.S. Congress with a mandate to establish a secondary market for mortgage



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loans. The Federal National Mortgage Association guarantees the timely payment of principal and interest on Federal
National Mortgage Association securities. Federal Home Loan Mortgage Corporation and Federal National Mortgage Association securities are not backed by the full faith and credit of the United States, but because the Federal Home Loan Mortgage
Corporation and the Federal National Mortgage Association are U.S. Government-sponsored enterprises, these securities are considered to be among the highest quality investments with minimal credit risks.

Mortgage-backed securities generally yield less than the loans underlying those securities because of their payment guarantees or credit enhancements
that offer nominal credit risk. In addition, mortgage-backed securities are more liquid than individual mortgage loans and may be used to collateralize borrowings or other obligations of the Bank.

Sources of Funds

General. Deposits are the
primary source of funding for lending and other investment purposes. In addition to deposits, principal and interest payments on loans and mortgage-backed securities are a source of funds. Loan repayments are a relatively stable source of funds,
while deposit inflows and outflows are significantly influenced by general interest rates and money market conditions. Borrowings may also be used on a short-term basis to compensate for reductions in the availability of funds from other sources and
on a longer-term basis for general business purposes.

Deposits. Deposits are attracted by the Bank principally from within its
primary market area. Deposit account terms vary, with the principal differences being the minimum balance required, the time periods the funds must remain on deposit and the interest rate.

The Bank obtains deposits primarily from residents of Illinois and Northwest Indiana. The Bank has not solicited deposits from outside Illinois or paid
fees to brokers to solicit funds for deposit.

Interest rates paid, maturity terms, service fees and withdrawal penalties are established
on a periodic basis. Management determines the rates and terms based on rates paid by competitors, the need for funds or liquidity, growth goals and federal and state regulations. The Bank attempts to control the flow of deposits by pricing its
accounts to remain generally competitive with other financial institutions in its market area.



12



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##### Table of Contents

The following table shows the distribution of and certain other information relating to the Banks
deposits by type as of the dates indicated.



|                           |        |                        |                    |      |        |        |      |                    |        |  |        |   |                    |   |        |  |        |  
|-------------------------- | ------ | ---------------------- | ------------------ | ---- | ------ | ------ | ---- | ------------------ | ------ |  | ------ | - | ------------------ | - | ------ |  | ------ | -
|                           |        | At June 30,            |                   
|                           | 2006   |                        |                    | 2005 |        |        | 2004 |                   
|                           | Amount |                        | Percent ofDeposits |      |        | Amount |      | Percent ofDeposits |        |  | Amount |   | Percent ofDeposits |  
|                           |        | (Dollars in thousands) |                   
|Transaction accounts:      |        |                        |                    |      |        |        |      |                    |        |  |        |   |                    |   |        |  |        |  
|Demand deposits            |        |                        |                    |      |        |        |      |                    |        |  |        |   |                    |   |        |  |        |  
|Interest bearing           |        | $                      | 9,496              |      | 12.04  | %      |      | $                  | 10,386 |  | 13.30  | % |                    | $ | 9,411  |  | 12.14  | %
|Non-interest bearing       |        |                        | 6,337              |      | 8.03   |        |      |                    | 4,599  |  | 5.89   |   |                    |   | 1,850  |  | 2.39   |  
|Savings deposits           |        |                        | 30,237             |      | 38.32  |        |      |                    | 31,915 |  | 40.86  |   |                    |   | 32,247 |  | 41.59  |  
|                           |        |                        |                    |      |        |        |      |                    |        |  |        |   |                    |   |        |  |        |  
|Total transaction accounts |        |                        | 46,070             |      | 58.39  |        |      |                    | 46,900 |  | 60.05  |   |                    |   | 43,508 |  | 56.12  |  
|Certificate accounts:      |        |                        |                    |      |        |        |      |                    |        |  |        |   |                    |   |        |  |        |  
|0.00%  0.99%              |        |                        |                   |      |       |        |      |                    |       |  |       |   |                    |   | 114    |  | 0.15   |  
|1.00%  1.99%              |        |                        | 1,317              |      | 1.67   |        |      |                    | 8,794  |  | 11.26  |   |                    |   | 21,248 |  | 27.41  |  
|2.00%  2.99%              |        |                        | 8,551              |      | 10.84  |        |      |                    | 16,278 |  | 20.84  |   |                    |   | 5,606  |  | 7.23   |  
|3.00%  3.99%              |        |                        | 13,264             |      | 16.81  |        |      |                    | 5,009  |  | 6.41   |   |                    |   | 5,582  |  | 7.20   |  
|4.00%  4.99%              |        |                        | 9,310              |      | 11.80  |        |      |                    | 1,126  |  | 1.44   |   |                    |   | 1,273  |  | 1.64   |  
|5.00%  5.99%              |        |                        | 386                |      | 0.49   |        |      |                    |       |  |       |   |                    |   | 191    |  | 0.25   |  
|                           |        |                        |                    |      |        |        |      |                    |        |  |        |   |                    |   |        |  |        |  
|Total certificate accounts |        |                        | 32,828             |      | 41.61  |        |      |                    | 31,207 |  | 39.95  |   |                    |   | 34,014 |  | 43.88  |  
|                           |        |                        |                    |      |        |        |      |                    |        |  |        |   |                    |   |        |  |        |  
|Total deposits             |        | $                      | 78,898             |      | 100.00 | %      |      | $                  | 78,107 |  | 100.00 | % |                    | $ | 77,522 |  | 100.00 | %
|                           |        |                        |                    |      |        |        |      |                    |        |  |        |   |                    |   |        |  |        |  

The following table sets forth the savings activities of the Bank during the periods indicated.



|                                      |      |                     |        |      |  |   |        |   |  |   |       
|------------------------------------- | ---- | ------------------- | ------ | ---- |  | - | ------ | - |  | - | ------
|                                      |      | Year Ended June 30,
|                                      | 2006 |                     |        | 2005 |  |   | 2004  
|                                      |      | (In thousands)     
|Total deposits at beginning of period |      | $                   | 78,107 |      |  | $ | 77,522 |   |  | $ | 70,455
|Net deposits (withdrawals)            |      |                     | (561   | )    |  |   | (612   | ) |  |   | 5,959 
|Interest credited                     |      |                     | 1,352  |      |  |   | 1,197  |   |  |   | 1,108 
|                                      |      |                     |        |      |  |   |        |   |  |   |       
|Total deposits at end of period       |      | $                   | 78,898 |      |  | $ | 78,107 |   |  | $ | 77,522
|                                      |      |                     |        |      |  |   |        |   |  |   |       

The following table shows the interest rate and maturity information for the Banks
certificates of deposit at June 30, 2006.



|              |  |                  |        |           |   |           |  |              |     |       |   |     |  |   |       
|------------- |  | ---------------- | ------ | --------- | - | --------- |  | ------------ | --- | ----- | - | --- |  | - | ------
|              |  | Maturity Date   
|Interest Rate |  | One Year or Less |        | 1-2 Years |   | 2-3 Years |  | Over 3 Years |     | Total
|              |  | (In thousands)  
|1.00% - 1.99% |  | $                | 1,317  |           | $ |          |  | $            |    |       | $ |    |  | $ | 1,317 
|2.00% - 2.99% |  |                  | 8,022  |           |   | 529       |  |              |    |       |   |    |  |   | 8,551 
|3.00% - 3.99% |  |                  | 10,518 |           |   | 2,595     |  |              | 151 |       |   |    |  |   | 13,264
|4.00% - 4.99% |  |                  | 7,244  |           |   | 602       |  |              | 532 |       |   | 932 |  |   | 9,310 
|5.00% - 5.99% |  |                  | 386    |           |   |          |  |              |    |       |   |    |  |   | 386   
|              |  |                  |        |           |   |           |  |              |     |       |   |     |  |   |       
|Total         |  | $                | 27,487 |           | $ | 3,726     |  | $            | 683 |       | $ | 932 |  | $ | 32,828
|              |  |                  |        |           |   |           |  |              |     |       |   |     |  |   |       

As of June 30, 2006, the aggregate amount of outstanding time certificates of deposit at the
Bank in amounts greater than or equal to $100,000, was approximately $9.9 million. The following table presents the maturity of these time certificates of deposit at such dates.



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|                                |                |               |      
|------------------------------- | -------------- | ------------- | -----
|                                |                | June 30, 2006
|                                | (In thousands)
|3 months or less                |                | $             | 3,435
|Over 3 months through 6 months  |                |               | 2,708
|Over 6 months through 12 months |                |               | 1,999
|Over 12 months                  |                |               | 1,739
|                                |                |               |      
|                                |                | $             | 9,881
|                                |                |               |      

Borrowings. The Bank may obtain advances from the Federal Home Loan Bank of Chicago upon
the security of the common stock it owns in that bank and certain of its residential mortgage loans and mortgage-backed and other investment securities, provided certain standards related to creditworthiness have been met. These advances are made
under several credit programs, each of which has its own interest rate and range of maturities. Federal Home Loan Bank advances are generally available to meet seasonal and other withdrawals of deposit accounts and to permit increased lending.

The following table shows certain information regarding the short-term borrowings of the Bank at or for the dates indicated:



|                                                              |      |                                   |      |  |   |       |   |  |   |       |  
|------------------------------------------------------------- | ---- | --------------------------------- | ---- |  | - | ----- | - |  | - | ----- | -
|                                                              |      | At or for the Year Ended June 30, |     
|                                                              | 2006 |                                   | 2005 |  |   | 2004  |  
|                                                              |      | (Dollars in thousands)            |     
|Federal Home Loan Bank open line of credit:                   |      |                                   |      |  |   |       |   | 
|Average balance outstanding                                   |      | $                                 |     |  | $ | 1,145 |   |  | $ | 2,000 |  
|Maximum amount outstanding at any month-end during the period |      |                                   |     |  |   | 2,000 |   |  |   | 2,000 |  
|Balance outstanding at end of period                          |      |                                   |     |  |   |      |   |  |   | 2,000 |  
|Average interest rate during the period                       |      |                                   | N/A  |  |   | 4.89  | % |  |   | 4.85  | %
|Weighted average interest rate at end of period               |      |                                   | N/A  |  |   |      |   |  |   | 4.78  |  

At June 30, 2006, the Bank had no outstanding advances from the Federal Home Loan Bank.

Subsidiaries

The Companys only
subsidiary is Royal Savings Bank. The Bank does not currently have any subsidiaries.

Total Employees

The Bank had 47 equivalent full-time employees at June 30, 2006. None of these employees are represented by a collective bargaining agent, and the
Bank believes that it enjoys good relations with its personnel.

SUPERVISION AND REGULATION

The following is a summary of material provisions of the statutes and regulations applicable to the Bank and the Company. However, these summaries are
not complete, and you should refer to the statutes and regulations for more information. Also, these statutes and regulations are likely to change in the future, and we cannot predict what effect these changes, if made, will have on our operations.
Finally, please remember that the supervision, regulation and examination of banks and bank holding companies by bank regulatory agencies are intended primarily for the protection of depositors rather than stockholders of banks and bank holding
companies.



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Bank Holding Company Regulation

General. Upon completion of the conversion, Royal Financial became a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended, or the BHC Act. A bank holding company
registered in accordance with the BHC Act is regulated by and subject to the supervision of the Federal Reserve Board and is required to file with the Federal Reserve Board an annual report and such other information as may be required. The Federal
Reserve Board has the authority to conduct examinations of bank holding companies as well. The Federal Reserve Board has the authority to issue orders to bank holding companies to cease and desist from unsound banking practices and violations of
conditions imposed by, or violations of agreements with, the Federal Reserve Board. The Federal Reserve Board is also empowered to:



| |  |  | assess civil money penalties against companies or individuals who violate the BHC Act or orders or regulations relating to the BHC Act;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | order termination of nonbanking activities of nonbanking subsidiaries of bank holding companies; and
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | order termination of ownership and control of a nonbanking subsidiary by a bank holding company.
| | - |  | ------------------------------------------------------------------------------------------------

Because the Bank is chartered under Illinois law, the Company is also subject as a savings bank holding company to examination and regulation by the
Division of Banks and Real Estate of the Illinois Department of Financial and Professional Regulation, or DBRE, under the Illinois Savings Bank Act.

The BHC Act - Acquisitions and Permissible Activities. The BHC Act requires the prior approval of the Federal Reserve Board for a bank holding company to:



| |  |  | acquire substantially all the assets of a bank;
| | - |  | -----------------------------------------------



| |  |  | acquire direct or indirect ownership or control of more than 5% of any class of the voting shares of any bank, bank holding company or savings association;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | increase any such nonmajority ownership or control of any bank, bank holding company or savings association; or
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | merge or consolidate with any bank holding company.
| | - |  | ---------------------------------------------------

Federal law generally authorizes bank holding companies to acquire banks located in any state, subject to certain state-imposed age and deposit concentration limits, and also generally authorizes interstate bank holding company and bank
mergers and, to a lesser extent, interstate branching.

Unless a bank holding company becomes a financial holding company under the
Gramm-Leach-Bliley Act of 1999, or GLBA (as discussed below), the BHC Act prohibits a bank holding company from acquiring a direct or indirect interest in or control of more than 5% of any class of the voting shares of a company that is not a bank
or a bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiary banks. However, a bank holding company may engage in and may own
shares of companies engaged in certain activities the Federal Reserve Board has determined to be so closely related to banking or managing or controlling banks as to be a proper incidental business.



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The GLBA, which was enacted on November 12, 1999, permits a qualifying bank holding company to
become a financial holding company and to engage in a broader range of activities than is permissible for a traditional bank holding company. In order to qualify for this election, all of the depository institution subsidiaries of the
bank holding company must be well capitalized and well managed, as defined under Federal Reserve Board regulations, and all such subsidiaries must have achieved a rating of satisfactory or better with respect to meeting community credit
needs. Under the GLBA, financial holding companies are permitted to engage in activities that are financial in nature or incidental or complementary to those activities, as determined by the Federal Reserve Board. The GLBA identifies
several activities as financial in nature, including, among others, insurance underwriting and agency activities, investment advisory services, merchant banking and underwriting, and dealing in or making a market in securities. At this
time, Royal Financial has not elected to become a financial holding company and has no immediate plans to do so.

Interstate Banking and
Branching Legislation. Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, or Interstate Banking Act, bank holding companies are allowed to acquire banks across state lines subject to various requirements of the
Federal Reserve Board. In addition, under the Interstate Banking Act, banks are permitted, under some circumstances, to merge with one another across state lines and, as a result, create a main bank with branches in separate states. After
establishing branches in a state through an interstate merger transaction, a bank may establish and acquire additional branches at any location in the state where any bank involved in the interstate merger could have established or acquired branches
under applicable federal and state law.

Capital Requirements. The Federal Reserve Board has adopted capital adequacy guidelines
under which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing applications submitted to it under the BHC Act. These capital adequacy guidelines generally require bank holding companies to
maintain total capital equal to 8% of total risk-adjusted assets and off-balance-sheet items, or total risk-based capital ratio, with at least one-half of that amount consisting of Tier 1 or core capital and the remaining amount consisting of
Tier 2 or supplementary capital. Tier 1 capital for bank holding companies generally consists of the sum of common stockholders equity and perpetual preferred stock (subject in the case of the latter to limitations on the kind and
amount of such stocks which may be included as Tier 1 capital), less goodwill and other nonqualifying intangible assets. Tier 2 capital generally consists of:



| |  |  | hybrid capital instruments;
| | - |  | ---------------------------



| |  |  | perpetual preferred stock, which is not eligible to be included as Tier 1 capital;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | term subordinated debt and intermediate-term preferred stock; and
| | - |  | -----------------------------------------------------------------



| |  |  | subject to limitations, general allowances for loan losses.
| | - |  | -----------------------------------------------------------

Assets are adjusted under the risk-based guidelines to take into account different risk characteristics.

In addition to the
risk-based capital requirements, the Federal Reserve Board requires bank holding companies to maintain a minimum leverage capital ratio of Tier 1 capital (defined by reference to the risk-based capital guidelines) to total average assets, or
leverage ratio, of 3.0%. Total average assets for this purpose do not include goodwill and any other intangible assets and investments that the Federal Reserve Board determines should be deducted from Tier 1 capital. The Federal Reserve Board
has announced that the 3.0% leverage ratio requirement is the minimum for the top-rated bank holding companies without any supervisory, financial or operational weaknesses or deficiencies or those that are



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not experiencing or anticipating significant growth. For all other bank holding companies, the minimum leverage ratio is
4%, and bank holding companies with supervisory, financial, managerial or operational weaknesses or organizations expecting significant growth are expected to maintain capital ratios well above minimum levels.

U.S. bank regulatory authorities and international bank supervisory organizations, principally the Basel Committee on Banking Supervision, currently are
considering changes to the risk-based capital adequacy framework, including emphasis on credit, market and operational risk components, which ultimately could affect the appropriate capital guidelines. At June 30, 2006, the Companys total
risk-based capital ratio, Tier 1 Capital and leverage ratio exceed the Federal Reserve Boards capital adequacy requirements.

Ownership Limitations. The Change in Bank Control Act prohibits a person or group of persons from acquiring control of a depository institution or a depository institution holding company unless the appropriate federal
banking agency has been given at least 60 days to review the proposal and public notice has been provided. Control is generally defined under this act as ownership of 25% or more of any class of voting stock. In addition, under a
rebuttable presumption established by the Federal Reserve Board, the acquisition of 10% or more of a class of voting stock of a depository institution or a depository institution holding company with a class of securities registered under
Section 12 of the Securities Exchange Act of 1934, as amended, or Exchange Act, would, under the circumstances set forth in the presumption, constitute the acquisition of control. Furthermore, any company, as that term is broadly defined in the
BHC Act, would be required to obtain the approval of the Federal Reserve Board before acquiring 25% (5% in the case of an acquirer that is a bank holding company) or more of any class of voting securities of a depository institution or a depository
institution holding company, or such lesser percentage as the Federal Reserve Board deems to constitute a controlling influence.

In addition, under the Savings Bank Act, any person who acquires more than 10% of Royal Financial stock may be required to obtain the prior approval of the Director of the DBRE.

Bank Holding Company Dividends. The Federal Reserve Board has authority to prohibit bank holding companies from paying dividends if such payment
is deemed to be an unsafe or unsound practice. The Federal Reserve Board has indicated generally that it may be an unsafe or unsound practice for bank holding companies to pay dividends unless the bank holding companys net income for the
preceding year is sufficient to fund the dividends and the expected rate or earnings retention is consistent with the organizations capital needs, asset quality and overall financial condition.

Bank Holding Company Support of Subsidiary Banks. Under Federal Reserve Board policy, a bank holding company is expected to act as a source of
financial and managerial strength to each of its subsidiary banks and to commit resources to their support. This support may be required at times when the bank holding company may not have the resources to provide it. Similarly, under the
cross-guarantee provisions of the Federal Deposit Insurance Act, or FDIA, the FDIC can hold any FDIC-insured depository institution liable for any loss suffered or anticipated by the FDIC in connection with:



| |  |  | the default of a commonly controlled FDIC-insured depository institution; or
| | - |  | ------------------------------------------------------------------------------



| |  |  | any assistance provided by the FDIC to a commonly controlled FDIC  insured deposited institution in danger of default.
| | - |  | -------------------------------------------------------------------------------------------------------------------------

The Sarbanes-Oxley Act. The Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, implements a broad range of corporate governance and accounting
measures for public companies (including publicly held bank holding companies such as the Company) designed to promote honesty and transparency in



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corporate America. Sarbanes-Oxleys principal provisions, many of which have been interpreted through recently
adopted rules, provide for and include, among other things: (i) the creation of an independent accounting oversight board; (ii) auditor independence provisions that restrict non-audit services that accountants may provide to their audit
clients; (iii) additional corporate governance and responsibility measures, including the requirement that the chief executive officer and chief financial officer of a public company certify financial statements; (iv) the forfeiture of
bonuses or other incentive-based compensation and profits from the sale of an issuers securities by directors and senior officers in the twelve-month period following initial publication of any financial statements that later require
restatement; (v) an increase in the oversight of, and enhancement of certain requirements relating to, audit committees of public companies and how they interact with the companys independent auditors; (vi) requirements that audit
committee members must be independent and are barred from accepting consulting, advisory or other compensatory fees from the issuer; (vii) requirements that companies disclose whether at least one member of the audit committee is a
financial expert (as such term is defined by the SEC); (viii) expanded disclosure requirements for corporate insiders, including accelerated reporting of stock transactions by insiders and a prohibition on insider trading during
pension blackout periods; (ix) a prohibition on personal loans to directors and officers, except certain loans made by insured financial institutions on nonpreferential terms and in compliance with other bank regulatory requirements;
(x) disclosure of a code of ethics and filing a Form 8-K for a change or waiver of such code; and (xi) a range of enhanced penalties for fraud and other violations.

Bank Regulation

General. The Bank is an Illinois-chartered savings bank. Its operations are
subject to federal and state laws applicable to commercial banks and to extensive regulation, supervision and examination by the DBRE, as well as by the FDIC, as its primary federal regulator and insurer of deposits. The Bank is a member of the
Federal Home Loan Bank of Chicago, or FHLB. The Federal Deposit Insurance Act, or FDIA, requires prior FDIC approval for any merger or consolidation by or with another depository institution, as well as for the establishment or relocation of any
bank or branch office. The FDIA also gives the FDIC the power to issue cease-and-desist orders. A cease-and-desist order could either prohibit a bank from engaging in certain unsafe and unsound bank activities or could require a bank to take certain
affirmative action. The FDIC also supervises compliance with the federal laws and regulations that, in addition to several other mandates, place restrictions on loans by FDIC-insured banks to an executive officer, director or principal stockholder
of the bank, the bank holding company which owns the bank, and any subsidiary of such bank holding company. The FDIC also examines the Bank for its compliance with statutes that restrict and, in some cases, prohibit certain transactions between a
bank and its affiliates. Among other provisions, these laws place restrictions upon:



| |  |  | extensions of credit to the bank holding company and any non-banking affiliates;
| | - |  | --------------------------------------------------------------------------------



| |  |  | the purchase of assets from affiliates;
| | - |  | ---------------------------------------



| |  |  | the issuance of guarantees, acceptances or letters of credit on behalf of affiliates; and
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | investments in stock or other securities issued by affiliates or acceptance of these loans as collateral for an extension of credit.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------

In addition, the Bank is subject to restrictions with respect to engaging in the issuance, underwriting, public sale or distribution of certain types of
securities:



| |  |  | the nature and amount of loans which it may make to a single borrower (and, in some instances, a group of affiliated borrowers);
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



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| |  |  | the nature and amount of securities in which it may invest;
| | - |  | -----------------------------------------------------------



| |  |  | the amount of investment in the banks premises; and
| | - |  | ----------------------------------------------------



| |  |  | the manner in and extent to which it may borrow money.
| | - |  | ------------------------------------------------------

Furthermore, all banks are affected by the credit policies of the Federal Reserve Board, which regulates the national supply of bank credit. Such regulation influences overall growth of bank loans, investments, and deposits and may also
affect interest rates charged on loans and paid on deposits. The Federal Reserve Boards monetary policies have had a significant effect on the operating results of commercial banks in the past, and we expect this influence to continue in the
future.

Capital Requirements. Under the Illinois Savings Bank Act and the implementing regulations of the DBRE, an Illinois savings
bank must maintain a minimum capital at a level not less than that required to maintain insurance of deposits by the FDIC. The DBRE has the authority to require an Illinois savings bank to maintain a higher level of capital if deemed necessary based
on the savings banks financial condition, history, management or earnings prospects.

Lending Restriction. The Bank is
prohibited by the Illinois Savings Bank Act from making secured or unsecured loans for business, commercial or agricultural purposes representing in the aggregate an amount in excess of 15% of its total assets, unless the DBRE authorizes in higher
percentage limit for those loans upon the request of an institution.

The Bank is also subject to a loans-to-one-borrower limitation. Under
the Illinois Savings Bank Act, the total loans and extensions of credit by the Bank to any one person outstanding at one time must not exceed the greater of 25% of the Banks total capital plus general loan loss reserves, or $500,000. In
addition, the Bank may make loans in an amount equal to an additional 10% of the Banks capital plus general loan loss reserves if secured by readily marketable collateral.

Transactions with Affiliates. Sections 23A and 23B of the Federal Reserve Act restrict transactions between a bank and an affiliated company,
including a parent bank holding company. The Bank is subject to certain restrictions on loans to affiliated companies, on investments in the stock or securities of affiliated companies, on the taking of such stock or securities as collateral for
loans to any borrower, and on the issuance of a guarantee or letter of credit on their behalf. Among other things, these restrictions limit the amount of such transactions, require collateral in prescribed amounts for extensions of credit, prohibit
the purchase of low quality assets and require that the terms of such transactions be substantially equivalent to terms of similar transactions with nonaffiliates. Generally, the Bank is limited in its extensions of credit to any affiliate to 10% of
its capital and in its extensions of credit to all affiliates to 20% of its capital.

The Illinois Savings Bank Act prohibits the Bank from
extending credit of any kind to any person or entity to purchase stock in the offering.

Dividends. Under the Illinois Savings Bank
Act, the Bank may declare dividends only when its total capital is greater than that required by the Illinois Savings Bank Act. Dividends may be paid by the Bank out of its net profits. The written approval of the DBRE must be obtained, however,
before a savings bank may declare dividends in excess of its net profits in any year. Finally, the Bank will be unable to pay dividends in an amount which would reduce its capital below the greater of (i) the amount required by FDIC capital
regulations or otherwise specified by the FDIC, (ii) the amount required by the DBRE or (iii) the amount required for the liquidation account established by the Bank in connection with the Banks conversion to stock form. The DBRE and
the FDIC also have the authority to prohibit the payment of any dividends by the Bank if the DBRE or the FDIC determines that the distribution would constitute an unsafe or unsound practice.



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Federal Reserve System. The Bank is subject to Federal Reserve Board regulations requiring
depository institutions to maintain noninterest-earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The Federal Reserve Board regulations generally require 3% reserves on the first $47.6 million of
transaction accounts plus 10% on the remainder. The first $7 million of otherwise reservable balances (subject to adjustments by the Federal Reserve Board) are exempted from the reserve requirements. The Bank is in compliance with this requirement.

Federal Home Loan Bank System. The Bank is a member of the FHLB. Each FHLB serves as a reserve or central bank for its members
within its assigned region. Each FHLB is funded primarily from proceeds derived from the sale of consolidated obligations of the Federal Home Loan Bank System. Each FHLB makes loans to members (i.e., advances) in accordance with policies and
procedures established by the Board of Directors of the Federal Home Loan Bank.

As a member, the Bank is required to purchase and maintain
stock in the FHLB in an amount equal to at least 1% of its aggregate unpaid residential mortgage loans or similar obligations at the beginning of each year. At June 30, 2006, the Bank had $345,913 in FHLB stock, which was in compliance with
this requirement. At June 30, 2006, the Bank had no FHLB advances outstanding.

Illinois Banking System. The DBRE and the FDIC
have extensive enforcement authority over Illinois-chartered savings banks, such as the Bank. This enforcement authority includes, among other things, the ability to issue cease-and-desist or removal orders, to assess civil money penalties and to
initiate injunctive actions. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe and unsound practices. The DBRE has established a schedule for the assessment of supervisory fees upon
all Illinois savings banks to fund the operation of the DBRE. These supervisory fees are computed on the basis of each savings banks total assets (including consolidated subsidiaries) and are payable at the end of each calendar quarter. A
schedule of fees has also been established for certain filings made by Illinois savings banks with the DBRE. The DBRE also assesses fees for examinations conducted by the DBREs staff, based upon the number of hours spent by the staff
performing the examination. During the year ended June 30, 2006, the Bank paid approximately $30,000 in supervisory fees and expenses.

Under the Illinois Savings Bank Act, a savings bank, such as the Bank, must maintain minimum capital of 3% of total assets. The DBRE may establish higher minimums based upon a savings banks history, management or earnings prospects.

Standards for Safety and Soundness. The FDIA, as amended by the Federal Deposit Insurance Corporation Improvements Act of 1991, or
the FDICIA, and the Riegle Community Development and Regulatory Improvement Act of 1994, requires the FDIC, together with the other federal bank regulatory agencies, to prescribe standards of safety and soundness, by regulations or guidelines,
relating generally to operations and management, asset growth, asset quality, earnings, stock valuation, and compensation. The FDIC and the other federal bank regulatory agencies have adopted a set of guidelines prescribing safety and soundness
standards under FDICIA. The guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation, fees
and benefits. In general, the guidelines require appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and
describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal



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stockholder. In addition, the FDIC adopted regulations that authorize, but do not require, the FDIC to order an
institution that has been given notice by the FDIC that it is not satisfying the safety and soundness guidelines to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any
material respect to implement an accepted compliance plan, the FDIC must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized institution is subject under
the prompt corrective action provisions of FDICIA discussed below. If an institution fails to comply with such an order, the FDIC may seek to enforce its order in judicial proceedings and to impose civil money penalties. The FDIC and the
other federal bank regulatory agencies have also proposed guidelines for asset quality and earning standards.

Prompt Corrective
Action. FDICIA requires the federal banking regulators, including the Federal Reserve Board and the FDIC, to take prompt corrective action with respect to depository institutions that fall below minimum capital standards and prohibits any
depository institution from making any capital distribution that would cause it to be undercapitalized. Institutions that are not adequately capitalized may be subject to a variety of supervisory actions, including restrictions on growth, investment
activities, capital distributions and affiliate transactions, and will be required to submit a capital restoration plan that, to be accepted by the regulators, must be guaranteed in part by any company having control of the institution (for example,
the company or a stockholder controlling the company). In other respects, FDICIA provides for enhanced supervisory authority, including greater authority for the appointment of a conservator or receiver for critically under-capitalized institutions.
The capital-based prompt corrective action provisions of FDICIA and its implementing regulations apply to FDIC-insured depository institutions. However, federal banking agencies have indicated that, in regulating bank holding companies, the agencies
may take appropriate action at the holding company level based on their assessment of the effectiveness of supervisory actions imposed upon subsidiary insured depository institutions under the prompt corrective action provisions of FDICIA. Also,
under FDICIA, insured depository institutions with assets of $1 billion or more at the beginning of a fiscal year, must submit an annual report for that year, including financial statements and a management report, to each of the FDIC, any
appropriate federal banking agency, and any appropriate bank supervisor. The Bank did not have assets of $1 billion or more at the beginning of fiscal year 2006, and therefore need not provide an annual report as required by FDICIA.

As of June 30, 2006, the Company and the Bank had capital in excess of the requirements for a well-capitalized institution under the
prompt corrective action provisions of FDICIA.

Insurance of Deposit Accounts. Under FDICIA, as an FDIC-insured institution, the
Bank is required to pay deposit insurance premiums based on the risk it poses to the Savings Association Insurance Fund, or SAIF. The FDIC has authority to raise or lower assessment rates on insured deposits in order to achieve statutorily required
reserve ratios in the insurance funds and to impose special additional assessments. Each depository institution is assigned to one of three capital groups: well capitalized, adequately capitalized or
undercapitalized. Within each capital group, institutions are assigned to one of three supervisory subgroups: A (institutions with few minor weaknesses), B (institutions that demonstrate weaknesses that, if not
corrected, could result in significant deterioration of the institution and increased risk of loss to SAIF), and C (institutions that pose a substantial probability of loss to SAIF unless effective corrective action is taken).
Accordingly, there are nine combinations of capital groups and supervisory subgroups to which varying assessment rates would be applicable. An institutions assessment rate depends on the capital category and supervisory category to which it is
assigned. During fiscal year 2006, the Bank paid deposit insurance premiums in the aggregate amount of $11,000.



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Deposit insurance may be terminated by the FDIC upon a finding that an institution has engaged in unsafe
or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. Such terminations can only occur, if contested, following judicial review
through the federal courts. Management does not know of any practice, condition or violation that might lead to termination of the Banks deposit insurance.

Community Reinvestment. Under the Community Reinvestment Act, or the CRA, a financial institution has a continuing and affirmative obligation to help meet the credit needs of its entire community, including
low- and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, or limit an institutions discretion to develop the types of products and services that it believes are
best suited to its particular community. However, institutions are rated on their performance in meeting the needs of their communities. Performance is tested in three areas:



| |  |  | lending, to evaluate the institutions record of making loans in its assessment areas;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | investment, to evaluate the institutions record of investing in community development projects, affordable housing, and programs benefiting low- or moderate-income individuals
and business; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | service, to evaluate the institutions delivery of services through its branches, ATMs and other offices.
| | - |  | ---------------------------------------------------------------------------------------------------------

The CRA requires each federal banking agency, in connection with its examination of a financial institution, to assess and assign one of four ratings to
the institutions record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by the institution, including applications for charters, branches and other deposit facilities,
relocations, mergers, consolidations, acquisitions of assets or assumptions of liabilities, and savings and loan holding company acquisitions. The CRA also requires that all institutions make public disclosure of their CRA ratings.

The Bank was assigned a satisfactory rating in July 2003 as a result of its last CRA examination.

Bank Secrecy Act. Under the Bank Secrecy Act, a financial institution is required to have systems in place to detect certain transactions, based
on the size and nature of the transaction. Financial institutions are generally required to report cash transactions involving more than $10,000 to the United States Treasury. In addition, financial institutions are required to file suspicious
activity reports for transactions that involve more than $5,000 and that the financial institution knows, suspects or has reason to suspect involves illegal funds, is designed to evade the requirements of the Bank Secrecy Act or has no lawful
purpose.

USA PATRIOT Act. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001, or the Patriot Act, is designed to deny terrorists and others the ability to obtain access to the United States financial system. The Patriot Act has significant implications for depository institutions, broker-dealers and
other businesses involved in the transfer of money. The Patriot Act, as implemented by various federal regulatory agencies, requires financial institutions, including the Company and the Bank, to implement new policies and procedures or amend
existing policies and procedures with respect to, among other matters, anti-money laundering, compliance, suspicious activity and currency transaction reporting, and due diligence on customers. The Patriot Act and its implementing regulations also
permit information sharing for counter-terrorist purposes between federal law enforcement agencies and financial institutions, as well as among financial



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##### Table of Contents

institutions, subject to certain conditions, and require the Federal Reserve Board (and other federal banking agencies)
to evaluate the effectiveness of an applicant in combating money laundering activities when considering applications filed under the BHC Act or the Bank Merger Act.

Compliance with Consumer Protection Laws. The Bank is subject to many federal consumer protection statutes and regulations including the CRA, the Truth in Lending Act, the Truth in Savings Act, the Equal Credit
Opportunity Act, the Fair Housing Act, the Real Estate Settlement Procedures Act and the Home Mortgage Disclosure Act. Among other things, these acts:



| |  |  | require banks to meet the credit needs of their communities;
| | - |  | ------------------------------------------------------------



| |  |  | require banks to disclose credit terms in meaningful and consistent ways;
| | - |  | -------------------------------------------------------------------------



| |  |  | prohibit discrimination against an applicant in any consumer or business credit transaction;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | prohibit discrimination in housing-related lending activities;
| | - |  | --------------------------------------------------------------



| |  |  | require banks to collect and report applicant and borrower data regarding loans for home purchases or improvement projects;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | require lenders to provide borrowers with information regarding the nature and cost of real estate settlements;
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | prohibit certain lending practices and limit escrow account amounts with respect to real estate transactions; and
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | prescribe possible penalties for violations of the requirements of consumer protection statutes and regulations.
| | - |  | ----------------------------------------------------------------------------------------------------------------

Enforcement Actions. Federal and state statutes and regulations provide financial institution regulatory agencies with great flexibility to
undertake an enforcement action against an institution that fails to comply with regulatory requirements, particularly capital requirements. Possible enforcement actions range from the imposition of a capital plan and capital directive to civil
money penalties, cease-and-desist orders, receivership, conservatorship or the termination of deposit insurance.

ITEM 2. DESCRIPTION OF PROPERTY

The Company is located and conducts its business at the Banks main
office at 9226 Commercial Avenue, Chicago, Illinois 60617. In addition to the main office, the Bank has branch locations at 10555 South Ewing Avenue, Chicago, Illinois 60617; 17130 S. Torrence Avenue, Lansing, Illinois 60438; 19802 S. Harlem Avenue,
Frankfort, Illinois 60423; and 713 US Highway 41, Schererville, Indiana 46375. The Company owns the office buildings for the main office and Ewing Avenue locations. The Company leases the branch facilities in Lansing, Frankfort, and Schererville.
The Company believes that the current facilities are adequate to meet its present and immediately foreseeable needs.

ITEM 3. LEGAL PROCEEDINGS

The Company and the Bank are not involved in any pending proceedings other than
the legal proceedings occurring in the ordinary course of business. Such legal proceedings in the aggregate are believed by management to be immaterial to the Companys business, financial condition, results of operations and cash flows.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of
stockholders during the fourth quarter of the year ended June 30, 2006.



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##### Table of Contents

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Companys common stock is
traded on the Over-the-Counter Bulletin Board under the symbol RYFL.OB. At September 15, 2006, the Company had 169 record holders of its common stock. The table below shows the reported high and low bid price of the common stock, as
reported on the OTC Bulletin Board and dividends declared during the periods indicated in 2006 and 2005. The Company completed its initial public offering on January 20, 2005.



|               |  |      |       |     |   |                   |  |    
|-------------- |  | ---- | ----- | --- | - | ----------------- |  | ---
|2006          
|               |  | High |       | Low |   | DividendsDeclared
|First quarter  |  | $    | 14.00 |     | $ | 12.80             |  | N/A
|Second quarter |  |      | 14.50 |     |   | 13.60             |  | N/A
|Third quarter  |  |      | 14.85 |     |   | 14.15             |  | N/A
|Fourth quarter |  |      | 14.85 |     |   | 14.55             |  | N/A
|              
|2005          
|               |  | High |       | Low |   | DividendsDeclared
|First quarter  |  |      | N/A   |     |   | N/A               |  | N/A
|Second quarter |  |      | N/A   |     |   | N/A               |  | N/A
|Third quarter  |  | $    | 12.75 |     | $ | 10.00             |  | N/A
|Fourth quarter |  |      | 12.90 |     |   | 11.50             |  | N/A

Dividend Policy

The Company does not currently pay cash dividends on its common stock. In the event that the Board of Directors does decide to declare a dividend, such payment will depend upon a number of factors, including capital
requirements, the Companys and the Banks financial condition and results of operations, tax considerations, statutory and regulatory limitations and general economic conditions. No assurances can be given that any dividends will be paid
or that, if paid, will not be reduced or eliminated in future periods. Special cash dividends, stock dividends or returns of capital may, to the extent permitted by regulations, be paid in addition to, or in lieu of, regular cash dividends. The
Company files consolidated tax returns with the Bank. Accordingly, it is anticipated that any cash distributions made by the Company to its stockholders would be treated as cash dividends and not as a nontaxable return of capital for federal and
state tax purposes.

Dividends from the Company will depend, in large part, upon receipt of dividends from the Bank. Federal and state law
imposes certain limitations on dividends by savings banks. See Supervision and Regulation.

The Company currently has no
intention to initiate, any action that leads to a return of capital (as distinguished from a dividend) to stockholders of the Company.



24



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##### Table of Contents

Small Business Issuer Purchases of Equity Securities

The following table provides information about purchases by the Company during the quarter ended June 30, 2006 of equity securities that are
registered by the Company under Section 12 of the Securities Exchange Act of 1934.



|                  |  |                                   |  |                                |       |                                                                              |        |                                                                             |       
|----------------- |  | --------------------------------- |  | ------------------------------ | ----- | ---------------------------------------------------------------------------- | ------ | --------------------------------------------------------------------------- | ------
|Period            |  | (a) TotalNumber ofSharesPurchased |  | (b) AveragePrice paidper Share |       | (c) TotalNumber ofSharesPurchased aspart ofpubliclyannouncedPlans orPrograms |        | (d) MaximumNumber ofShares that mayyet bepurchasedunder thePlans/Program(1)
|04/01/06-04/30/06 |  |                                  |  |                                |      |                                                                              |       |                                                                             | 24,700
|05/01/06-05/31/06 |  | 10,000                            |  | $                              | 14.75 |                                                                              | 10,000 |                                                                             | 14,700
|06/01/06-06/30/06 |  | 14,700                            |  |                                | 14.78 |                                                                              | 14,700 |                                                                             |      
|                  |  |                                   |  |                                |       |                                                                              |        |                                                                             |       
|Total             |  | 24,700                            |  | $                              | 14.73 |                                                                              | 24,700 |                                                                             |      
|                  |  |                                   |  |                                |       |                                                                              |        |                                                                             |       

---

|(1) | In January 2006, the Company received regulatory approval to repurchase up to 5% of its outstanding shares of common stock, or 132,250 shares (the Program). As of
June 30, 2006, all of the common stock approved for repurchase under the Program had been purchased.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

General

This discussion and analysis reflects the financial statements of the Company and other relevant statistical data, and is intended to enhance your
understanding of the financial condition and results of operations of the Company. The information in this section has been derived from the Companys audited consolidated financial statements, which appear beginning on page F-1.

Overview

Our results of operations
depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets, consisting primarily of loans, securities available for sale, mortgage-backed securities, Federal
Home Loan Bank stock and other interest-earning assets (primarily cash and cash equivalents), and the interest we pay on our interest-bearing liabilities, consisting of savings accounts, time deposits, money market deposit accounts and federal funds
purchased. Our results of operations also are affected by our provision for loan losses, noninterest income and noninterest expense. Noninterest income currently consists primarily of service charges on deposit accounts, increases in the cash
surrender value of bank owned life insurance, gains and losses on the sale of securities and loans and miscellaneous other income, including income on rental properties. In 2006, we recognized $568,000 of income from the proceeds of the death
benefit of bank-owned life insurance received as a result of the untimely and unfortunate death of our former Chief Financial Officer, Neil Brodzinski, in March 2006. Noninterest expense currently consists primarily of salaries and employee
benefits, occupancy, data processing, professional services, directors fees, charitable contributions, and other operating expenses. Our results of operations also may be affected significantly by general and local economic and competitive
conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.



25



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##### Table of Contents

Forward-Looking Statements

This report includes forward-looking statements, including statements regarding our strategy, effectiveness of investment programs, evaluations of future interest rate trends and liquidity, expectations as to growth
in assets, deposits and results of operations, future operations, market position, financial position, and prospects, plans and objectives of management. 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; legislative/regulatory provisions;
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; deposit flows; competition;
demand for financial services in the Companys market area; and 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.

Critical Accounting Policies and Estimates

The accounting and reporting policies of the Company are in accordance with U.S. generally accepted accounting principles and conform to general practices within the banking industry. Accounting and reporting policies
for the allowance for loan losses and income taxes are deemed critical because they involve the use of estimates and require significant management judgments.

Allowance for Loan Losses. The allowance for loan losses is an amount that management believes will be adequate to absorb probable incurred losses in existing loans, taking into consideration such factors as
past loss experience, changes in the nature and volume of the portfolio, overall portfolio quality, loan concentrations, specific problem loans, and current economic conditions that affect the borrowers ability to pay. Determination of the
allowance is inherently subjective due to the above mentioned reasons. Loan losses are charged off against the allowance when management believes that the full collectibility of the loan is unlikely. Recoveries of amounts previously charged-off are
credited to the allowance. Allowances established to provide for losses under commitments to extend credit, or recourse provisions under loan sales agreements or servicing agreements are classified with other liabilities.

A loan is considered impaired when it is probable that not all principal and interest amounts will be collected according to the loan contract.
Residential mortgage, installment and other consumer loans are collectively evaluated for impairment. Individual commercial loans are evaluated for impairment. Impaired loans are recorded at the loans fair value by the establishment of a
specific allowance where necessary. The fair value of collateral-dependent loans is determined by the fair value of the underlying collateral. The fair value of noncollateral-dependent loans is determined by discounting expected future interest and
principal payments at the loans effective interest rate.

The Company maintains the allowance for loan losses at a level adequate to
absorb managements estimate of probable losses inherent in the loan portfolio. Management believes that it uses the best information available to determine the adequacy of the allowance for loan losses. However,



26



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##### Table of Contents

future adjustments to the allowance may be necessary and the results of operations could be significantly and adversely
affected if circumstanced differ substantially from the assumptions used in making the determinations.

Income Taxes. Accounting for
income taxes is a critical accounting policy due to the subjective nature of certain estimates that are involved in the calculation. The Company uses an asset/liability method of accounting for income taxes in which deferred tax assets and
liabilities are established for temporary differences between the financial reporting basis and the tax basis of the Companys assets and liabilities. The Company must assess the realization of the deferred tax asset quarterly, and to the
extent that management believes that recovery is not likely, a valuation allowance is established. This assessment is impacted by various factors, including future taxable income and the composition of the investment securities portfolio. Material
changes to these items can cause an adjustment to the valuation allowance. An adjustment to increase or decrease the valuation allowance is charged or credited, respectively to income tax expense.



27



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##### Table of Contents

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. The information should be read in conjunction with the Consolidated Financial
Statements and Notes thereto of the Company contained elsewhere herein.



|                                                                        |      |                                       |         |      |  |   |         |    |  |   |        |  
|----------------------------------------------------------------------- | ---- | ------------------------------------- | ------- | ---- |  | - | ------- | -- |  | - | ------ | -
|                                                                        |      | At June 30,                           |        
|                                                                        | 2006 |                                       |         | 2005 |  |   | 2004    |   
|                                                                        |      | (In thousands, except per share data) |        
|Selected Financial Condition Data:                                      |      |                                       |         |      |  |   |         |    |  |   |        |  
|Total assets                                                            |      | $                                     | 114,279 |      |  | $ | 113,221 |    |  | $ | 92,677 |  
|Cash and cash equivalents                                               |      |                                       | 4,348   |      |  |   | 17,022  |    |  |   | 7,943  |  
|Securities available for sale                                           |      |                                       | 21,518  |      |  |   | 33,242  |    |  |   | 44,526 |  
|Loans receivable, net                                                   |      |                                       | 77,326  |      |  |   | 52,326  |    |  |   | 34,697 |  
|Deposits                                                                |      |                                       | 78,898  |      |  |   | 78,107  |    |  |   | 77,522 |  
|Advances from the Federal Home Loan Bank                                |      |                                       |        |      |  |   |        |    |  |   | 2,000  |  
|Total equity                                                            |      |                                       | 32,755  |      |  |   | 34,266  |    |  |   | 12,699 |  
|Book value per common share                                             |      | $                                     | 13.95   |      |  | $ | 12.96   |    |  |   | N/A    |  
|                                                                        |     
|                                                                        |      | Year Ended June 30,                   |        
|                                                                        | 2006 |                                       |         | 2005 |  |   | 2004    |   
|                                                                        |      | (In thousands, except per share data) |        
|Selected Operating Data:                                                |      |                                       |         |      |  |   |         |    |  |   |        |  
|Total interest income                                                   |      | $                                     | 5,834   |      |  | $ | 4,291   |    |  | $ | 3,581  |  
|Total interest expense                                                  |      |                                       | 1,354   |      |  |   | 1,253   |    |  |   | 1,199  |  
|Net interest income                                                     |      |                                       | 4,480   |      |  |   | 3,038   |    |  |   | 2,382  |  
|Provision for loan losses                                               |      |                                       | 127     |      |  |   | 50      |    |  |   | 3      |  
|Net interest income after provision for loan losses                     |      |                                       | 4,353   |      |  |   | 2,988   |    |  |   | 2,379  |  
|Total noninterest income                                                |      |                                       | 1,130   |      |  |   | 525     |    |  |   | 518    |  
|Total noninterest expense                                               |      |                                       | 4,885   |      |  |   | 4,569   |    |  |   | 2,798  |  
|Income (loss) before provision for income taxes                         |      |                                       | 598     |      |  |   | (1,056  | )  |  |   | 99     |  
|Provision (benefit) for income taxes                                    |      |                                       | 44      |      |  |   | (412    | )  |  |   | 15     |  
|Net income (loss)                                                       |      |                                       | 554     |      |  |   | (644    | )  |  |   | 84     |  
|Basic and diluted earnings (loss) per share(4)                          |      |                                       | 0.23    |      |  |   | (0.22   | )  |  |   | N/A    |  
|                                                                        |     
|                                                                        |      | Year Ended June 30,                   |        
|                                                                        | 2006 |                                       |         | 2005 |  |   | 2004    |   
|Key Financial Ratios:                                                   |      |                                       |         |      |  |   |         |    |  |   |        |  
|                                                                        |      |                                       |        
|Performance Ratios:                                                     |      |                                       |         |      |  |   |         |    |  |   |        |  
|Return on average assets                                                |      |                                       | 0.49    | %    |  |   | (0.58   | )% |  |   | 0.09   | %
|Return on average equity                                                |      |                                       | 1.67    |      |  |   | (2.90   | )  |  |   | 0.63   |  
|Interest rate spread(1)                                                 |      |                                       | 4.16    |      |  |   | 2.71    |    |  |   | 2.80   |  
|Net interest margin(2)                                                  |      |                                       | 4.51    |      |  |   | 2.93    |    |  |   | 2.94   |  
|Total noninterest expenses to average total assets                      |      |                                       | 4.35    |      |  |   | 4.13    |    |  |   | 3.10   |  
|Efficiency ratio(3)                                                     |      |                                       | 96.01   |      |  |   | 117.15  |    |  |   | 102.68 |  
|                                                                        |      |                                       |        
|Asset Quality Ratios:                                                   |      |                                       |         |      |  |   |         |    |  |   |        |  
|Nonperforming loans to total loans at end of period                     |      |                                       | 0.00    | %    |  |   | 0.00    | %  |  |   | 0.37   | %
|Nonperforming assets to total assets at end of period                   |      |                                       | 0.00    |      |  |   | 0.00    |    |  |   | 0.14   |  
|Allowance for loan losses to total loans at end of period               |      |                                       | 0.52    |      |  |   | 0.54    |    |  |   | 0.68   |  
|Allowance for loan losses to total nonperforming loans at end of period |      |                                       | 0.00    |      |  |   | 0.00    |    |  |   | 184.38 |  
|                                                                        |      |                                       |        
|Capital Ratios:                                                         |      |                                       |         |      |  |   |         |    |  |   |        |  
|Total capital (to risk-weighted assets)                                 |      |                                       | 29.92   | %    |  |   | 35.79   | %  |  |   | 28.07  | %
|Tier 1 capital (to risk-weighted assets)                                |      |                                       | 29.42   |      |  |   | 35.34   |    |  |   | 27.57  |  
|Tier 1 capital (to average assets)                                      |      |                                       | 21.13   |      |  |   | 19.54   |    |  |   | 13.85  |  
|Equity to assets at end of period                                       |      |                                       | 28.66   |      |  |   | 30.26   |    |  |   | 13.70  |  

---

|(1) | Yield on average interest-earning assets less rate on average interest-bearing liabilities.
|--- | -------------------------------------------------------------------------------------------

|(2) | Net interest income, on a tax-equivalent basis, divided by average interest-earning assets.
|--- | -------------------------------------------------------------------------------------------

|(3) | Noninterest expense, excluding the expenses related to the formation of the Royal Charitable Foundation, divided by the sum of net interest income, plus noninterest income,
excluding net gain on sales of securities and income from the death benefit of bank-owned life insurance.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Earnings per share in 2005 is calculated based on the period of time from the date of the initial public offering, January 20, 2005, through the period ended June 30,
2005.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|N/A | Not applicable.
|--- | ---------------



28



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##### Table of Contents

Average Balances, Net Interest Income and Yields Earned and Rates Paid

The following table presents for the periods indicated the total dollar amount of interest income from average interest-earning assets and the resultant
yields, as well as the total dollar amount of interest expense on average interest-bearing liabilities and the resultant rates, and the net interest margin. The table reflects an adjustment to interest income for nontaxable securities to be included
on a fully tax adjusted basis. All average balances are based on average monthly balances during the periods. The Company does not believe that the monthly averages differ significantly from what the daily averages would be.



|                                                                        |                |                        |         |          |  |                      |       |  |                |   |  |          |         |                      |  |   |                |  |      |          |  |                      |        |   |  |   |       |  |      |  
|----------------------------------------------------------------------- | -------------- | ---------------------- | ------- | -------- |  | -------------------- | ----- |  | -------------- | - |  | -------- | ------- | -------------------- |  | - | -------------- |  | ---- | -------- |  | -------------------- | ------ | - |  | - | ----- |  | ---- | -
|                                                                        |                | Year Ended June 30,    |        
|                                                                        | 2006           |                        |         | 2005     |  |                      | 2004  | 
|                                                                        | AverageBalance |                        |         | Interest |  | AverageYield/Rate(1) |       |  | AverageBalance |   |  | Interest |         | AverageYield/Rate(1) |  |   | AverageBalance |  |      | Interest |  | AverageYield/Rate(1) |       
|                                                                        |                | (Dollars in thousands) |        
|Interest-Earning Assets:                                                |                |                        |         |          |  |                      |       |  |                |   |  |          |         |                      |  |   |                |  |      |          |  |                      |        |   |  |   |       |  |      |  
|Loans receivable, net(2)                                                |                | $                      | 74,791  |          |  | $                    | 4,610 |  | 6.16           | % |  | $        | 42,080  |                      |  | $ | 2,646          |  | 6.29 | %        |  | $                    | 27,787 |   |  | $ | 1,821 |  | 6.55 | %
|Securities available for sale(7)                                        |                |                        | 21,794  |          |  |                      | 1,009 |  | 4.63           |   |  |          | 36,686  |                      |  |   | 1,175          |  | 3.20 |          |  |                      | 50,076 |   |  |   | 1,724 |  | 3.44 |  
|Deposits with financial institutions(3)                                 |                |                        | 2,353   |          |  |                      | 207   |  | 8.80           |   |  |          | 24,686  |                      |  |   | 454            |  | 1.84 |          |  |                      | 3,863  |   |  |   | 39    |  | 1.01 |  
|Federal Home Loan Bank stock                                            |                |                        | 365     |          |  |                      | 8     |  | 2.19           |   |  |          | 359     |                      |  |   | 20             |  | 5.57 |          |  |                      | 336    |   |  |   | 27    |  | 8.04 |  
|                                                                        |                |                        |         |          |  |                      |       |  |                |   |  |          |         |                      |  |   |                |  |      |          |  |                      |        |   |  |   |       |  |      |  
|Total interest-earning assets                                           |                |                        | 99,303  |          |  |                      | 5,834 |  | 5.88           |   |  |          | 103,811 |                      |  |   | 4,295          |  | 4.14 |          |  |                      | 82,062 |   |  |   | 3,611 |  | 4.40 |  
|                                                                        |                |                        |         |          |  |                      |       |  |               
|Noninterest-earning assets:                                             |                |                        | 13,094  |          |  |                      |       |  |                |   |  |          | 6,715   |                      |  |   |                |  |      |          |  |                      | 8,321  |   |  |   |       |  |      |  
|                                                                        |                |                        |         |          |  |                      |       |  |                |   |  |          |         |                      |  |   |                |  |      |          |  |                      |        |   |  |   |       |  |      |  
|Total assets                                                            |                | $                      | 112,397 |          |  |                      |       |  |                |   |  | $        | 110,526 |                      |  |   |                |  |      |          |  | $                    | 90,383 |   |  |   |       |  |      |  
|                                                                        |                |                        |         |          |  |                      |       |  |                |   |  |          |         |                      |  |   |                |  |      |          |  |                      |        |   |  |   |       |  |      |  
|Interest-Bearing Liabilities:                                           |                |                        |         |          |  |                      |       |  |                |   |  |          |         |                      |  |   |                |  |      |          |  |                      |        |   |  |   |       |  |      |  
|Deposits:                                                               |                |                        |         |          |  |                      |       |  |                |   |  |          |         |                      |  |   |                |  |      |          |  |                      |        |   |  |   |       |  |      |  
|Demand                                                                  |                | $                      | 15,765  |          |  |                      | 109   |  | 0.69           |   |  | $        | 21,245  |                      |  |   | 130            |  | 0.61 |          |  | $                    | 5,889  |   |  |   | 39    |  | 0.66 |  
|Savings                                                                 |                |                        | 30,156  |          |  |                      | 306   |  | 1.02           |   |  |          | 40,756  |                      |  |   | 589            |  | 1.45 |          |  |                      | 32,348 |   |  |   | 329   |  | 1.02 |  
|Certificates of Deposit                                                 |                |                        | 32,795  |          |  |                      | 937   |  | 2.86           |   |  |          | 24,772  |                      |  |   | 478            |  | 1.93 |          |  |                      | 34,579 |   |  |   | 734   |  | 2.12 |  
|                                                                        |                |                        |         |          |  |                      |       |  |                |   |  |          |         |                      |  |   |                |  |      |          |  |                      |        |   |  |   |       |  |      |  
|Total deposits                                                          |                |                        | 78,716  |          |  |                      | 1,352 |  | 1.72           |   |  |          | 86,773  |                      |  |   | 1,197          |  | 1.38 |          |  |                      | 72,816 |   |  |   | 1,102 |  | 1.51 |  
|Borrowings:                                                             |                |                        |         |          |  |                      |       |  |                |   |  |          |         |                      |  |   |                |  |      |          |  |                      |        |   |  |   |       |  |      |  
|Federal Home Loan Bank advances                                         |                |                        |        |          |  |                      |      |  |               |   |  |          | 1,145   |                      |  |   | 56             |  | 4.89 |          |  |                      | 2,000  |   |  |   | 97    |  | 4.85 |  
|Federal funds purchased                                                 |                |                        | 41      |          |  |                      | 1     |  | 2.44           |   |  |          |        |                      |  |   |               |  |     |          |  |                      |       |   |  |   |      |  |     |  
|                                                                        |                |                        |         |          |  |                      |       |  |                |   |  |          |         |                      |  |   |                |  |      |          |  |                      |        |   |  |   |       |  |      |  
|Total interest-bearing liabilities                                      |                |                        | 78,757  |          |  |                      | 1,353 |  | 1.72           |   |  |          | 87,918  |                      |  |   | 1,253          |  | 1.43 |          |  |                      | 74,816 |   |  |   | 1,199 |  | 1.60 |  
|                                                                        |                |                        |         |          |  |                      |       |  |                |   |  |          |         |                      |  |   |                |  |      |          |  |                      |        |   |  |   |       |  |      |  
|Noninterest-bearing liabilities:                                        |                |                        | 529     |          |  |                      |       |  |                |   |  |          | 384     |                      |  |   |                |  |      |          |  |                      | 2,191  |   |  |   |       |  |      |  
|                                                                        |                |                        |         |          |  |                      |       |  |                |   |  |          |         |                      |  |   |                |  |      |          |  |                      |        |   |  |   |       |  |      |  
|Total liabilities                                                       |                |                        | 79,286  |          |  |                      |       |  |                |   |  |          | 88,302  |                      |  |   |                |  |      |          |  |                      | 77,007 |   |  |   |       |  |      |  
|Total equity capital(4)                                                 |                |                        | 33,111  |          |  |                      |       |  |                |   |  |          | 22,224  |                      |  |   |                |  |      |          |  |                      | 13,376 |   |  |   |       |  |      |  
|                                                                        |                |                        |         |          |  |                      |       |  |                |   |  |          |         |                      |  |   |                |  |      |          |  |                      |        |   |  |   |       |  |      |  
|Total liabilities and equity capital                                    |                | $                      | 112,397 |          |  |                      |       |  |                |   |  | $        | 110,526 |                      |  |   |                |  |      |          |  | $                    | 90,383 |   |  |   |       |  |      |  
|                                                                        |                |                        |         |          |  |                      |       |  |                |   |  |          |         |                      |  |   |                |  |      |          |  |                      |        |   |  |   |       |  |      |  
|Net average interest-earning assets                                     |                | $                      | 20,546  |          |  |                      |       |  |                |   |  | $        | 15,893  |                      |  |   |                |  |      |          |  | $                    | 7,246  |   |  |   |       |  |      |  
|                                                                        |                |                        |         |          |  |                      |       |  |                |   |  |          |         |                      |  |   |                |  |      |          |  |                      |        |   |  |   |       |  |      |  
|Net interest income; interest rate spread(5)                            |                |                        |         |          |  | $                    | 4,481 |  | 4.16           | % |  |          |         |                      |  | $ | 3,042          |  | 2.71 | %        |  |                      |        |   |  | $ | 2,412 |  | 2.80 | %
|                                                                        |                |                        |         |          |  |                      |       |  |                |   |  |          |         |                      |  |   |                |  |      |          |  |                      |        |   |  |   |       |  |      |  
|Net interest margin(6)                                                  |                |                        |         |          |  |                      |       |  | 4.51           | % |  |          |         |                      |  |   |                |  | 2.93 | %        |  |                      |        |   |  |   |       |  | 2.94 | %
|Average interest-earning assets to average interest-bearing liabilities |                |                        | 126.09  | %        |  |                      |       |  |                |   |  |          | 118.08  | %                    |  |   |                |  |      |          |  |                      | 109.69 | % |  |   |       |  |      |  

---

|(1) | Yields and rates have been annualized where appropriate.
|--- | --------------------------------------------------------

|(2) | Includes nonaccruing loans.
|--- | ---------------------------

|(3) | Includes interest-bearing demand deposits, repurchase agreements and federal funds sold.
|--- | ----------------------------------------------------------------------------------------

|(4) | Includes retained earnings and accumulated other comprehensive income (loss).
|--- | -----------------------------------------------------------------------------

|(5) | Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate on interest-bearing liabilities.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Net interest margin is net interest income divided by average interest-earning assets.
|--- | --------------------------------------------------------------------------------------

|(7) | Tax effective yield, assuming a 34% rate.
|--- | -----------------------------------------



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Rate/Volume Analysis. The following table describes the extent to which changes in interest rates
and changes in volume of interest-related assets and liabilities have affected the Banks interest income and interest expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (1) changes in volume (change in volume multiplied by prior year rate), (2) changes in rate (change in rate multiplied by prior year volume), and (3) total change in rate and volume.
The combined effect of changes in both rate and volume has been allocated proportionately to the change due to rate and the change due to volume.



|                                           |               |                           |      |               |                         |   |       |                           |                 |   |                         |        |  |   |      |   |  |   |      |   |  |   |      |  
|------------------------------------------ | ------------- | ------------------------- | ---- | ------------- | ----------------------- | - | ----- | ------------------------- | --------------- | - | ----------------------- | ------ |  | - | ---- | - |  | - | ---- | - |  | - | ---- | -
|                                           |               | Year Ended June 30,       |     
|                                           | 2006 vs. 2005 |                           |      | 2005 vs. 2004 |                        
|                                           |               | Increase (Decrease)Due to |      |               | TotalIncrease(Decrease) |   |       | Increase (Decrease)Due to |                 |   | TotalIncrease(Decrease) |       
|                                           |               | Yield/Rate                |      |               | Volume                  |   |       |                           | TotalYield/Rate |   |                         | Volume |  |  
|                                           |               | (In thousands)            |     
|Interest-Earning Assets:                   |               |                           |      |               |                         |   |       |                           |                 |   |                         |       
|Loans receivable, net                      |               | $                         | (97  | )             |                         | $ | 2,061 |                           |                 | $ | 1,964                   |        |  | $ | (77  | ) |  | $ | 902  |   |  | $ | 825  |  
|Securities available for sale              |               |                           | 312  |               |                         |   | (478  | )                         |                 |   | (166                    | )      |  |   | (113 | ) |  |   | (430 | ) |  |   | (549 | )
|Deposits with financial institutions       |               |                           | 164  |               |                         |   | (411  | )                         |                 |   | (247                    | )      |  |   | 55   |   |  |   | 360  |   |  |   | 415  |  
|Federal Home Loan Bank stock               |               |                           | (12  | )             |                         |   |      |                           |                 |   | (12                     | )      |  |   | (9   | ) |  |   | 2    |   |  |   | (7   | )
|                                           |               |                           |      |               |                         |   |       |                           |                 |   |                         |        |  |   |      |   |  |   |      |   |  |   |      |  
|Total                                      |               |                           | 367  |               |                         |   | 1,172 |                           |                 |   | 1,539                   |        |  |   | (144 | ) |  |   | 828  |   |  |   | 684  |  
|Interest-Bearing Liabilities:              |               |                           |      |               |                         |   |       |                           |                 |   |                         |        |  |   |      |   |  |   |      |   |  |   |      |  
|Deposits:                                  |               |                           |      |               |                         |   |       |                           |                 |   |                         |        |  |   |      |   |  |   |      |   |  |   |      |  
|Demand                                     |               |                           | 13   |               |                         |   | (34   | )                         |                 |   | (21                     | )      |  |   | (3   | ) |  |   | 94   |   |  |   | 91   |  
|Savings                                    |               |                           | (130 | )             |                         |   | (153  | )                         |                 |   | (283                    | )      |  |   | 161  |   |  |   | 99   |   |  |   | 260  |  
|Certificates of Deposit                    |               |                           | 305  |               |                         |   | 154   |                           |                 |   | 459                     |        |  |   | (24  | ) |  |   | (232 | ) |  |   | (256 | )
|                                           |               |                           |      |               |                         |   |       |                           |                 |   |                         |        |  |   |      |   |  |   |      |   |  |   |      |  
|Total deposits                             |               |                           | 188  |               |                         |   | (33   | )                         |                 |   | 155                     |        |  |   | 134  |   |  |   | (39  | ) |  |   | 95   |  
|Borrowings:                                |               |                           |      |               |                         |   |       |                           |                 |   |                         |        |  |   |      |   |  |   |      |   |  |   |      |  
|Federal Home Loan Bank Advances            |               |                           |     |               |                         |   | (56   | )                         |                 |   | (56                     | )      |  |   | 1    |   |  |   | (42  | ) |  |   | (41  | )
|                                           |               |                           |      |               |                         |   |       |                           |                 |   |                         |        |  |   |      |   |  |   |      |   |  |   |      |  
|Federal funds purchased                    |               |                           | 1    |               |                         |   |      |                           |                 |   | 1                       |        |  |   |     |   |  |   |     |   |  |   |     |  
|Total                                      |               |                           | 189  |               |                         |   | (89   | )                         |                 |   | 100                     |        |  |   | 135  |   |  |   | (81  | ) |  |   | 54   |  
|                                           |               |                           |      |               |                         |   |       |                           |                 |   |                         |        |  |   |      |   |  |   |      |   |  |   |      |  
|Increase (decrease) in net interest income |               | $                         | 178  |               |                         | $ | 1,261 |                           |                 | $ | 1,439                   |        |  | $ | (279 | ) |  | $ | 909  |   |  | $ | 630  |  
|                                           |               |                           |      |               |                         |   |       |                           |                 |   |                         |        |  |   |      |   |  |   |      |   |  |   |      |  

Comparison of Financial Condition at June 30, 2006 and June 30, 2005

Total assets increased $1.1 million, or 0.93%, to $114.3 million at June 30, 2006 compared to $113.2 million at June 30, 2005. The
increase in total assets resulted primarily from increases in loans receivable and an increase in premises and equipment, partially offset by decreases in cash and cash equivalents and securities available for sale. Total deposits increased $791,000
to $78.9 million, or 1.01%, for the year ended June 30, 2006 compared to $78.1 million for the same period in 2005. The increase in loans receivable of $25.0 million, or 47.78%, to $77.3 million at June 30, 2006 compared to
$52.3 million at June 30, 2005, resulted from an increase in one-to-four family loans, commercial real estate loans and multi family loans, as well as the purchase of participation interests in commercial and commercial real estate loans.
The increase in premises and equipment resulted from the construction in progress related to two new branch locations located in Frankfort, Illinois and Schererville, Indiana. These facilities were subsequently opened in August 2006. The decrease in
securities available for sale of $11.7 million resulted from paydowns, calls and maturities of $5.9 million and the sale of select securities due to changes in market conditions. This activity was partially offset by $2.0 million of securities
available for sale purchases for the year ended June 30, 2006. Total stockholders equity decreased $1.5 million, or 4.41%, to $32.8 million for the year ended June 30, 2006 compared to $34.3 million for the same period in
2005. This decrease in stockholders equity resulted primarily from the purchase of



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$1,948,000 of treasury stock, of which $1,164,000 was allocated to unearned shares to fund the Recognition and Retention
Plan (RRP). Stockholders equity also decreased by $280,000 as a result of an increase in unrealized losses (net of income taxes) on securities available for sale. The decrease was offset by net income of $554,000 and shares earned in the
Companys ESOP and RRP plans of $299,000 and $209,000, respectively.

Comparison of Results of Operations for the Years Ended June 30, 2006
and June 30, 2005

General. The Companys net income amounted to $554,000 for the year ended June 30, 2006
compared to a net loss of $644,000 for the year ended June 30, 2005. The increase in net income reflected increases in net interest income, and noninterest income. Return on average assets was 0.49% for the year ended June 30, 2006 as
compared to (0.58)% for the year ended June 30, 2005. Return on average equity was 1.67% and (2.90)% for the years ended June 30, 2006 and 2005, respectively. Equity to assets at June 30, 2006 and 2005 was 28.66% and 30.26%,
respectively.

Interest Income. Interest income increased by $1.5 million, or 35.83%, to $5.8 million for the year ended
June 30, 2006 from $4.3 million for the same period in 2005. The increase in interest income resulted primarily from an increase in average yield on interest earning assets to 5.88% per annum from 4.14% per annum in 2005. The increase
was partially offset by a decrease in total interest earning assets of $4.5 million, or 4.34% to $99.3 million for the year ended June 30, 2006 from $103.8 million for the same period in 2005.

Interest income on loans increased by $2.0 million, or 74.3%, for the year ended June 30, 2006 compared to the same period in 2005. The increase was
due to a $32.7 million, or 77.74%, increase in the average balance of loans for the year ended June 30, 2006 compared to the same period in 2005, offset by a 13 basis point decrease in the yield on loans, reflecting a change in the mix of loan
products during 2006.

Interest income on securities available for sale decreased by $166,000, or 14.13%, due primarily to a $14.9 million
decrease in the average balance on such securities for the year ended June 30, 2006 compared to the same period in 2005, offset by an increase in the yield on such assets to 4.63% per annum in 2006 from 3.20% per annum in 2005.

Interest Expense. Interest expense on deposits increased $155,000, or 12.95%, to $1.4 million for the year ended June 30, 2006
from $1.2 million for the same period in 2005. The increase was due to a 34 basis point increase in the rates paid on such deposits to 1.72% per annum for the year ended June 30, 2006 from 1.38% in 2005, offset by a decrease of $8.1
million, or 9.29%, in the average balance of such deposits for the year ended June 30, 2006 from the same period in 2005.

Net
Interest Income. Net interest income is determined by the interest rate spread (i.e., the difference between the yields earned on interest-earning assets tax effected and the rates paid on interest-bearing liabilities) and the relative amounts
of interest-earning assets and interest-bearing liabilities. Net interest income increased $1.4 million, or 47.30%, to $4.5 million for the year ended June 30, 2006 compared to $3.0 million for the year ended June 30, 2005. The
increase was primarily due to an increase in the ratio of interest-earning assets to interest-bearing liabilities (126.09% from 118.08%) and an increase in our net interest rate spread to 4.16% per annum from 2.71% per annum.

Provision for Losses on Loans. Provision for losses on loans is charged to earnings to bring the total allowance for loan losses to a level
considered adequate by management to cover probable incurred losses based on a methodology implemented by the Bank that is designed to assess, among other things, experience, the volume and type of lending conducted by the Bank, overall portfolio
mix, the amount of the Banks classified assets, the status of past due principal and interest payments, loan-to-value ratios of



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loans in the Banks loan portfolio, general economic conditions, particularly as they relate to the Banks
market area, and other factors related to the collectibility of the Banks loan portfolio. Management assesses the allowance for loan losses on a quarterly basis and will make a provision for loan losses as deemed appropriate by management in
order to maintain the adequacy of the allowance for loan losses. When the collection of a loan becomes doubtful, or otherwise troubled, the Company records a loan charge-off equal to the difference between the fair value of the property securing the
loan and the loans carrying value. The allowance for loan losses is increased by charges to earnings and decreased by charge-offs (net of recoveries).

For the years ended June 30, 2006 and June 30, 2005, the provision for losses on loans amounted to $127,000 and $50,000, respectively. The additional provision in 2006 was the result of the changing
composition and increase in the loan portfolio. The Bank continued to have no nonperforming loans at June 30, 2006. The allowance for loan losses was $400,000, or 0.52% of total loans, at June 30, 2006, as compared to $286,000, or 0.54% of
total loans, at June 30, 2005. While the Bank cannot assure that future charge-offs and/or additional provisions will not be necessary, the Bank believes that, as of June 30, 2006, its allowance for loan losses was adequate to cover
probable incurred losses.

Noninterest Income. Noninterest income increased $604,000, or 114.83%, to $1.1 million for the year ended
June 30, 2006 compared to $526,000 for the same period in 2005. This increase was primarily due to income from a death benefit from the bank-owned life insurance policy of $568,000, an increase in earnings on bank-owned life insurance of
$179,000, offset by decrease in net securities gains of $221,000 over the prior year. Noninterest income also reflected increases in service charges on deposit accounts of $26,000 and $70,000 of fee income from mortgage-banking activity.

Noninterest Expense. Noninterest expense increased $316,000, or 6.92%, to $4.9 million for the year ended June 30, 2006 compared to
$4.6 million for the same period in 2005. Compensation and employee benefits increased $445,000, or 23.35%. The increase was the result of $209,000 of compensation expense for stock awards under the Companys RRP plan that was approved in
2006. The Company expects to recognize approximately $207,000 in compensation expense annually as the shares vest over a five-year period. Additionally, a new Chief Financial Officer (CFO) was hired in the current year due to the death
of the Companys previous CFO in the third quarter of 2006. The Bank also hired additional personnel in anticipation of opening its Frankfort and Schererville branches in August 2006. Preparation of the two new branch facilities caused
increases in various other expense categories during 2006. The increase in compensation expense and other noninterest expenses was offset by a decrease in charitable foundation donation as the initial funding contribution of $600,000 was made in
2005.

The Company estimates that it will incur $191,000 of additional compensation annually over the next four years in adopting the
provisions of Statement of Financial Accounting Standards (SFAS) 123R effective July 1, 2006. The amount is related to compensation expense attributable to unvested stock options.

Income Taxes Expense (Benefits). The provision for income taxes was $44,000 in 2006 compared to a benefit of ($412,000) recorded for the year
ended June 30, 2005. The resulting effective tax rates for 2006 and 2005 were 10.46% and (39.02)%, respectively. The effective rate in 2006 reflects the non-taxable income from the death benefit on the bank-owned life insurance policy, the
increase in the cash surrender value on remaining policies in force, and the valuation allowance established for a portion of the charitable contribution carryforward.



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Comparison of Financial Condition at June 30, 2005 and June 30, 2004

Total assets increased $20.5 million, or 22.17%, to $113.2 million at June 30, 2005 compared to $92.7 million at June 30, 2004.
The increase in total assets resulted primarily from increases in cash and cash equivalents, loans receivable and an increase in premises and equipment, partially offset by a decrease in securities available for sale. Total deposits increased to
$78.1 million, or 0.75%, for the year ended June 30, 2005 compared to $77.5 million for the same period in 2004. The increase in loans receivable of $17.6 million, or 50.81%, to $52.3 million at June 30, 2005 compared
to $34.7 million at June 30, 2004, resulted from an increase in commercial real estate loans and consumer loans, as well as the purchase of participation interests in commercial and commercial real estate loans. The Bank also purchased
life insurance on certain members of management of the Company, which provides $5 million in cash surrender value to the Bank. Increases in cash surrender value of the policies will be used to fund future employee benefit plan expense. The increase
in premises and equipment resulted from the construction of our new building at our main office location, which was completed in June 2004. The decrease in securities available for sale of $11.3 million resulted from paydowns, calls and
maturities of $19.3 million and our decision to sell select securities due to market conditions. This activity was partially offset by $8.0 million of available for sale securities purchases for the year ended June 30, 2005. Total
stockholders equity increased $21.6 million, or 169.84%, to $34.3 million for the year ended June 30, 2005 compared to $12.7 million for the same period in 2004. This increase in stockholders equity resulted from the
proceeds received from the Companys initial public offering.

Comparison of Results of Operations for the Years Ended June 30, 2005 and
June 30, 2004

General. The Companys net loss amounted to $644,000 for the year ended June 30, 2005 compared to
net income of $84,000 for the year ended June 30, 2004. The decrease in net income reflected primarily an increase in noninterest expense, partially offset by an increase in net interest income. Return on average assets was (0.58)% for the year
ended June 30, 2005 as compared to 0.09% for the year ended June 30, 2004. Return on average equity was (2.09)% and 0.63% for the years ended June 30, 2005 and 2004, respectively. Equity to assets at June 30, 2005 and 2004 was
30.26% and 13.70%, respectively.

Interest Income. Interest income increased by $710,000, or 19.82%, to $4.3 million for the year
ended June 30, 2005 from $3.6 million for the same period in 2004. The increase in interest income resulted primarily from an increase in total interest earning assets of $21.7 million, or 26.50%, to $103.8 million for the year ended
June 30, 2005 from $82.1 million for the same period in 2004. The increase was offset by a decline in the average yield on interest earning assets to 4.14% per annum from 4.40% per annum.

Interest income on loans increased by $825,000, or 45.31%, for the year ended June 30, 2005 compared to the same period in 2004. The increase was
due to a $14.3 million, or 51.44%, increase in the average balance of loans for the year ended June 30, 2005 compared to the same period in 2004, offset by a 26 basis point decrease in the yield on loans, reflecting the lower market
interest rate environment during 2005.

Interest income on securities available for sale decreased by $524,000, or 30.91%, due primarily to
a decrease in the yield on such assets to 3.20% per annum from 3.44% per annum, and a $13.4 million, or 26.74% decrease in the average balance of such securities for the year ended June 30, 2005 compared to the 2004 period.

Interest Expense. Interest expense on deposits increased $95,000, or 8.62%, to $1.2 million for the year ended June 30, 2005
from $1.1 million for the same period in 2004. The increase was due to an increase of $14.0 million, or 19.17%, in the average balance of such deposits for the year ended June 30, 2005 from the same period in 2004, offset by a 13 basis
point decline in the rates paid on such deposits to 1.38% per annum for the year ended June 30, 2005.



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Net Interest Income. Net interest income is determined by the interest rate spread (i.e., the
difference between the yields earned on interest-earning assets tax effected and the rates paid on interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities. Net interest income increased
$630,000, or 26.12%, to $3.0 million for the year ended June 30, 2005 compared to $2.4 million for the year ended June 30, 2004. The increase was primarily due to an increase in the ratio of interest-earning assets to
interest-bearing liabilities (118.08% from 109.69%) offset by a decrease in our net interest rate spread to 2.71% per annum from 2.80% per annum.

Provision for Losses on Loans. Provision for losses on loans is charged to earnings to bring the total allowance for loan losses to a level considered adequate by management to cover probable incurred losses
based on a methodology implemented by the Bank that is designed to assess, among other things, experience, the volume and type of lending conducted by the Bank, overall portfolio mix, the amount of the Banks classified assets, the status of
past due principal and interest payments, loan-to-value ratios of loans in the Banks loan portfolio, general economic conditions, particularly as they relate to the Banks market area, and other factors related to the collectibility of
the Banks loan portfolio. Management assesses the allowance for loan losses on a quarterly basis and will make a provision for loan losses as deemed appropriate by management in order to maintain the adequacy of the allowance for loan losses.
When the collection of a loan becomes doubtful, or otherwise troubled, the Company records a loan charge-off equal to the difference between the fair value of the property securing the loan and the loans carrying value. The allowance for loan
losses is increased by charges to earnings and decreased by charge-offs (net of recoveries).

For the years ended June 30, 2005 and
June 30, 2004, the provision for losses on loans amounted to $50,000 and $3,000, respectively. The allowance for loan losses was $286,000, or 0.54% of total loans, at June 30, 2005, as compared to $236,000, or 0.68% of total loans, at
June 30, 2004. While the Bank cannot assure that future charge-offs and/or additional provisions will not be necessary, the Bank believes that, as of June 30, 2005, its allowance for loan losses was adequate for probable incurred losses.

Noninterest Income. Noninterest income increased $7,000, or 1.35%, to $526,000 for the year ended June 30, 2005 compared to
$519,000 for the same period in 2004. This increase was primarily due to an increase in service charges on deposit accounts as the fee structure was changed, an increase in earnings on bank-owned life insurance, offset by a decrease in the gain on
the sales of loans and a decrease in other income.

Noninterest Expense. Noninterest expense increased $1.8 million, or 63.30%, to
$4.6 million for the year ended June 30, 2005 compared to $2.8 million for the same period in 2004. Compensation and employee benefits increased $405,000, or 26.99%, as new personnel were hired when the Bank expanded its product lines
and opened a new branch facility. Additionally, 21,160 shares of the Companys common stock were allocated to ESOP participants during 2005, resulting in $258,000 of compensation expense. Also, during 2005, the Company organized a charitable
foundation, to which it contributed $100,000 and shares of common stock of the Company valued at $500,000, which increased non-interest expense by $600,000. The $600,000 was an initial contribution to establish the foundation and accordingly,
contribution expense will likely decrease significantly in future periods. The opening of the new branch facility and the construction of the Banks new main office caused increases in various other expense categories during 2005.

Income Taxes (Benefits). Income tax (benefits) amounted to ($412,000) and $15,000 for the years ended June 30, 2005 and 2004,
respectively, resulting in effective tax rates of (39.02)% and 15.1%, respectively. The difference in the tax rate in 2005 compared to 2004 was primarily due to the net loss during 2005, as well as various tax refunds received.



34



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##### Table of Contents

Liquidity and Capital Resources

The Companys primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from maturities and calls of securities and FHLB advances. While maturities and scheduled
amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions, and competition. The Bank maintains a liquidity ratio substantially
above the regulatory requirement.

The Companys cash flows are comprised of three primary classifications: cash flows from operating
activities, investing activities, and financing activities. Net cash from operating activities were $834,000 and $1.1 million in 2006 and 2005, respectively. Net cash from investing activities consisted primarily of disbursements for loan
originations and participation interests and the purchase of securities, offset by principal collections on loans, proceeds from maturing securities and paydowns on mortgage-backed securities. Net cash used in investing activities were $13.7 million
and $12.3 million in 2006, and 2005, respectively. Net cash from financing activities consisted primarily of the activity in deposit accounts, increases in federal funds purchased, treasury stock purchases, FHLB repayments, and the
Companys initial public offering. The net cash from financing activities was $171,000 in 2006 and $20.3 million in 2005.

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 June 30, 2006, the Bank exceeded each of its capital
requirements with ratios of 21.2%, 29.5% and 30.0%, respectively.

Recent Accounting Standards

In February 2006, the Financial Accounting Standards Board (FASB) issued a Statement 155 (SFAS 155), Accounting for Certain
Hybrid Financial Instruments  An Amendment of FASB Statements No. 133 and 140. This statement is effective for all financial instruments acquired, issued, or subject to a remeasurement event for fiscal years beginning after
September 15, 2006.

In March 2006, the FASB issued Statement 156 (SFAS 156), Accounting for Servicing of
Financial Assets  An Amendment of FASB Statement No. 140. This Statement is effective as of the beginning of fiscal years beginning after September 15, 2006. Earlier adoption is permitted as of the beginning of an entitys
fiscal year, provided the entity has not yet issued financial statements, including interim financial statements, for any period of that fiscal year.

In July 2006, FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (FIN 48). FIN 48 is effective for fiscal years beginning after December 15, 2006. FIN
48 applies to all income tax positions subject to FASB Statement No. 109, Accounting for Income Taxes (SFAS 109), including tax positions considered to be routine and those with a high degree of uncertainty.

In September 2006, the Securities Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) 108, which was issued to address diversity in practice
in quantifying financial statement misstatements and the potential under current practice for the build up of improper amounts on the balance sheet.

The Company is evaluating the potential impact of the standards on future periods.



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##### Table of Contents

Off-Balance-Sheet Arrangements

In the ordinary course of business, the Bank is a party to credit-related financial instruments with off-balance-sheet risk to meet the financing needs of its customers. These financial instruments include commitments
to extend credit. The Bank follows the same credit policies in making commitments as it does for on-balance-sheet instruments.

Commitments
to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The
commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Bank, is
based on managements credit evaluation of the customer.

At June 30, 2006, the Bank had outstanding commitments to originate
$13.1 million in loans, as compared to $10.3 million at June 30, 2005. In addition, as of June 30, 2006, the total amount of certificates of deposit that were scheduled to mature in the following 12 months was $27.5 million. Standby
letters of credit amounted to $147,000 and $262,000 at June 30, 2006 and 2005, respectively.

Impact of Inflation and Changing Prices

The financial statements and related financial data presented in this report regarding the Company have been prepared in accordance
with accounting principles generally accepted in the United States of America, which generally require the measurement of financial position and operating results in terms of historical dollars, without considering changes in relative purchasing
power over time due to inflation. Unlike most industrial companies, virtually all of the Companys assets and liabilities are monetary in nature. As a result, interest rates generally have a more significant impact on the Companys
performance than does the effect of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services, since such prices are affected by inflation to a larger extent than interest
rates.

Our Exposure to Changes in Interest Rates

Our ability to maintain net interest income depends upon earning a higher yield on assets than the rates we pay on deposits and borrowings and sustaining this positive interest rate spread during fluctuations in
prevailing interest rates. Interest rate sensitivity is a measure of the difference between amounts of interest-earning assets and interest-bearing liabilities that either reprice or mature within a given period of time. The difference, or the
interest rate repricing gap, provides an indication of how an institutions interest rate spread will be affected by changes in interest rates. A gap is considered positive when the amount of interest-rate-sensitive assets exceeds
the amount of interest-rate sensitive liabilities, and is considered negative when the amount of interest-rate-sensitive liabilities exceeds the amount of interest-rate-sensitive assets. Generally, during a period of rising interest rates, a
negative gap within shorter maturities would adversely affect net interest income, while a positive gap within shorter maturities would result in an increase in net interest income, and during a period of falling interest rates, a negative gap
within shorter maturities would result in an increase in net interest income while a positive gap within shorter maturities would have the opposite effect.

Although interest rate sensitivity gap is a useful measurement and contributes toward effective asset and liability management, it is difficult to predict the effect of changing interest rates based solely on that
measure. As a result, management also regularly reviews interest rate risk by forecasting the impact of alternative interest rate environments on net interest income and net portfolio value, which is defined as the net present value of a savings
banks existing assets, liabilities and off-balance-sheet instruments, and evaluating such impacts against the maximum potential changes in net interest income and net portfolio value.



36



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##### Table of Contents

ITEM 7. FINANCIAL STATEMENTS

See Index to Financial Statements on page F-1.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not
Applicable.

ITEM 8A. CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the Companys reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms, and that such information is accumulated and communicated to the Companys management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure. As of the end of the period covered by this report, the Company carried out an evaluation, with the participation of management, including its Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of its disclosure controls and procedures pursuant to the Exchange Act Rule 13a-15. Based upon, and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were not effective as of June 30, 2006, because of the material weakness disclosed below.

In connection with its audit of the Companys consolidated financial statements for the fiscal year ended June 30, 2006, Crowe Chizek and Company LLC (Crowe Chizek), the Companys independent registered public
accounting firm, advised the Board of Directors, the Audit Committee and management of certain significant internal control deficiencies that they considered to be, in the aggregate, a material weakness. A material weakness is a significant
deficiency, or combination of significant deficiencies, that results in there being more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

In particular, in connection with the audit for the year ended June 30, 2006, Crowe Chizek identified several adjustments and corrections that had
to be incorporated into the consolidated financial statements as a result of Crowe Chizeks audit. These adjustments encompassed various areas, including deferred loan costs, income taxes, professional fees and the employee stock ownership plan
According to Crowe Chizek, these adjustments and corrections indicated that managements internal review process over financial reporting was not appropriately designed and implemented. Specifically, Crowe Chizek advised the Board of Directors,
the Audit Committee and management that: (a) a formal procedure was not in place to ensure that entries were recorded in accordance with United States generally accepted accounting principles and that the posting of these entries was
appropriately reviewed; and (b) when there were departures from United States generally accepted accounting principles, a formal procedure was not in place to ensure that an analysis of the potential differences was completed, conclusions as to
materiality documented and remediation steps determined on a quarterly and annual basis.

In order to remediate this material weakness
identified by Crowe Chizek and to improve the effectiveness of the Companys disclosure controls, management is in the process of designing and implementing and continuing to enhance controls to aid in the correct preparation, review,
presentation and disclosures of the Companys consolidated financial statements, including the recent hiring of additional staff in the Companys finance department. Management will continue to monitor, evaluate and test the operating
effectiveness of these controls.

ITEM 8B. OTHER INFORMATION

None.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

(a) Directors. The information required in response to this item regarding the Companys directors will be contained in the Companys definitive Proxy Statement (the Proxy Statement) for
its Annual Meeting of Stockholders to be held on October 25, 2006 under the captions Beneficial Ownership; Election of DirectorsInformation with Respect to Nominees for Director, Members of the Board of
Directors Continuing in Office, Board Meetings, Board Committees and Section 16(a) Beneficial Ownership Reporting Compliance and the information included therein is incorporated herein by reference.

(b) Executive Officers of the Company. The information required in response to this item regarding the Companys executive
officers will be contained in the Companys Proxy Statement under the captions Election of DirectorsExecutive Officers Who Are Not Directors and Section 16(a) Beneficial Ownership Reporting Compliance and the
information included therein is incorporated herein by reference.

(c) The Company has adopted a Code of Ethics as required by the rules of
the SEC. The Code of Ethics applies to all of the Companys directors, officers, including the Companys Chief Executive Officer and Chief Financial Officer, and employees. The Code of Ethics is posted and available on the Companys
website at www.royalsavingsbank.com.

ITEM 10. EXECUTIVE COMPENSATION

The information required in response to this item will be contained in
the Proxy Statement under the captions Election of DirectorsDirectors Compensation, and Executive Compensation and the information included therein is incorporated herein by reference.



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##### Table of Contents

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by Item 403 of Regulation S-B in response to this item will be contained in the Proxy Statement under the caption Beneficial Ownership and the information included therein is incorporated herein by
reference.

Equity Compensation Plan Information

The following table sets forth information as of June 30, 2006 regarding shares of the Companys common stock to be issued upon exercise and the weighted-average exercise price of all outstanding options,
warrants and rights granted under the Companys equity compensation plans as well as the number of shares available for issuance under such plans.



|                                                           |  |                                                                                              |  |                                                                             |       |                                                                                                                                         |       
|---------------------------------------------------------- |  | -------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- | ----- | --------------------------------------------------------------------------------------------------------------------------------------- | ------
|Plan Category                                              |  | Number of securities tobe issued upon exercise ofoutstanding options,warrants and rights (a) |  | Weighted-averageexercise price
ofoutstanding optionswarrants and rights (b) |       | Number of securitiesremaining for
futureissuance under equitycompensation plans(excluding securitiesreflected in column (a)and (b)) (c)
|Equity compensation plans approved by security holders     |  | 198,375                                                                                      |  | $                                                                           | 13.94 |                                                                                                                                         | 66,125
|Equity compensation plans not approved by security holders |  |                                                                                             |  |                                                                             |      |                                                                                                                                         |      
|                                                           |  |                                                                                              |  |                                                                             |       |                                                                                                                                         |       
|Total                                                      |  | 198,375                                                                                      |  | $                                                                           | 13.94 |                                                                                                                                         | 66,125
|                                                           |  |                                                                                              |  |                                                                             |       |                                                                                                                                         |       

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required in response to this
item will be contained in the Proxy Statement under the caption Transactions with Related Persons and the information included therein is incorporated herein by reference.

ITEM 13. EXHIBITS

The exhibits filed as a part of this Form 10-KSB are listed in the Exhibit Index,
which is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required in response to this item will
be contained in the Proxy Statement under the captions Audit Fees, Audit-Related Fees, Tax Fees and All Other Fees and the information included therein is incorporated herein by reference.



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##### Table of Contents

INDEX TO FINANCIAL STATEMENTS



|                                                                                           |  |     
|------------------------------------------------------------------------------------------ |  | ----
|                                                                                           |  | Page
|                                                                                           | 
|Report of Independent Registered Public Accounting Firm                                    |  | F-2 
|                                                                                           | 
|Consolidated Statements of Financial Condition as of June 30, 2006 and 2005                |  | F-3 
|                                                                                           | 
|Consolidated Statements of Income (Loss) for the Years Ended June 30, 2006 and 2005        |  | F-4 
|                                                                                           | 
|Consolidated Statements of Stockholders Equity for the Years Ended June 30, 2006 and 2005 |  | F-5 
|                                                                                           | 
|Consolidated Statements of Cash Flows for the Years Ended June 30, 2006 and 2005           |  | F-6 
|                                                                                           | 
|Notes to Consolidated Financial Statements                                                 |  | F-7 



F-1



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors

Royal Financial, Inc. and Subsidiary

Chicago, Illinois

We have audited the accompanying consolidated statements of financial condition of Royal Financial, Inc. and Subsidiary (Company) as of June 30,
2006 and 2005, and the related consolidated statements of income (loss), stockholders equity, and cash flows for the years then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the financial position of Royal Financial, Inc. and Subsidiary as of June 30, 2006 and 2005, and the results of their operations and their cash flows for the years
then ended in conformity with U.S. generally accepted accounting principles.

/s/ Crowe Chizek and Company LLC

Oak Brook, Illinois

September 26, 2006



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##### Table of Contents

ROYAL FINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

June 30, 2006 and 2005



|                                                                                                                                                      |  |      |             |   |      |   |             |  
|----------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|Assets                                                                                                                                                |  | 2006 |             |   | 2005 |  
|Cash and due from financial institutions                                                                                                              |  | $    | 3,454,828   |   |      | $ | 5,434,381   |  
|Federal funds sold                                                                                                                                    |  |      | 893,392     |   |      |   | 11,587,315  |  
|                                                                                                                                                      |  |      |             |   |      |   |             |  
|Total cash and cash equivalents                                                                                                                       |  |      | 4,348,220   |   |      |   | 17,021,696  |  
|                                                                                                                                                      |  |     
|Securities available for sale                                                                                                                         |  |      | 21,517,841  |   |      |   | 33,241,548  |  
|Loans receivable, net of allowance for loan losses of $400,000 in 2006 and $286,020 in 2005                                                           |  |      | 77,325,934  |   |      |   | 52,325,571  |  
|Federal Home Loan Bank stock, at cost                                                                                                                 |  |      | 345,913     |   |      |   | 369,500     |  
|Cash surrender value of bank-owned life insurance                                                                                                     |  |      | 4,553,721   |   |      |   | 5,038,027   |  
|Premises and equipment, net                                                                                                                           |  |      | 5,402,419   |   |      |   | 4,616,417   |  
|Accrued interest receivable                                                                                                                           |  |      | 446,591     |   |      |   | 306,961     |  
|Other assets                                                                                                                                          |  |      | 337,975     |   |      |   | 301,041     |  
|                                                                                                                                                      |  |      |             |   |      |   |             |  
|Total assets                                                                                                                                          |  | $    | 114,278,614 |   |      | $ | 113,220,761 |  
|                                                                                                                                                      |  |      |             |   |      |   |             |  
|                                                                                                                                                      |  |     
|Liabilities and Stockholders
Equity                                                                                                                  |  |      |             |   |      |  
|Liabilities                                                                                                                                           |  |      |             |   |      |   |             |  
|Deposits                                                                                                                                              |  | $    | 78,897,747  |   |      | $ | 78,107,014  |  
|Federal funds purchased                                                                                                                               |  |      | 1,225,404   |   |      |   |            |  
|Advances from borrowers for taxes and insurance                                                                                                       |  |      | 479,706     |   |      |   | 377,037     |  
|Accrued interest payable and other liabilities                                                                                                        |  |      | 302,502     |   |      |   | 197,419     |  
|Common stock in ESOP subject to contingent repurchase obligation                                                                                      |  |      | 617,872     |   |      |   | 272,964     |  
|                                                                                                                                                      |  |     
|Commitments and contingencies                                                                                                                         |  |      |             |   |      |   |             |  
|                                                                                                                                                      |  |     
|Stockholders equity                                                                                                                                  |  |      |             |   |      |   |             |  
|Preferred stock $0.01 par value per share, authorized 1,000,000 shares, no issues are outstanding                                                     |  |      |            |   |      |   |            |  
|Common stock, $0.01 par value per share, authorized 5,000,000 shares, 2,645,000 and 2,592,100 shares issued and outstanding at June 30,
2006 and 2005 |  |      | 26,450      |   |      |   | 26,450      |  
|Additional paid-in capital                                                                                                                            |  |      | 24,739,005  |   |      |   | 24,764,553  |  
|Retained earnings                                                                                                                                     |  |      | 12,822,013  |   |      |   | 12,268,336  |  
|Treasury stock, 52,900 shares and 0 shares, at cost                                                                                                   |  |      | (783,611    | ) |      |   |            |  
|Accumulated other comprehensive loss, net of tax                                                                                                      |  |      | (393,231    | ) |      |   | (113,322    | )
|Unearned RRP shares                                                                                                                                   |  |      | (897,072    | ) |      |   |            |  
|Unearned ESOP shares                                                                                                                                  |  |      | (2,140,299  | ) |      |   | (2,406,726  | )
|Reclassification of ESOP shares                                                                                                                       |  |      | (617,872    | ) |      |   | (272,964    | )
|                                                                                                                                                      |  |      |             |   |      |   |             |  
|Total stockholders equity                                                                                                                            |  |      | 32,755,383  |   |      |   | 34,266,327  |  
|                                                                                                                                                      |  |      |             |   |      |   |             |  
|Total liabilities and stockholders equity                                                                                                            |  | $    | 114,278,614 |   |      | $ | 113,220,761 |  
|                                                                                                                                                      |  |      |             |   |      |   |             |  

See accompanying notes to consolidated financial statements.



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##### Table of Contents

ROYAL FINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

Years ended June 30, 2006 and 2005



|                                                       |  |      |           |   |      |   |            |  
|------------------------------------------------------ |  | ---- | --------- | - | ---- | - | ---------- | -
|                                                       |  | 2006 |           |   | 2005 |  
|Interest income                                        |  |      |           |   |      |   |            |  
|Loans                                                  |  | $    | 4,610,024 |   |      | $ | 2,645,589  |  
|Securities                                             |  |      |           |   |      |   |            |  
|Taxable                                                |  |      | 1,008,990 |   |      |   | 1,162,611  |  
|Tax-exempt                                             |  |      |          |   |      |   | 7,993      |  
|Securities sold under repurchase agreements            |  |      |          |   |      |   | 69,500     |  
|Federal funds sold and other                           |  |      | 215,201   |   |      |   | 404,870    |  
|                                                       |  |      |           |   |      |   |            |  
|Total interest income                                  |  |      | 5,834,215 |   |      |   | 4,290,563  |  
|                                                       |  |     
|Interest expense                                       |  |      |           |   |      |   |            |  
|Deposits                                               |  |      | 1,352,255 |   |      |   | 1,196,952  |  
|Advances from Federal Home Loan Bank                   |  |      |          |   |      |   | 56,032     |  
|Federal funds purchased                                |  |      | 1,380     |   |      |   |           |  
|                                                       |  |      |           |   |      |   |            |  
|Total interest expense                                 |  |      | 1,353,635 |   |      |   | 1,252,984  |  
|                                                       |  |      |           |   |      |   |            |  
|Net interest income                                    |  |      | 4,480,580 |   |      |   | 3,037,579  |  
|Provision for loan losses                              |  |      | 127,470   |   |      |   | 50,000     |  
|                                                       |  |      |           |   |      |   |            |  
|Net interest income after provision for loan losses    |  |      | 4,353,110 |   |      |   | 2,987,579  |  
|Noninterest income                                     |  |      |           |   |      |   |            |  
|Service charges on deposit accounts                    |  |      | 223,709   |   |      |   | 197,507    |  
|Gain (loss) on sales of securities, net                |  |      | (45,457   | ) |      |   | 175,532    |  
|Gain on sales of loans                                 |  |      |          |   |      |   | 19,791     |  
|Mortgage-banking fees                                  |  |      | 85,666    |   |      |   | 15,982     |  
|Earnings on bank-owned life insurance                  |  |      | 217,263   |   |      |   | 38,027     |  
|Income from death benefit of bank-owned life insurance |  |      | 567,754   |   |      |   |           |  
|Other                                                  |  |      | 80,639    |   |      |   | 78,726     |  
|                                                       |  |      |           |   |      |   |            |  
|Total noninterest income                               |  |      | 1,129,574 |   |      |   | 525,565    |  
|Noninterest expense                                    |  |      |           |   |      |   |            |  
|Salaries and employee benefits                         |  |      | 2,351,023 |   |      |   | 1,906,415  |  
|Occupancy and equipment                                |  |      | 935,511   |   |      |   | 794,470    |  
|Data processing                                        |  |      | 463,681   |   |      |   | 395,510    |  
|Professional services                                  |  |      | 481,519   |   |      |   | 229,853    |  
|Director fees                                          |  |      | 134,400   |   |      |   | 122,400    |  
|Supplies                                               |  |      | 73,841    |   |      |   | 78,193     |  
|Advertising                                            |  |      | 48,637    |   |      |   | 40,680     |  
|Charitable foundation donation                         |  |      |          |   |      |   | 600,000    |  
|Federal Home Loan Bank advance prepayment penalty      |  |      |          |   |      |   | 47,699     |  
|Insurance premiums                                     |  |      | 81,473    |   |      |   | 88,516     |  
|Other                                                  |  |      | 314,936   |   |      |   | 265,396    |  
|                                                       |  |      |           |   |      |   |            |  
|Total noninterest expense                              |  |      | 4,885,021 |   |      |   | 4,569,132  |  
|                                                       |  |      |           |   |      |   |            |  
|Income (loss) before income taxes                      |  |      | 597,663   |   |      |   | (1,055,988 | )
|Provision (benefit) for income taxes                   |  |      | 43,986    |   |      |   | (412,000   | )
|                                                       |  |      |           |   |      |   |            |  
|Net income (loss)                                      |  | $    | 553,677   |   |      | $ | (643,988   | )
|                                                       |  |      |           |   |      |   |            |  
|Basic earnings (loss) per share*                       |  | $    | 0.23      |   |      | $ | (0.22      | )
|                                                       |  |      |           |   |      |   |            |  
|Diluted earnings (loss) per share                      |  | $    | 0.23      |   |      | $ | (0.22      | )
|                                                       |  |      |           |   |      |   |            |  

---

|* | Earnings per share for 2005 is calculated based on the period of time from the completion date of the initial public offering, January 20, 2005, through the period ended
June 30, 2005, see Note 10.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.



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##### Table of Contents

ROYAL FINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

Years ended June 30, 2006 and 2005



|                                                                                                                                            |  |             |        |                          |   |            |                 |  |   |               |   |  |                                              |            |   |                    |   |          |                     |  |   |                                 |   |  |       |            |   |  |   |          |   |  |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ------ | ------------------------ | - | ---------- | --------------- |  | - | ------------- | - |  | -------------------------------------------- | ---------- | - | ------------------ | - | -------- | ------------------- |  | - | ------------------------------- | - |  | ----- | ---------- | - |  | - | -------- | - |  | - | ---------- | -
|                                                                                                                                            |  | CommonStock |        | AdditionalPaid-InCapital |   |            | RetainedEarning |  |   | TreasuryStock |   |  | AccumulatedOther Compre-hensive Income(Loss) |            |   | UnearnedRRP Shares |   |          | UnearnedESOP Shares |  |   | AmountReclassifiedon ESOPShares |   |  | Total |           
|Balance at July 1, 2004                                                                                                                     |  | $           |       |                          | $ |           |                 |  | $ | 12,912,324    |   |  | $                                            |           |   |                    | $ | (213,511 | )                   |  | $ |                                |   |  | $     |           |   |  | $ |         |   |  | $ | 12,698,813 |  
|                                                                                                                                            |  |             |        |                          |   |            |                 |  |  
|Comprehensive income (loss)                                                                                                                 |  |             |        |                          |   |            |                 |  |   |               |   |  |                                              |            |   |                    |   |          |                     |  |   |                                 |   |  |       |            |   |  |   |          |   |  |   |            |  
|Net loss                                                                                                                                    |  |             |       |                          |   |           |                 |  |   | (643,988      | ) |  |                                              |           |   |                    |   |         |                     |  |   |                                |   |  |       |           |   |  |   |         |   |  |   | (643,988   | )
|Net increase in fair value of securities classified as available for sale, net of income taxes and reclassification
adjustments             |  |             |       |                          |   |           |                 |  |   |              |   |  |                                              |           |   |                    |   | 100,189  |                     |  |   |                                |   |  |       |           |   |  |   |         |   |  |   | 100,189    |  
|                                                                                                                                            |  |             |        |                          |   |            |                 |  |   |               |   |  |                                              |            |   |                    |   |          |                     |  |   |                                 |   |  |       |            |   |  |   |          |   |  |   |            |  
|Total comprehensive loss                                                                                                                    |  |             |        |                          |   |            |                 |  |   |               |   |  |                                              |            |   |                    |   |          |                     |  |   |                                 |   |  |       |            |   |  |   |          |   |  |   | (543,799   | )
|                                                                                                                                            |  |             |        |                          |   |            |                 |  |  
|Issuance of common stock, net of offering costs                                                                                             |  |             | 26,450 |                          |   | 24,773,815 |                 |  |   |              |   |  |                                              |           |   |                    |   |         |                     |  |   |                                |   |  |       |           |   |  |   |         |   |  |   | 24,800,265 |  
|Purchase of 211,600 ESOP shares                                                                                                             |  |             |       |                          |   |           |                 |  |   |              |   |  |                                              |           |   |                    |   |         |                     |  |   |                                |   |  |       | (2,674,140 | ) |  |   |         |   |  |   | (2,674,140 | )
|Release of 21,160 of unearned ESOP shares                                                                                                   |  |             |       |                          |   | (9,262     | )               |  |   |              |   |  |                                              |           |   |                    |   |         |                     |  |   |                                |   |  |       | 267,414    |   |  |   |         |   |  |   | 258,152    |  
|Reclassification due to release and change in fair value of common stock in ESOP subject to contingent repurchase obligation of ESOP
shares |  |             |       |                          |   |           |                 |  |   |              |   |  |                                              |           |   |                    |   |         |                     |  |   |                                |   |  |       |           |   |  |   | (272,964 | ) |  |   | (272,964   | )
|                                                                                                                                            |  |             |        |                          |   |            |                 |  |   |               |   |  |                                              |            |   |                    |   |          |                     |  |   |                                 |   |  |       |            |   |  |   |          |   |  |   |            |  
|Balance at June 30, 2005                                                                                                                    |  |             | 26,450 |                          |   | 24,764,553 |                 |  |   | 12,268,336    |   |  |                                              |           |   |                    |   | (113,322 | )                   |  |   |                                |   |  |       | (2,406,726 | ) |  |   | (272,964 | ) |  |   | 34,266,327 |  
|                                                                                                                                            |  |             |        |                          |   |            |                 |  |  
|Comprehensive income (loss)                                                                                                                 |  |             |        |                          |   |            |                 |  |   |               |   |  |                                              |            |   |                    |   |          |                     |  |   |                                 |   |  |       |            |   |  |   |          |   |  |   |            |  
|Net income                                                                                                                                  |  |             |       |                          |   |           |                 |  |   | 553,677       |   |  |                                              |           |   |                    |   |         |                     |  |   |                                |   |  |       |           |   |  |   |         |   |  |   | 553,677    |  
|Net decrease in fair value of securities classified as available for sale, net of income taxes and reclassification
adjustments             |  |             |       |                          |   |           |                 |  |   |              |   |  |                                              |           |   |                    |   | (279,909 | )                   |  |   |                                |   |  |       |           |   |  |   |         |   |  |   | (279,909   | )
|                                                                                                                                            |  |             |        |                          |   |            |                 |  |   |               |   |  |                                              |            |   |                    |   |          |                     |  |   |                                 |   |  |       |            |   |  |   |          |   |  |   |            |  
|Total comprehensive income                                                                                                                  |  |             |        |                          |   |            |                 |  |   |               |   |  |                                              |            |   |                    |   |          |                     |  |   |                                 |   |  |       |            |   |  |   |          |   |  |   | 273,768    |  
|                                                                                                                                            |  |             |        |                          |   |            |                 |  |   |               |   |  |                                              |            |   |                    |   |          |                     |  |   |                                 |   |  |       |            |   |  |   |          |   |  |   |            |  
|Reclassification due to release and change in fair value of common stock in ESOP subject to contingent repurchase obligation of ESOP
shares |  |             |       |                          |   |           |                 |  |   |              |   |  |                                              |           |   |                    |   |         |                     |  |   |                                |   |  |       |           |   |  |   | (344,908 | ) |  |   | (344,908   | )
|Purchase of 132,250 Treasury shares at cost                                                                                                 |  |             |       |                          |   |           |                 |  |   |              |   |  |                                              | (1,947,609 | ) |                    |   |         |                     |  |   |                                |   |  |       |           |   |  |   |         |   |  |   | (1,947,609 | )
|Allocation of 79,350 shares to the RRP Plan                                                                                                 |  |             |       |                          |   | (57,912    | )               |  |   |              |   |  |                                              | 1,163,998  |   |                    |   |         |                     |  |   | (1,106,086                      | ) |  |       |           |   |  |   |         |   |  |   |           |  
|RRP shares earned                                                                                                                           |  |             |       |                          |   |           |                 |  |   |              |   |  |                                              |           |   |                    |   |         |                     |  |   | 209,014                         |   |  |       |           |   |  |   |         |   |  |   | 209,014    |  
|Release of 21,160 of unearned ESOP shares                                                                                                   |  |             |       |                          |   | 32,364     |                 |  |   |              |   |  |                                              |           |   |                    |   |         |                     |  |   |                                |   |  |       | 266,427    |   |  |   |         |   |  |   | 298,791    |  
|                                                                                                                                            |  |             |        |                          |   |            |                 |  |   |               |   |  |                                              |            |   |                    |   |          |                     |  |   |                                 |   |  |       |            |   |  |   |          |   |  |   |            |  
|Balance at June 30, 2006                                                                                                                    |  | $           | 26,450 |                          | $ | 24,739,005 |                 |  | $ | 12,822,013    |   |  | $                                            | (783,611   | ) |                    | $ | (393,231 | )                   |  | $ | (897,072                        | ) |  | $     | (2,140,299 | ) |  | $ | (617,872 | ) |  | $ | 32,755,383 |  
|                                                                                                                                            |  |             |        |                          |   |            |                 |  |   |               |   |  |                                              |            |   |                    |   |          |                     |  |   |                                 |   |  |       |            |   |  |   |          |   |  |   |            |  

See accompanying notes to consolidated financial statements.



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##### Table of Contents

ROYAL FINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended June 30, 2006 and 2005



|                                                                                 |  |      |             |   |      |   |             |  
|-------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                                                                 |  | 2006 |             |   | 2005 |  
|Cash flows from operating activities                                             |  |      |             |   |      |   |             |  
|Net income (loss)                                                                |  | $    | 553,677     |   |      | $ | (643,988    | )
|Adjustments to reconcile net income (loss) to net cash from operating activities |  |      |             |   |      |   |             |  
|Depreciation                                                                     |  |      | 280,320     |   |      |   | 274,789     |  
|Net amortization of securities                                                   |  |      | 77,233      |   |      |   | 355,387     |  
|Change in net deferred loan costs                                                |  |      | (37,164     | ) |      |   | 5,032       |  
|Provision for loan losses                                                        |  |      | 127,470     |   |      |   | 50,000      |  
|Increase in the cash surrender value of bank-owned life insurance                |  |      | (217,263    | ) |      |   | (38,027     | )
|Income from the death benefit of bank-owned life insurance                       |  |      | (567,754    | ) |      |   |            |  
|Net increase in ESOP shares earned                                               |  |      | 298,791     |   |      |   | 258,152     |  
|Charitable foundation donation                                                   |  |      |            |   |      |   | 500,000     |  
|(Gain) loss on sale of securities, net                                           |  |      | 45,457      |   |      |   | (175,532    | )
|Federal Home Loan Bank stock dividend                                            |  |      | (8,014      | ) |      |   | (20,200     | )
|Origination of loans held for sale                                               |  |      |            |   |      |   | (1,835,680  | )
|Proceeds from sales of loans held for sale                                       |  |      |            |   |      |   | 2,185,471   |  
|Gain on sale of loans sold                                                       |  |      |            |   |      |   | (19,791     | )
|RRP shared earned                                                                |  |      | 209,014     |   |      |   |            |  
|Change in accrued interest receivable and other assets                           |  |      | (32,368     | ) |      |   | 239,926     |  
|Change in other accrued interest payable and liabilities                         |  |      | 105,083     |   |      |   | (33,640     | )
|                                                                                 |  |      |             |   |      |   |             |  
|Net cash from operating activities                                               |  |      | 834,482     |   |      |   | 1,101,899   |  
|                                                                                 |  |     
|Cash flows from investing activities                                             |  |      |             |   |      |   |             |  
|Proceeds from maturities, calls, and paydowns of securities available for sale   |  |      | 7,013,723   |   |      |   | 11,564,140  |  
|Proceeds from sales of securities available for sale                             |  |      | 7,163,189   |   |      |   | 7,713,460   |  
|Purchase of securities available for sale                                        |  |      | (3,000,000  | ) |      |   | (8,020,853  | )
|Redemption of Federal Home Loan Bank stock                                       |  |      | 31,601      |   |      |   |            |  
|Change in loans receivable                                                       |  |      | (6,175,669  | ) |      |   | (11,628,902 | )
|Purchase of loan participations                                                  |  |      | (18,915,000 | ) |      |   | (6,384,405  | )
|Purchase of bank-owned life insurance                                            |  |      |            |   |      |   | (5,000,000  | )
|Proceeds from the death benefit of bank-owned life insurance                     |  |      | 1,269,323   |   |      |   |            |  
|Purchase of premises and equipment                                               |  |      | (1,066,322  | ) |      |   | (577,469    | )
|                                                                                 |  |      |             |   |      |   |             |  
|Net cash from investing activities                                               |  |      | (13,679,155 | ) |      |   | (12,334,029 | )
|                                                                                 |  |     
|Cash flows from financing activities                                             |  |      |             |   |      |   |             |  
|Net increase in deposits                                                         |  |      | 790,733     |   |      |   | 584,714     |  
|Net increase in federal funds purchased                                          |  |      | 1,225,404   |   |      |   |            |  
|Repayment of Federal Home Loan Bank advance                                      |  |      |            |   |      |   | (2,000,000  | )
|Proceeds from stock offering, net of offering costs                              |  |      |            |   |      |   | 24,300,265  |  
|Purchase of Treasury Stock                                                       |  |      | (1,947,609  | ) |      |   |            |  
|Purchase of ESOP shares                                                          |  |      |            |   |      |   | (2,674,140  | )
|Net increase in advances from borrowers for taxes and insurance                  |  |      | 102,669     |   |      |   | 100,420     |  
|                                                                                 |  |      |             |   |      |   |             |  
|Net cash from financing activities                                               |  |      | 171,197     |   |      |   | 20,311,259  |  
|                                                                                 |  |      |             |   |      |   |             |  
|Net change in cash and cash equivalents                                          |  |      | (12,673,476 | ) |      |   | 9,079,129   |  
|                                                                                 |  |     
|Cash and cash equivalents                                                        |  |      |             |   |      |   |             |  
|Beginning of the year                                                            |  |      | 17,021,696  |   |      |   | 7,942,567   |  
|                                                                                 |  |      |             |   |      |   |             |  
|End of the year                                                                  |  | $    | 4,348,220   |   |      | $ | 17,021,696  |  
|                                                                                 |  |      |             |   |      |   |             |  
|Supplemental cash flow information:                                              |  |      |             |   |      |   |             |  
|Interest paid                                                                    |  | $    | 1,313,343   |   |      | $ | 1,258,365   |  
|Income taxes (refunded)                                                          |  |      | (143,630    | ) |      |   | (389,541    | )
|Supplemental noncash disclosure:                                                 |  |      |             |   |      |   |             |  
|Common stock in ESOP subject to contingent repurchase obligation                 |  | $    | 617,872     |   |      | $ | 272,964     |  

See accompanying notes to consolidated financial statements.



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##### Table of Contents

ROYAL FINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2006 and 2005

NOTE 1 - SIGNIFICANT
ACCOUNTING POLICIES

Principles of Consolidation: The accompanying consolidated financial statements include the accounts of
Royal Financial, Inc. (the Company) and its wholly owned subsidiary, Royal Savings Bank (the Bank). All significant intercompany transactions and balances are eliminated in consolidation.

Change in Reporting Entity: On August 18, 2004, the Board of Directors of the Bank unanimously adopted a plan of conversion providing for the
conversion of the Bank from an Illinois-chartered mutual savings bank to an Illinois-chartered stock savings bank and the purchase of all of the common stock of the Bank by the Company. The plan was approved by the Division of Banks and Real Estate
for the state of Illinois, and the Bank received a nonobjection from the FDIC. The stockholders of the Bank approved the plan at a meeting held on December 21, 2004.

In adopting the plan, the Board of Directors of the Bank determined that the conversion was advisable and in the best interests of its stockholders and the Bank. The conversion was completed on January 20, 2005
when the Company issued 2,595,000 shares of common stock to the public resulting in $25,950,000 of gross proceeds. Costs to complete the stock offering were deducted from the gross proceeds of the offering. The Bank issued all of its outstanding
capital stock to the Company in exchange for one half of the net proceeds of the offering, which amounted to $12.1 million. The Company contributed 50,000 shares of common stock and $100,000 of cash to the Royal Charitable Foundation in
February 2005.

Nature of Business: The primary business of the Company is the ownership of the Bank. Through the Bank, the
Company is engaged in the business of retail banking, with operations conducted through its main office and two branches, which are located in Chicago and Lansing, Illinois. The Banks primary services include accepting deposits, making loans,
and investing in securities.

Use of Estimates: To prepare financial statements in conformity with U.S. generally accepted
accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ.
The allowance for loan losses and valuation allowance on deferred tax assets are particularly subject to change.

Cash Flows: Cash
and cash equivalents include cash, deposits with other financial institutions under 90 days, and federal funds sold. Net cash flows are reported for loan and deposit transactions and short-term obligations with original maturities of ninety days or
less.

Securities: Securities are classified as available-for-sale when they might be sold before maturity. Securities
available-for-sale are carried at fair value with unrealized holding gains and losses reported in other comprehensive income or loss, net of tax.

Interest income is recognized under the interest method and includes amortization of purchase premium and discount. Gains and losses on sales are based on the amortized cost of the security sold and determined using the specific
identification method.

Declines in the fair value of securities below their cost that are other-than-temporary are reflected as realized
losses. In determining if losses are other-than-temporary, management considers (1) the length of time and extent that fair value has been less than cost or adjusted cost, as applicable; (2) the financial condition and near term prospects
of the issuer; and (3) the Companys ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value.



F-7



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##### Table of Contents

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued)

The Company evaluates its securities for impairment on a quarterly basis to determine whether an impairment charge should be recorded when a security has
experienced a decline in value that is other-than-temporary. This analysis includes reviewing credit ratings and discounted cash flows as well as evaluating intent and ability to hold the securities for a period sufficient to allow for any
applicable recovery in fair value.

Loans: Loans that management has the intent and ability to hold for the foreseeable future or
until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, and an allowance for loan losses.

Participations purchased consist primarily of commercial and commercial real estate loans in Chicago and Northwest Indiana. The Bank utilizes the same underwriting standards and criteria as it would if it originated
the loans. These loans are generally made at a 75% loan-to-value ratio or less.

Transfers of financial assets, including loan
participations, are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Bank, (2) the transferee obtains the
right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase
them before their maturity.

Interest income is reported on the interest method and includes amortization of net deferred loan fees and
costs over the loan term. Interest income on loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection.

Loans are typically charged off no later than 90 to 120 days past due. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if
collection of principal or interest is considered doubtful.

All interest accrued but not received for loans placed on nonaccrual is
reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably assured.

Loans Held For Sale: Loans originated and
intended for sale in the secondary market are carried at the lower of cost or market in the aggregate. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.

Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged
against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience;
the nature and volume of the portfolio; information about specific borrower situations; and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is
available for any loan that, in managements judgment, should be charged off.

The allowance consists of specific and general
components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful. The general component covers non-classified loans and is based on historical loss experience
adjusted for current factors.



F-8



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##### Table of Contents

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued)

A loan is impaired when it is probable that all amounts due will not be collected according to contractual terms of the loan agreement. Commercial and
commercial real estate loans are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loans
existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller-balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment,
and accordingly, they are not separately identified for impairment disclosures.

Foreclosed Assets: Assets acquired through or
instead of loan foreclosure are initially recorded at fair value when acquired, establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Costs after acquisition are expensed.

Bank-Owned Life Insurance: The Company has purchased life insurance policies on certain key officers. Bank-owned life insurance is
recorded at its cash surrender value, which is the amount that can be realized.

Premises and Equipment: Land is carried at cost.
Premises and equipment are stated at cost less accumulated depreciation and are depreciated using the straight-line method over the estimated useful lives. Building and improvements are depreciated using the straight-line method with useful lives
ranging from 5 to 40 years. Furniture and equipment are depreciated using the straight-line method with useful lives ranging from 3 to 7 years.

Federal Home Loan Bank (FHLB) stock and advances: The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional
amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income. At June 30, 2006 and 2005, the
Bank had no outstanding advances from the FHLB. The Bank could borrow up to $6,900,000 at June 30, 2006 from the FHLB under collateral pledge agreement guidelines.

Stock Compensation: Employee compensation expense under stock options is reported using the fair value method. No stock-based compensation cost is reflected in net income, as all options granted had an exercise
price equal to or greater than the market price of the underlying common stock at date of grant. The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of
FASB Statement No. 123, Accounting for Stock-Based Compensation.



|                                                                                  |  |      |        
|--------------------------------------------------------------------------------- |  | ---- | -------
|                                                                                  |  | 2006
|Net income as reported                                                            |  | $    | 553,677
|Deduct: Stock-based compensation expense determined under fair value based method |  |      | 117,695
|                                                                                  |  |      |        
|Pro forma net income                                                              |  |      | 435,982
|                                                                                  |  |      |        
|                                                                                  | 
|Basic and diluted earnings per share as reported                                  |  | $    | .23    
|Pro forma basic and diluted earnings per share                                    |  |      | .18    

No activity for the year ended June 30, 2005 is reported as the stock option plan was not
adopted until October 26, 2005.



F-9



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##### Table of Contents

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued)

The fair value of options granted and pro forma effects are computed using option pricing models, using the following weighted-average assumptions as of
grant date.

|                                                           |  |      |         |  
|---------------------------------------------------------- |  | ---- | ------- | -
|                                                           |  | 2006 |        
|Risk-free interest rate                                    |  |      | 4.52    | %
|Expected option life                                       |  |      | 7 years |  
|Expected stock price volatility                            |  |      | 20.00   | %
|Dividend yield                                             |  |      | 0.00    | %
|                                                           | 
|Weighted average fair value of options granted during year |  | $    | 4.83    |  
|                                                           |  |      |         |  

The Company will be required to record compensation expense related to the nonvested portion of
the stock options outstanding beginning July 1, 2006, the effective date of the Companys adoption of Statement on Financial Account Standard No. 123R. Compensation expense related to vesting of stock options will approximate $179,000
per year for the next four years based on current unvested options outstanding.

Income Taxes: Income tax expense is the total of
the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of
assets and liabilities, computed using enacted tax rates. A valuation allowance reduces deferred tax assets to the amount expected to be realized.

Employee Stock Ownership Plan: The cost of shares issued to the employee stock ownership plan (ESOP) but not yet allocated to participants is presented in the consolidated balance sheet as a reduction of
stockholders equity. Compensation expense is recorded based on the market price of the shares as they are committed to be released for allocation to participant accounts. Because participants may require the Company to purchase their ESOP
shares upon termination of their employment, the market value of all earned and allocated ESOP shares is reclassified from stockholders equity. Unearned ESOP shares are reported as a reduction of stockholders equity.

Off-Balance-Sheet Financial Instruments: Financial instruments include off-balance-sheet credit instruments, such as commitments to make loans,
issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

Comprehensive Income (Loss): Comprehensive income (loss) consists of net income and other comprehensive income (loss). Other comprehensive income
(loss) includes unrealized gains and losses on securities available for sale, net of tax, which are also recognized as separate components of equity.

Long-Term Assets: Premises and equipment and other long-term assets are reviewed for impairment when events indicate that their carrying amount may not be recoverable from future undiscounted cash flows. If
impaired, the assets are recorded at fair value.

Loss Contingencies: Loss contingencies, including claims and legal actions arising
in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe that there are such matters that will have a material
effect on the financial statements.



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##### Table of Contents

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued)

Fair Values of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions,
as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

Earnings (Loss) Per
Share: Basic earnings (loss) per share is based on net income (loss) divided by the weighted average number of shares outstanding during the period, including allocated and committed-to-be-released ESOP shares. Diluted earnings (loss) per share
reflects the dilutive effect, if any, of additional common shares issuable under stock options and stock awards.

Operating
Segments: While the chief decision makers monitor the revenue streams of the various products and services, the identifiable segments are not material and operations are managed and financial performance is evaluated on a company-wide basis.
Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.

Reclassifications: Some items in the prior-year financial statements were reclassified to conform to the current presentation.

NOTE 2 -
CASH AND CASH EQUIVALENTS

Cash and cash equivalents at June 30, 2006 and 2005 included balances of approximately $1,146,000 and
$15,846,000 with the Banks primary correspondent.



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##### Table of Contents

NOTE 3 - SECURITIES

The fair value of securities available for sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:



|                                             |  |            |            |                       |   |                        |  |   |          |  
|-------------------------------------------- |  | ---------- | ---------- | --------------------- | - | ---------------------- |  | - | -------- | -
|                                             |  | Fair Value |            | GrossUnrealized Gains |   | GrossUnrealized Losses | 
|2006                                         |  |            |            |                       |   |                        |  |   |          |  
|U.S. government-sponsored entity             |  | $          | 8,813,600  |                       | $ |                       |  | $ | (184,568 | )
|Federal Home Loan Mortgage Corporation bonds |  |            | 2,903,000  |                       |   |                       |  |   | (94,903  | )
|Mortgage-backed                              |  |            | 1,101,037  |                       |   | 362                    |  |   | (47,278  | )
|Collateralized mortgage obligations          |  |            | 8,245,004  |                       |   | 477                    |  |   | (225,095 | )
|Corporate                                    |  |            | 455,200    |                       |   |                       |  |   | (44,800  | )
|                                             |  |            |            |                       |   |                        |  |   |          |  
|Total                                        |  | $          | 21,517,841 |                       | $ | 839                    |  | $ | (596,644 | )
|                                             |  |            |            |                       |   |                        |  |   |          |  
|2005                                         |  |            |            |                       |   |                        |  |   |          |  
|U.S. government-sponsored entity             |  | $          | 12,712,950 |                       | $ |                       |  | $ | (88,991  | )
|Federal Home Loan Mortgage Corporation bonds |  |            | 2,969,200  |                       |   |                       |  |   | (36,098  | )
|Federal National Mortgage Association bonds  |  |            | 502,500    |                       |   |                       |  |   | (884     | )
|Mortgage-backed                              |  |            | 2,038,241  |                       |   | 44,108                 |  |   | (17,006  | )
|Collateralized mortgage obligations          |  |            | 14,523,157 |                       |   | 8,443                  |  |   | (76,772  | )
|Corporate                                    |  |            | 495,500    |                       |   |                       |  |   | (4,500   | )
|                                             |  |            |            |                       |   |                        |  |   |          |  
|Total                                        |  | $          | 33,241,548 |                       | $ | 52,551                 |  | $ | (224,251 | )
|                                             |  |            |            |                       |   |                        |  |   |          |  

The fair value of securities available for sale at year-end 2006 by contractual maturity were as
follows. Securities not due at a single maturity date, primarily mortgage-backed securities and collateralized mortgage obligations, are shown separately.



|                                    |  |            |           
|----------------------------------- |  | ---------- | ----------
|                                    |  | Fair Value
|Due in one year or less             |  | $          | 1,985,500 
|Due from one to five years          |  |            | 9,731,100 
|Due from five to ten years          |  |            | 455,200   
|Mortgage-backed                     |  |            | 1,101,037 
|Collateralized mortgage obligations |  |            | 8,245,004 
|                                    |  |            |           
|Total                               |  | $          | 21,517,841
|                                    |  |            |           

Sales of securities available for sale were as follows:



|             |  |      |           |   |      |   |           |  
|------------ |  | ---- | --------- | - | ---- | - | --------- | -
|             |  | 2006 |           |   | 2005 |  
|Proceeds     |  | $    | 7,163,189 |   |      | $ | 7,713,460 |  
|Gross gains  |  |      | 17,538    |   |      |   | 193,712   |  
|Gross losses |  |      | (62,995   | ) |      |   | (18,180   | )

Securities with unrealized losses at June 30, 2006 and 2005, aggregated by investment
category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:



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##### Table of Contents

NOTE 3 - SECURITIES (continued)



|                                             |  |                     |           |                |                   |         |            |       |                |            |  |            |          |                |  |   |            |  |   |          |  
|-------------------------------------------- |  | ------------------- | --------- | -------------- | ----------------- | ------- | ---------- | ----- | -------------- | ---------- |  | ---------- | -------- | -------------- |  | - | ---------- |  | - | -------- | -
|                                             |  | Less Than 12 months |           |                | 12 Months or More |         |            | Total |               
|                                             |  | Fair Value          |           | UnrealizedLoss |                   |         | Fair Value |       | UnrealizedLoss |            |  | Fair Value |          | UnrealizedLoss | 
|2006                                         |  |                     |           |                |                   |         |            |       |                |            |  |            |          |                |  |   |            |  |   |          |  
|U.S. government and federal agency           |  | $                   |          |                | $                 |        |            |       | $              | 8,813,600  |  | $          | (184,568 | )              |  | $ | 8,813,600  |  | $ | (184,568 | )
|Federal Home Loan Mortgage Corporation       |  |                     |          |                |                   |        |            |       |                | 2,903,000  |  |            | (94,903  | )              |  |   | 2,903,000  |  |   | (94,903  | )
|Mortgage-backed                              |  |                     | 119,270   |                |                   | (1,107  | )          |       |                | 943,891    |  |            | (46,171  | )              |  |   | 1,063,161  |  |   | (47,278  | )
|Collateralized mortgage obligations          |  |                     | 290,869   |                |                   | (338    | )          |       |                | 7,850,686  |  |            | (224,757 | )              |  |   | 8,141,555  |  |   | (225,095 | )
|Corporate                                    |  |                     |          |                |                   |        |            |       |                | 455,200    |  |            | (44,800  | )              |  |   | 455,200    |  |   | (44,800  | )
|                                             |  |                     |           |                |                   |         |            |       |                |            |  |            |          |                |  |   |            |  |   |          |  
|                                             |  | $                   | 410,139   |                | $                 | (1,445  | )          |       | $              | 20,966,377 |  | $          | (595,199 | )              |  | $ | 21,376,516 |  | $ | (596,644 | )
|                                             |  |                     |           |                |                   |         |            |       |                |            |  |            |          |                |  |   |            |  |   |          |  
|2005                                         |  |                     |           |                |                   |         |            |       |                |            |  |            |          |                |  |   |            |  |   |          |  
|U.S. government-sponsored entities           |  | $                   | 3,491,950 |                | $                 | (6,948  | )          |       | $              | 9,221,000  |  | $          | (82,043  | )              |  | $ | 12,712,950 |  | $ | (88,991  | )
|Federal Home Loan Mortgage Corporation bonds |  |                     | 991,400   |                |                   | (5,878  | )          |       |                | 1,977,800  |  |            | (30,220  | )              |  |   | 2,969,200  |  |   | (36,098  | )
|Federal National Mortgage Association bonds  |  |                     |          |                |                   |        |            |       |                | 502,500    |  |            | (884     | )              |  |   | 502,500    |  |   | (884     | )
|Mortgage-backed                              |  |                     |          |                |                   |        |            |       |                | 1,290,866  |  |            | (17,006  | )              |  |   | 1,290,866  |  |   | (17,006  | )
|Collateralized mortgage obligations          |  |                     | 1,423,096 |                |                   | (11,842 | )          |       |                | 10,091,722 |  |            | (64,930  | )              |  |   | 11,514,818 |  |   | (76,772  | )
|Corporate                                    |  |                     |          |                |                   |        |            |       |                | 495,500    |  |            | (4,500   | )              |  |   | 495,500    |  |   | (4,500   | )
|                                             |  |                     |           |                |                   |         |            |       |                |            |  |            |          |                |  |   |            |  |   |          |  
|                                             |  | $                   | 5,906,446 |                | $                 | (24,668 | )          |       | $              | 23,579,388 |  | $          | (199,583 | )              |  | $ | 29,485,834 |  | $ | (224,251 | )
|                                             |  |                     |           |                |                   |         |            |       |                |            |  |            |          |                |  |   |            |  |   |          |  

The Company evaluates securities for other-than-temporary impairment at least on a quarterly basis
and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer,
and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuers financial condition, the Company may consider whether
the securities are issued by the federal government or one of its sponsored entities, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuers financial condition. The corporate bond has a fixed rate
of 5.24% and is AA-rated by Standard and Poors. The value is expected to recover as market rates decline and the security approaches its maturity.

Unrealized losses on securities have not been recognized into income because the securities are of high credit quality, management has the intent and ability to hold the securities for the foreseeable future, and the
decline in fair value is largely due to changes in interest rates. The fair value is expected to recover as the securities approach their maturity date or repayments are made.



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NOTE 4 - LOANS

At June 30, 2006 and 2005, loans receivable consisted of the following:



|                              |  |      |            |   |      |   |            |  
|----------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                              |  | 2006 |            |   | 2005 |  
|Real estate loans             |  |      |            |   |      |   |            |  
|One-to-four-family            |  | $    | 31,646,224 |   |      | $ | 21,912,867 |  
|Commercial                    |  |      | 30,025,338 |   |      |   | 24,371,673 |  
|Multi-family                  |  |      | 5,286,956  |   |      |   | 778,335    |  
|                              |  |      |            |   |      |   |            |  
|Total real estate loans       |  |      | 66,958,518 |   |      |   | 47,062,875 |  
|Commercial loans              |  |      | 10,173,659 |   |      |   | 5,266,542  |  
|Consumer loans                |  |      |            |   |      |   |            |  
|Home equity loans             |  |      | 362,611    |   |      |   | 117,332    |  
|Other                         |  |      | 192,600    |   |      |   | 163,460    |  
|                              |  |      |            |   |      |   |            |  
|Total consumer loans          |  |      | 555,211    |   |      |   | 280,792    |  
|Less:                         |  |      |            |   |      |   |            |  
|Net deferred loan fees (cost) |  |      | (38,546    | ) |      |   | (1,382     | )
|Allowance for loan losses     |  |      | 400,000    |   |      |   | 286,020    |  
|                              |  |      |            |   |      |   |            |  
|Loans, net                    |  | $    | 77,325,934 |   |      | $ | 52,325,571 |  
|                              |  |      |            |   |      |   |            |  

There were no loans held for sale at June 30, 2006 or 2005.

A summary of changes in the allowance for loan losses for the years ended June 30, 2006 and 2005 is as follows:



|                             |  |      |         |   |      |   |        
|---------------------------- |  | ---- | ------- | - | ---- | - | -------
|                             |  | 2006 |         |   | 2005
|Balance at beginning of year |  | $    | 286,020 |   |      | $ | 236,020
|Provision for loan loss      |  |      | 127,470 |   |      |   | 50,000 
|Charge-offs                  |  |      | (13,490 | ) |      |   |       
|                             |  |      |         |   |      |   |        
|Balance at end of year       |  | $    | 400,000 |   |      | $ | 286,020
|                             |  |      |         |   |      |   |        

The Bank has no loans that they consider to be impaired as of or during the period ended
June 30, 2006 and 2005. For the years ended June 30, 2006 and 2005, there were no impaired loans or income recognized on impaired loans. The Bank also has no loans past due over 90 days still on accrual or nonaccrual loans.

NOTE 5 - PREMISES AND EQUIPMENT

Premises and
equipment as of June 30, 2006 and 2005 are as follows:



|                              |  |      |           |      |   |          
|----------------------------- |  | ---- | --------- | ---- | - | ---------
|                              |  | 2006 |           | 2005
|Land                          |  | $    | 357,731   |      | $ | 357,731  
|Buildings and improvements    |  |      | 5,049,120 |      |   | 5,049,120
|Furniture and equipment       |  |      | 1,754,712 |      |   | 1,667,114
|Construction in progress      |  |      | 978,724   |      |   |         
|                              |  |      |           |      |   |          
|Total cost                    |  |      | 8,140,287 |      |   | 7,073,965
|Less accumulated depreciation |  |      | 2,737,868 |      |   | 2,457,548
|                              |  |      |           |      |   |          
|                              |  | $    | 5,402,419 |      | $ | 4,616,417
|                              |  |      |           |      |   |          

The Company is in the process of opening two new branch locations. The facilities are leased by
the Company under separate operating leases. As of June 30, 2006, construction in process includes improvement costs for these two locations, which subsequently opened in August 2006. Also, subsequent to year end, the Company purchased $656,000
of additional land in Frankfort as a potential branch site.

Depreciation expense was $280,000 and $275,000 for the years ended
June 30, 2006 and 2005.



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NOTE 5 - PREMISES AND EQUIPMENT (continued)

Rent expense was $209,000 and $180,000 for the years ended June 30, 2006 and 2005, respectively. Rent commitments under noncancelable operating
leases were as follows, before considering renewal options that generally are present, for the 12 months ended June 30:



|      |  |   |          
|----- |  | - | ---------
|2007  |  | $ | 282,000  
|2008  |  |   | 309,000  
|2009  |  |   | 306,000  
|2010  |  |   | 152,000  
|2011  |  |   | 137,000  
|      |  |   |          
|Total |  | $ | 1,186,000
|      |  |   |          

NOTE 6 - DEPOSITS

Deposit account balances as of June 30 are summarized as follows:



|                               |  |      |            |      |   |           
|------------------------------ |  | ---- | ---------- | ---- | - | ----------
|                               |  | 2006 |            | 2005
|Savings                        |  | $    | 30,237,183 |      | $ | 31,914,683
|NOW accounts                   |  |      | 5,775,336  |      |   | 5,593,880 
|Non-interest-bearing checking  |  |      | 6,337,035  |      |   | 4,598,931 
|Money market                   |  |      | 3,720,134  |      |   | 4,792,662 
|                               |  |      |            |      |   |           
|                               |  |      | 46,069,688 |      |   | 46,900,156
|Certificates of deposit        |  |      | 25,433,597 |      |   | 23,117,764
|Individual retirement accounts |  |      | 7,394,462  |      |   | 8,089,094 
|                               |  |      |            |      |   |           
|                               |  |      | 32,828,059 |      |   | 31,206,858
|                               |  |      |            |      |   |           
|                               |  | $    | 78,897,747 |      | $ | 78,107,014
|                               |  |      |            |      |   |           

Time deposits of $100,000 and over totaled $9,881,000 and $7,017,000 at June 30, 2006 and
2005.

At June 30, 2006, scheduled maturities of certificates of deposit and individual retirement accounts are as follows:



|      |  |   |           
|----- |  | - | ----------
|2007  |  | $ | 27,486,852
|2008  |  |   | 3,726,551 
|2009  |  |   | 683,104   
|2010  |  |   | 285,074   
|2011  |  |   | 646,478   
|      |  |   |           
|Total |  | $ | 32,828,059
|      |  |   |           



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##### Table of Contents

NOTE 7 - INCOME TAXES

The components of the provision (benefit) for income taxes are as follows:



|                              |  |      |         |   |      |   |          |  
|----------------------------- |  | ---- | ------- | - | ---- | - | -------- | -
|                              |  | 2006 |         |   | 2005 |  
|Current                       |  |      |         |   |      |   |          |  
|Federal                       |  | $    | 34,766  |   |      | $ | (462,578 | )
|State                         |  |      |        |   |      |   |         |  
|                              |  |      |         |   |      |   |          |  
|                              |  |      | 34,766  |   |      |   | (462,578 | )
|Deferred                      |  |      | (91,187 | ) |      |   | 6,608    |  
|Change in valuation allowance |  |      | 100,407 |   |      |   | 43,970   |  
|                              |  |      |         |   |      |   |          |  
|                              |  | $    | 43,986  |   |      | $ | (412,000 | )
|                              |  |      |         |   |      |   |          |  

Deferred tax assets (liabilities) are comprised of the following at June 30:



|                                                 |  |      |           |   |      |   |          |  
|------------------------------------------------ |  | ---- | --------- | - | ---- | - | -------- | -
|                                                 |  | 2006 |           |   | 2005 |  
|Federal net operating loss carryforward          |  | $    | 30,244    |   |      | $ |         |  
|Bad debts                                        |  |      | 135,836   |   |      |   | 97,083   |  
|Deferred compensation                            |  |      | 22,320    |   |      |   | 24,549   |  
|Charitable contribution carryover                |  |      | 210,115   |   |      |   | 208,281  |  
|State NOL carryforward                           |  |      | 602,953   |   |      |   | 602,546  |  
|Unrealized loss on securities available for sale |  |      | 202,574   |   |      |   | 58,378   |  
|                                                 |  |      |           |   |      |   |          |  
|Gross deferred tax assets                        |  |      | 1,204,042 |   |      |   | 990,837  |  
|                                                 |  |     
|Deferred loan fees                               |  |      |          |   |      |   |         |  
|Depreciation and other                           |  |      | (263,556  | ) |      |   | (285,265 | )
|FHLB stock dividends                             |  |      | (34,959   | ) |      |   | (35,428  | )
|                                                 |  |      |           |   |      |   |          |  
|Gross deferred tax liabilities                   |  |      | (298,515  | ) |      |   | (320,693 | )
|Valuation allowance for deferred tax assets      |  |      | (702,953  | ) |      |   | (602,546 | )
|                                                 |  |      |           |   |      |   |          |  
|Net deferred tax assets (liabilities)            |  | $    | 202,574   |   |      | $ | 67,598   |  
|                                                 |  |      |           |   |      |   |          |  

The difference between the provision (benefit) for income taxes in the financial statements and
amounts computed by applying the current federal income tax rate of 34% to income (loss) before income taxes is reconciled as follows for the year ended June 30:



|                                                            |  |                     |          |   |      |   |          |  
|----------------------------------------------------------- |  | ------------------- | -------- | - | ---- | - | -------- | -
|                                                            |  | Year Ended June 30, |         
|                                                            |  | 2006                |          |   | 2005 |  
|Income tax expense (benefit) computed at the statutory rate |  | $                   | 203,205  |   |      | $ | (359,036 | )
|State income tax, net of federal tax benefit                |  |                     | (407     | ) |      |   | (43,970  | )
|Valuation allowance                                         |  |                     | 100,407  |   |      |   | 43,970   |  
|Tax-exempt interest income on securities                    |  |                     |         |   |      |   | (2,589   | )
|Earnings on life insurance                                  |  |                     | (270,306 | ) |      |   | (12,929  | )
|Tax refunds                                                 |  |                     |         |   |      |   | (34,745  | )
|Other                                                       |  |                     | 11,087   |   |      |   | (2,701   | )
|                                                            |  |                     |          |   |      |   |          |  
|Total provision (benefit) for income taxes                  |  | $                   | 43,986   |   |      | $ | (412,000 | )
|                                                            |  |                     |          |   |      |   |          |  

At June 30, 2006, the Bank had state operating loss carryforwards of $12.6 million expiring
between 2006 and 2017. A valuation allowance has been established for the deferred tax asset related to net operating losses as the Company believes that it is more likely than not that they will not be realized. Also, at June 30, 2006 and
2005, the Company has charitable contribution carryforwards. These contributions have a five year life and are used on a last in, first out basis. In addition, these contributions are subjected to a tax return deduction limitation of 10% of taxable
income on an annual basis. The Company has continually evaluated this carryforward and based on an estimate of future taxable income, during the period when these contributions can be used, the Company has determined that a valuation allowance of
$100,000 is appropriate as of June 30, 2006. There was no valuation allowance for charitable contributions in 2005 as the Company estimated it could fully use the contribution carryforward.



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NOTE 7 - INCOME TAXES (continued)

In addition, at June 30, 2006, the Company has federal net operating loss carryforwards of $89,000 which will not expire for 20 years. A valuation allowance has not been established for the deferred tax asset
related to the net operating losses or other deferred tax assets, as the Company believes that they will be realized.

Prior to 1997, the
Bank had qualified under provisions of the Internal Revenue Code that permit it to deduct from taxable income a provision for bad debts that differs from the provision charged to income on the financial statements. Retained earnings at June 30,
2006 include approximately $1,309,000 for which no deferred federal income tax liability has been recorded. This deferred federal income tax liability approximates $445,000.

NOTE 8 - EMPLOYEE BENEFITS

On January 20, 2005, the Company adopted an employee stock ownership
plan (ESOP) for the benefit of substantially all employees. The ESOP borrowed $2,674,140 from the Company and used those funds to acquire 211,600 shares of the Companys stock in the open market over a period of time at an average
price of approximately $12.64 per share.

Shares purchased by the ESOP with the loan proceeds are held in a suspense account and are
allocated to ESOP participants on a pro rata basis as principal and interest payments are made by the ESOP to the Company. The loan is secured by shares purchased with the loan proceeds and will be repaid by the ESOP with funds from the
Companys discretionary contributions to the ESOP and earnings on the ESOP assets. Annual principal payments of approximately $267,000, plus interest at 7.25%, are to be made by the ESOP.

As shares are released from collateral, the Company will report compensation expense equal to the current market price of the shares and the shares will
become outstanding for earnings-per-share (EPS) computations.

During both 2006 and 2005, 21,160 shares, with an average fair
value of $14.12 and $12.20 per share were committed to be released, resulting in ESOP compensation expense of $299,000 and $258,000, respectively. Contributions to the ESOP for repayment of principal and interest were $441,000 and $331,000 for 2006
and 2005, respectively.



|                                                                |  |               |           |               |   |          
|--------------------------------------------------------------- |  | ------------- | --------- | ------------- | - | ---------
|                                                                |  | June 30, 2006 |           | June 30, 2005
|Allocated shares                                                |  |               | 42,320    |               |   | 21,160   
|Unallocated shares                                              |  |               | 169,280   |               |   | 190,440  
|                                                                |  |               |           |               |   |          
|Total ESOP shares                                               |  |               | 211,600   |               |   | 211,600  
|                                                                |  |               |           |               |   |          
|Fair value of unallocated shares                                |  | $             | 2,471,488 |               | $ | 2,457,000
|                                                                |  |               |           |               |   |          
|Fair value of allocated shares subject to repurchase obligation |  | $             | 617,872   |               | $ | 272,964  
|                                                                |  |               |           |               |   |          

The Company sponsors a defined-contribution plan covering substantially all employees.
Contributions for the profit-sharing plan are determined by the Board of Directors. There were no contributions to the profit-sharing plan during 2006 and 2005

The Bank has a deferred compensation plan for one of its directors which pays her $1,000 per month for life. The present value of this agreement is recorded based on life expectancy rates and a discount rate of 7%. At
June 30, 2006 and 2005, a liability of approximately $66,000 and $72,000 remained and was included in accrued interest payable and other liabilities in the consolidated statements of financial condition.



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NOTE 9 - EMPLOYEE STOCK COMPENSATION

A Recognition and Retention Plan (RRP) provides for issue of shares to directors, officers, and employees. Compensation expense is recognized over the vesting period of the shares based the market value of
the Companys common stock at the issue date. Pursuant to the Royal Financial, Inc. 2005 Management Recognition and Retention Plan, the Company awarded 79,350 shares of restricted stock during 2006. These shares vest over a five-year period.
The unamortized cost of shares not yet earned (vested) is reported as a reduction of shareholders equity. Compensation expense for restricted stock awards totaled approximately $209,000 for the year ended June 30, 2006.

A Stock Option Plan (SOP) provides for issue of options to directors, officers, and employees. The Company adopted the Royal Financial, Inc.
2005 Stock Option Plan during 2006 under the terms of which 264,500 shares of the Companys common stock were reserved for issuance. The options become exercisable in equal installments over a five-year period from the date of grant. The
options expire ten years from the date of grant.

A summary of the activity in the SOP is as follows:



|                                 |  |         |  |                              |      
|-------------------------------- |  | ------- |  | ---------------------------- | -----
|                                 |  | Shares  |  | WeightedAverageExercisePrice
|Outstanding at beginning of year |  |        |  | $                            |     
|Granted                          |  | 198,375 |  |                              | 13.94
|Exercised                        |  |        |  |                              |     
|Forfeited                        |  |        |  |                              |     
|                                 |  |         |  |                              |      
|Outstanding at end of year       |  | 198,375 |  | $                            | 13.94
|                                 |  |         |  |                              |      

There were 13,225 options exercisable at June 30, 2006 at an exercise price of $13.90. The
vesting of these options was accelerated due to the death of the Companys former chief financial officer.

Options outstanding at
year-end 2006 were as follows.



|                        |  |         |  |                                                    |  |                          |     
|----------------------- |  | ------- |  | -------------------------------------------------- |  | ------------------------ | ----
|Exercise Prices         |  | Number  |  | OutstandingWeightedAverageRemainingContractualLife |  | WeightedAverageFairValue
|$13.90                  |  | 185,150 |  | 9.33 years                                         |  | $                        | 4.81
|$14.49                  |  | 13,225  |  | 9.67 years                                         |  |                          | 5.05
|                        |  |         |  |                                                    |  |                          |     
|Outstanding at year end |  | 198,375 |  |                                                    |  |                          |     
|                        |  |         |  |                                                    |  |                          |     



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##### Table of Contents

NOTE 10 - EARNINGS (LOSS) PER SHARE

The following table presents a reconciliation of the components used to compute basic and diluted earnings (loss) per share for 2006 and 2005:



|                                                                                                         |  |      |           |      |   |           |  
|-------------------------------------------------------------------------------------------------------- |  | ---- | --------- | ---- | - | --------- | -
|                                                                                                         |  | 2006 |           | 2005 |  
|Basic and diluted earnings per share                                                                     |  |      |           |      |   |           |  
|Net income (loss) for the year ended June 30, 2006 and the period January 20, 2005 through June 30, 2005 |  | $    | 553,677   |      | $ | (543,306  | )
|Weighted average common shares outstanding                                                               |  |      | 2,432,352 |      |   | 2,479,055 |  
|Basic and diluted earnings (loss) per share                                                              |  | $    | 0.23      |      | $ | (0.22     | )

The effect of stock awards and stock options was not included in the calculation of diluted
earnings per share because to do so would have been anti-dilutive for all shares. Stock award and stock option plans were not in place at June 30, 2005.

NOTE 11 - LOAN COMMITMENTS AND OTHER OFF-BALANCE SHEET ACTIVITY

The Company is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit. These
instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the statement of financial condition.

The Companys exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments.
The Company uses the same credit policies in making commitments and conditional obligations as it does for loans recorded in the statement of financial condition.

At June 30, 2006 and 2005, unused lines of credit were:



|                       |  |            |           |               |   |            |  |              |           |  |   |          
|---------------------- |  | ---------- | --------- | ------------- | - | ---------- |  | ------------ | --------- |  | - | ---------
|                       |  | 2006       |           | 2005         
|                       |  | Fixed Rate |           | Variable Rate |   | Fixed Rate |  | VariableRate
|Unused lines of credit |  | $          | 2,866,000 |               | $ | 10,277,000 |  | $            | 1,617,093 |  | $ | 8,658,546

Fixed rate commitments have rates ranging from 6.00% to 9.23% and 5.25% to 8.25% at June 30,
2006 and 2005. The commitments have terms of up to 90 days. Since many commitments to make loans expire without being used, the amounts above do not necessarily represent future cash commitments. Collateral may be obtained upon exercise of a
commitment. The amount of collateral is determined by management and may include commercial and residential real estate and other business and consumer assets.

At June 30, 2006 and 2005, the Company had standby letters of credit with contract amounts of $147,000 and $262,000. These are considered financial guarantees under FASB Interpretation 45. The fair value of these
guarantees was not considered material.

The Companys primary financial instruments where concentrations of credit risk may exist are
loans. The Companys principal loan customers are located on the southeast side of Chicago and surrounding suburbs. Most loans are secured by specific collateral, including residential and commercial real estate.



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##### Table of Contents

NOTE 12 - REGULATORY MATTERS

The Bank is subject to regulatory capital requirements administered by federal regulatory agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors, and
the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements.

The prompt corrective action regulations provide five classifications including well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If only adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital
distributions are limited, as is asset growth and expansion, and plans of capital restoration are required.

At year end, the Banks
actual capital levels and minimum required levels (dollars in thousands) were as follows:



|                                         |  |        |        |       |                                              |   |        |                                                                                |       |  |      |        |  |       |       |  |       |  
|---------------------------------------- |  | ------ | ------ | ----- | -------------------------------------------- | - | ------ | ------------------------------------------------------------------------------ | ----- |  | ---- | ------ |  | ----- | ----- |  | ----- | -
|                                         |  | Actual |        |       | MinimumRequired for CapitalAdequacy Purposes |   |        | MinimumRequired to Be WellCapitalized UnderPrompt CorrectiveAction
Regulations |      
|                                         |  | Amount |        | Ratio |                                              |   | Amount |                                                                                | Ratio |  |      | Amount |  | Ratio |      
|2006                                     |  |        |        |       |                                              |   |        |                                                                                |       |  |      |        |  |       |       |  |       |  
|Total capital (to risk-weighted assets)  |  | $      | 24,115 |       | 30.04                                        | % |        | $                                                                              | 6,422 |  | 8.00 | %      |  | $     | 8,028 |  | 10.00 | %
|Tier I capital (to risk-weighted assets) |  |        | 23,715 |       | 29.54                                        |   |        |                                                                                | 3,211 |  | 4.00 |        |  |       | 4,817 |  | 6.00  |  
|Tier I capital (to average assets)       |  |        | 23,715 |       | 21.22                                        |   |        |                                                                                | 4,471 |  | 4.00 |        |  |       | 5,589 |  | 5.00  |  
|2005                                     |  |        |        |       |                                              |   |        |                                                                                |       |  |      |        |  |       |       |  |       |  
|Total capital (to risk-weighted assets)  |  | $      | 22,712 |       | 35.79                                        | % |        | $                                                                              | 5,076 |  | 8.00 | %      |  | $     | 6,346 |  | 10.00 | %
|Tier I capital (to risk-weighted assets) |  |        | 22,426 |       | 35.34                                        |   |        |                                                                                | 2,538 |  | 4.00 |        |  |       | 3,807 |  | 6.00  |  
|Tier I capital (to average assets)       |  |        | 22,426 |       | 19.54                                        |   |        |                                                                                | 4,592 |  | 4.00 |        |  |       | 5,740 |  | 5.00  |  

The Bank was categorized by its regulators as well capitalized at June 30, 2006 and 2005.
Management is not aware of any conditions or events since the most recent notification that would change the Banks category at June 30, 2006.



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##### Table of Contents

NOTE 13 - OTHER COMPREHENSIVE INCOME (LOSS)

Other comprehensive income (loss) components were as follows:



|                                                                              |  |      |          |   |      |   |        
|----------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------
|                                                                              |  | 2006 |          |   | 2005
|Unrealized holding gains (losses) on securities available for sale            |  | $    | (469,562 | ) |      | $ | 327,334
|Less reclassification adjustments for net gains (losses) recognized in income |  |      | (45,457  | ) |      |   | 175,532
|                                                                              |  |      |          |   |      |   |        
|Net unrealized gains (losses)                                                 |  |      | (424,105 | ) |      |   | 151,802
|Tax expense (benefit)                                                         |  |      | (144,196 | ) |      |   | 51,613 
|                                                                              |  |      |          |   |      |   |        
|Other comprehensive income (loss)                                             |  | $    | (279,909 | ) |      | $ | 100,189
|                                                                              |  |      |          |   |      |   |        

NOTE 14 - RELATED-PARTY TRANSACTIONS

Loans to principal officers, directors, and their affiliates during the fiscal year ended June 30, 2006 were as follows:



|                  |  |   |          |  
|----------------- |  | - | -------- | -
|Beginning balance |  | $ | 214,031  |  
|New loans         |  |   | 91,608   |  
|Repayments        |  |   | (213,566 | )
|                  |  |   |          |  
|Ending balance    |  | $ | 92,073   |  
|                  |  |   |          |  

Deposits from principal officers, directors, and their affiliates at year-end 2006 and 2005 were
$1,212,000 and $1,074,000.

NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS

Carrying amount and estimated fair values of financial instruments were as follows at year end (in thousands):



|                                                |  |                |         |   |           |   |         |                |  |   |           |   |  |   |         |  
|----------------------------------------------- |  | -------------- | ------- | - | --------- | - | ------- | -------------- |  | - | --------- | - |  | - | ------- | -
|                                                |  | 2006           |         |   | 2005      |  
|                                                |  | CarryingAmount |         |   | FairValue |   |         | CarryingAmount |  |   | FairValue |  
|Financial assets                                |  |                |         |   |           |   |         |                |  |   |           |   |  |   |         |  
|Cash and cash equivalent                        |  | $              | 4,348   |   |           | $ | 4,348   |                |  | $ | 17,022    |   |  | $ | 17,022  |  
|Securities available for sale                   |  |                | 21,518  |   |           |   | 21,518  |                |  |   | 33,242    |   |  |   | 33,242  |  
|Loans, net                                      |  |                | 77,326  |   |           |   | 77,547  |                |  |   | 52,326    |   |  |   | 53,170  |  
|FHLB stock                                      |  |                | 346     |   |           |   | 346     |                |  |   | 370       |   |  |   | 370     |  
|Accrued interest receivable                     |  |                | 447     |   |           |   | 447     |                |  |   | 307       |   |  |   | 307     |  
|Financial liabilities                           |  |                |         |   |           |   |         |                |  |   |           |   |  |   |         |  
|Deposits                                        |  | $              | (78,898 | ) |           | $ | (80,377 | )              |  | $ | (78,107   | ) |  | $ | (78,064 | )
|Federal Funds purchased                         |  |                | (1,225  | ) |           |   | (1,225  | )              |  |   |          |   |  |   |        |  
|Advances from borrowers for taxes and insurance |  |                | (480    | ) |           |   | (480    | )              |  |   | (377      | ) |  |   | (377    | )
|Accrued interest payable                        |  |                | (82     | ) |           |   | (82     | )              |  |   | (43       | ) |  |   | (43     | )

The methods and assumptions used to estimate fair value are described as follows.



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##### Table of Contents

NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS (continued)

Carrying amount is the estimated fair value for cash and cash equivalents, interest-bearing deposits, FHLB stock, accrued interest receivable and payable,
advances from borrowers for taxes and insurance, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully. Security fair values are based on market prices or dealer quotes and, if no such information is
available, on the rate and term of the security and information about the issuer. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows
using current market rates applied to the estimated life and credit risk. Fair value of debt is based on current rates for similar financing. The fair value of off-balance-sheet items is not material.

NOTE 16 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION

Condensed financial information of Royal Financial, Inc. follows:

CONDENSED BALANCE SHEETS



|                                                                 |  |               |            |               |   |           
|---------------------------------------------------------------- |  | ------------- | ---------- | ------------- | - | ----------
|                                                                 |  | June 30, 2006 |            | June 30, 2005
|ASSETS                                                           |  |               |            |               |   |           
|Cash and cash equivalents                                        |  | $             | 7,774,673  |               | $ | 9,601,337 
|Investment in bank subsidiary                                    |  |               | 23,321,618 |               |   | 22,313,228
|ESOP loan                                                        |  |               | 2,139,312  |               |   | 2,406,726 
|Other assets                                                     |  |               | 183,673    |               |   | 218,000   
|                                                                 |  |               |            |               |   |           
|Total assets                                                     |  | $             | 33,419,276 |               | $ | 34,359,291
|                                                                 |  |               |            |               |   |           
|LIABILITIES AND STOCKHOLDERS EQUITY                             |  |               |            |               |   |           
|Other Liabilities                                                |  | $             | 46,021     |               |   |          
|Common stock in ESOP subject to contingent repurchase obligation |  |               | 617,872    |               |   | 272,964   
|Stockholders equity                                             |  |               | 32,755,383 |               |   | 34,266,327
|                                                                 |  |               |            |               |   |           
|Total liabilities and stockholders equity                       |  | $             | 33,419,276 |               | $ | 34,539,291
|                                                                 |  |               |            |               |   |           

CONDENSED STATEMENT OF INCOME



|                                                                 |  |                          |          |   |                                                   |   |          |  
|---------------------------------------------------------------- |  | ------------------------ | -------- | - | ------------------------------------------------- | - | -------- | -
|                                                                 |  | Year Ended June 30, 2006 |          |   | Period from January 20, 2005 throughJune 30, 2006 |  
|Income                                                           |  |                          |          |   |                                                   |   |          |  
|Interest on ESOP loan                                            |  | $                        | 174,488  |   |                                                   | $ | 63,476   |  
|Expense                                                          |  |                          |          |   |                                                   |   |          |  
|Charitable foundation donation                                   |  |                          |         |   |                                                   |   | 600,000  |  
|Other expense                                                    |  |                          | 366,978  |   |                                                   |   | 105,545  |  
|                                                                 |  |                          |          |   |                                                   |   |          |  
|Loss before income tax benefit and undistributed subsidiary loss |  |                          | (192,490 | ) |                                                   |   | (642,069 | )
|Income tax (expense) benefit                                     |  |                          | (34,327  | ) |                                                   |   | 218,000  |  
|Equity in undistributed subsidiary income (loss)                 |  |                          | 780,494  |   |                                                   |   | (119,237 | )
|                                                                 |  |                          |          |   |                                                   |   |          |  
|Net income (loss)                                                |  | $                        | 553,677  |   |                                                   | $ | (543,306 | )
|                                                                 |  |                          |          |   |                                                   |   |          |  



F-22



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##### Table of Contents

NOTE 16 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION

CONDENSED STATEMENT OF CASH FLOWS



|                                                 |  |                          |            |   |                                                   |   |             |  
|------------------------------------------------ |  | ------------------------ | ---------- | - | ------------------------------------------------- | - | ----------- | -
|                                                 |  | Year Ended June 30, 2006 |            |   | Period from January 20, 2005 throughJune 30, 2006 |  
|Cash flows from operating activities             |  |                          |            |   |                                                   |   |             |  
|Net income (loss)                                |  | $                        | 553,677    |   |                                                   | $ | (543,306    | )
|Adjustments:                                     |  |                          |            |   |                                                   |   |             |  
|Equity in undistributed subsidiary income (loss) |  |                          | (780,494   | ) |                                                   |   | 119,237     |  
|Charitable foundation donation                   |  |                          |           |   |                                                   |   | 500,000     |  
|Change in other assets                           |  |                          | 34,327     |   |                                                   |   | (218,000    | )
|Change in other liabilities                      |  |                          | 46,021     |   |                                                   |   |            |  
|                                                 |  |                          |            |   |                                                   |   |             |  
|Net cash from operating activities               |  |                          | (146,469   | ) |                                                   |   | (142,069    | )
|                                                 |  |                         
|Cash flows from investing activities             |  |                          |            |   |                                                   |   |             |  
|Initial investment in bank subsidiary            |  |                          |           |   |                                                   |   | (12,150,133 | )
|ESOP loan origination                            |  |                          |           |   |                                                   |   | (2,674,140  | )
|Repayment of ESOP loan                           |  |                          | 267,414    |   |                                                   |   | 267,414     |  
|                                                 |  |                          |            |   |                                                   |   |             |  
|Net cash from investing activities               |  |                          | 267,414    |   |                                                   |   | (14,556,859 | )
|                                                 |  |                         
|Cash flows from financing activities             |  |                          |            |   |                                                   |   |             |  
|Issuance of common stock, net of offering costs  |  |                          |           |   |                                                   |   | 24,300,265  |  
|Purchase of Treasury stock                       |  |                          | (1,947,609 | ) |                                                   |   |            |  
|                                                 |  |                          |            |   |                                                   |   |             |  
|Net cash from financing activities               |  |                          | (1,947,609 | ) |                                                   |   | 24,300,265  |  
|                                                 |  |                          |            |   |                                                   |   |             |  
|Net change in cash and cash equivalents          |  |                          | (1,826,664 | ) |                                                   |   | 9,601,337   |  
|Beginning cash and cash equivalents              |  |                          | 9,601,337  |   |                                                   |   |            |  
|                                                 |  |                          |            |   |                                                   |   |             |  
|Ending cash and cash equivalents                 |  | $                        | 7,774,673  |   |                                                   | $ | 9,601,337   |  
|                                                 |  |                          |            |   |                                                   |   |             |  



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##### Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 27th day of September, 2006.



ROYAL FINANCIAL, INC.By:

/s/ Donald A. MollDonald A. MollPresident and Chief Executive Officer


KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby
constitutes and appoints Alan W. Bird and Donald A. Moll, and each of them, the true and lawful attorney-in-fact and agents of the undersigned, with full power of substitution and resubstitution, for and in the name, place and stead of the
undersigned, to sign any and all amendments to this Annual Report on Form 10-KSB, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, and hereby grants to such
attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully as to all intents and purposes as each of the undersigned might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1933, this report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.



|                        |  |                                                                      |  |                   
|----------------------- |  | -------------------------------------------------------------------- |  | ------------------
|Name                    |  | Title                                                                |  | Date              
|/s/ Alan W. Bird        |  | Chairman of the Board                                                |  | September 27, 2006
|Alan W. Bird            |  |                                                                      |  |                   
|                        |  |                                                                     
|/s/ Donald A. Moll      |  | President, Chief Executive Officer, and                              |  | September 27, 2006
|Donald A. Moll          |  | Director (principal executive officer)                               |  |                   
|                        |  |                                                                     
|/s/ Leonard Szwajkowski |  | Senior Vice President, Treasurer, and                                |  | September 27, 2006
|Leonard Szwajkowski     |  | Chief Financial Officer (principal financial and accounting officer) |  |                   
|                        |  |                                                                     
|/s/ John T. Dempsey     |  | Director                                                             |  | September 27, 2006
|John T. Dempsey         |  |                                                                      |  |                   
|                        |  |                                                                     
|/s/ Barbara K. Minster  |  | Director                                                             |  | September 27, 2006
|Barbara K. Minster      |  |                                                                      |  |                   
|                        |  |                                                                     
|/s/ Peter C. Rolewicz   |  | Director                                                             |  | September 27, 2006
|Peter C. Rolewicz       |  |                                                                      |  |                   
|                        |  |                                                                     
|/s/ Rodolfo Serna       |  | Director                                                             |  | September 27, 2006
|Rodolfo Serna           |  |                                                                      |  |                   



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##### Table of Contents

EXHIBIT INDEX



|            |  |                                                                                                                                                                                                                                                          
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                                                                                                                                   
|3.1         |  | Certificate of Incorporation of Royal Financial, Inc. (filed as an exhibit to the Companys Registration Statement on Form SB-2 (File No. 333-119138) and incorporated herein by
reference).                                                             
|            | 
|3.2         |  | Bylaws of Royal Financial, Inc. (filed as an exhibit to the Companys Registration Statement on Form SB-2 (File No. 333-119138) and incorporated herein by
reference).                                                                                   
|            | 
|10.1        |  | Employee Stock Ownership Plan (filed as an exhibit to the Companys Registration Statement on Form SB-2 (File No. 333-119138) and incorporated herein by
reference).*                                                                                    
|            | 
|10.2        |  | Employment Agreement by and between Royal Financial, Inc., Royal Savings Bank and Donald A. Moll (filed as an exhibit to the Companys Annual Report on Form 10-KSB for the fiscal year
ended June 30, 2005 and incorporated herein by reference).*      
|            | 
|10.3        |  | Employment Agreement by and between Royal Financial, Inc., Royal Savings Bank and Alan W. Bird (filed as an exhibit to the Companys Annual Report on Form 10-KSB for the fiscal year
ended June 30, 2005 and incorporated herein by reference).*        
|            | 
|10.4        |  | Employment Agreement by and between Royal Financial, Inc., Royal Savings Bank, and Leonard Szwajkowski (filed as an exhibit to the Companys Quarterly Report on Form 10-QSB for the
quarter ended March 31, 2006 and incorporated herein by reference).*
|            | 
|10.5        |  | Royal Financial, Inc. 2005 Stock Option Plan (filed as Appendix B to the Companys proxy statement in connection with its 2005 Annual Stockholders Meeting and incorporated herein by
reference).*                                                       
|            | 
|10.6        |  | Royal Financial, Inc. 2005 Recognition and Retention Plan (filed as Appendix C to the Companys proxy statement in connection with its 2005 Annual Stockholders Meeting and incorporated
herein by reference).*                                          
|            | 
|21.1        |  | List of Subsidiaries (filed as an exhibit to the Companys Registration Statement on Form SB-2 (File No. 333-119138) and incorporated herein by reference).                                                                                              
|            | 
|24.1        |  | Powers of Attorney (included on signature page)                                                                                                                                                                                                          
|            | 
|31.1        |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                      
|            | 
|31.2        |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                      
|            | 
|32.1        |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                          

---

|* | Indicates management contract or compensatory plan or arrangement required to be filed as an exhibit.
|- | -----------------------------------------------------------------------------------------------------