SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C.  20549
 __________
  FORM
10-KSB
  ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)
 OF
THE SECURITIES EXCHANGE ACT OF 1934
  For
the fiscal year ended June 30, 2008
  Commission
File Number 000-51123
  ROYAL
FINANCIAL, INC.
 (Exact
name of small business issuer as specified in its charter)
  Delaware
                (State
      or other jurisdiction of incorporation or organization)
              20-1636029
                (IRS
      Employer Identification No.)
 
 9226
S. Commercial Avenue
 Chicago,
Illinois 60617
 (Address
of principal executive offices)
  (773) 768-4800
 (Issuer’s
telephone number)
  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
  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 ý 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.  ý
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes  ̈   No
ý
  The
registrant’s revenues for its most recent fiscal year were
$7,764,170.
  As of
September 25, 2008, the aggregate market value of the voting common equity
held by non-affiliates of the registrant was approximately $17,643,973 (based on
the last sale price of the common stock on the OTC Bulletin Board of $7.70 per
share).
  The
number of shares of Common Stock of the registrant outstanding as of September
25, 2008 was 2,556,490.
  Documents Incorporated by
Reference:  Portions of the registrant’s definitive proxy
statement for its 2008 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 ý
   
  ROYAL
FINANCIAL, INC.
  Form
10-KSB for Fiscal Year Ended
  June 30,
2008
  TABLE OF CONTENTS
  Page
  PART I
              
              
              1Item 1.
              Description of Business
              1Item 2.
              Description of Property
              23Item 3.
              Legal Proceedings
              23Item 4.
              Submission of Matters to a Vote of Security
      Holders
              23PART II
              
              
              24Item 5.
              Market for Common Equity, Related Stockholder Matters and
      Small Business Issuer Purchases of Equity Securities
              24Item 6.
              Management’s Discussion and Analysis or Plan of
      Operation
              25Item 7.
              Financial Statements
              37Item 8.
              Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure
              37Item 8A.
              Controls and Procedures
              37Item 8B.
              Other Information
              38PART III
              
              
              39Item 9.
              Directors, Executive Officers, Promoters, Control Persons
      and Corporate Governance; Compliance with Section 16(a) of the
      Exchange Act
              39Item 10.
              Executive Compensation
              39Item 11.
              Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
              39Item 12.
              Certain Relationships and Related Transactions, and
      Director Independence
              40Item 13.
              Exhibits
              40Item 14.
              Principal Accountant Fees and Services
              40INDEX TO FINANCIAL
      STATEMENTS
              F-1SIGNATURES
              S-1EXHIBIT INDEX
   i
 
 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 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 three branch offices located in Chicago and
Frankfort, Illinois and Schererville, Indiana. On June 30, 2008, the Bank closed
its Lansing, Illinois branch location.
  The
Bank’s business consists of attracting deposits from the general public and
using those funds to originate one- to four-family residential loans, commercial
real estate loans, multi-family real estate loans, consumer loans, and to a
lesser extent, commercial loans and leases.
  Overview of
Fiscal 2008
  In an effort to minimize
operating expenses, management completed a performance analysis of the entire
branch network during fiscal year 2008.  The Bank serves a niche
market segment that values relationships over convenience.  A customer
mapping and traffic pattern analysis revealed the densely populated areas where
the Bank's Lansing customers reside are just as readily served by our other
existing branches.  As a result of the analysis, the inefficiencies
and lack of growth opportunities relating to the Lansing branch became
evident.  Management requested and received approval from federal and
state regulators to close the branch on June 30, 2008.  The cost to
the Company was approximately $149,000 in one time costs for early termination
of the lease and the write-off of assets not yet fully
depreciated.  Because of a negotiated agreement with the landlord, all
one-time closure costs were expensed in fiscal year 2008 and we expect no
further expenses for Lansing in fiscal year 2009.  With this closing,
we have eliminated some of our excess branch capacity, which we believe will
make the Company more efficient .
  The
Company also focused on overall non-interest expense reduction exploring all
avenues including reductions in staff and benefits, professional, occupancy,
contractual and marketing expenses.
  As
previously disclosed, at the end of the Company’s 2007 fiscal year, we
identified certain concerns about the bank’s internal controls as well as
certain irregularities concerning the Company’s conversion and initial public
offering conducted in 2005.  An investigation into these matters by
the Audit Committee of the Company’s Board of Directors was partially concluded
in late September 2007, and our previous CEO and President, Donald A. Moll,
resigned effective October 3, 2007.  As a result of the
investigation, which concluded in January 2008, the Company did not uncover
credible evidence of fraud or illegal acts in the connection with the conversion
or the IPO.  However, the investigation identified two instances in
which certain investors who purchased shares in the offering were later
determined to not be eligible to do so.  As a result, the Company
repurchased 5,200 shares of stock from these certain investors at the initial
public offering price of $10 per share in January, 2008.  For the
fiscal year ended June 30, 2008, the Company incurred costs of $540,483 related
to the investigation, which are included in non-interest
expense.
   1
 Table of Contents
 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.
  Highlights
of our business strategy are as follows:
  ·
                  Personal
      Relationships.  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.  Our approach is to continue to develop these valued
      relationships with our
customers.
 ·
              Diversification of Loan
      Portfolio.  At June 30, 2008, our $90.8 million, net
      loan portfolio consisted primarily of $36.4 million of one- to
      four-family residential loans, $43.3 million of commercial real
      estate loans, $8.7 million of commercial loans, $3.7 million of
      multi-family loans and $710,000 of consumer
  loans.
  ·
              Offering New Commercial
      Products and Services.  We continue to develop loan
      products and services to address the needs of customers.  By
      continuing to add products and services we expect to diversify our fee
      income and strengthen our
relationships.
  ·
              Strong Capital
      Position.  Based on our strong capital position we have
      the ability to follow the Company’s strategic plan, mapped by the Board of
      Directors which includes the origination of loans, primarily within the
      community, and maintaining the quality of the Company’s
      assets.
  ·
              Response to Market
      Decline.Some of the real estate markets in which we
      lend have experienced significant declines in sales volume and decreased
      property valuations over the past year.   Due to this
      decline, the Company’s level of nonperforming assets has
      increased.  We continue to monitor our loan portfolio and work
      with our borrowers to minimize the impact of the decline in the economy
      generally, and the real estate market
      specifically.  Additionally, the Company has strengthened its
      underwriting standards for loans, increased equity levels required from
      borrowers, and tightened loan covenant
  requirements.
  ·
              Maintaining High Levels of
      Interest Earning Assets.  Our average earning assets were
      approximately 88.4% of average assets at June 30, 2008. While the
      current economic downturn and difficulties it presents is unpleasant, the
      Company continues to monitor its non-performing assets
      closely.
  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, Will 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.  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 Frankfort office is located in south suburban Chicago, which consists
  2
 Table of Contents
    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 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.
  Competition
for loans comes principally from other 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 has increased 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, 2008, our net loan portfolio totaled $90.8 million,
representing approximately 78.2% 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.  The Bank continues 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
area,
  ·
              originate
      one- to four-family residential
loans,
  ·
              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, 2008, one- to four-family residential loans amounted to
$36.4 million, or 39.2% of the total loan portfolio.  At
June 30, 2008, commercial real estate loans and multi-family loans amounted
to $43.3 million and $3.7 million, or 46.7% and 4.0% of the total loan
portfolio, respectively.  At June 30, 2008, commercial and
consumer loans amounted to $8.7 million and $710,000 or 9.4% and 0.8%,
respectively of the total loan portfolio, before net items.
  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 the Bank’s
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, 2008, the Bank’s regulatory limit on loans
to one borrower was $6.3 million and its five largest loans or groups of loans
to one borrower, including related entities, aggregated $5.3 million, $3.0
million, $2.9 million, $2.6 million and $2.2 million.  Each of
the Bank’s five largest loans or groups of loans was performing in accordance
with its terms at June 30, 2008.
   3
 Table of Contents
  Loan Portfolio
Composition.  The following table sets forth the composition of
the loan portfolio by type of loan at the dates indicated.
  June 30,2008
                
                
                2007
                
                
                2006Amount
                
                
                Percentage
                
                
                Amount
                
                
                Percentage
                
                
                Amount
                
                
                PercentageReal
      estate loans:
                
                (Dollars
      in thousands)One-
      to four-family loans
                
                $
                36,363
                
                
                
                39.17
                %
                
                $
                36,757
                
                
                
                43.67
                %
                
                $
                31,646
                
                
                
                40.73
                %Commercial
      real estate loans
                
                
                43,337
                
                
                
                46.68
                
                
                
                32,880
                
                
                
                39.06
                
                
                
                30,025
                
                
                
                38.65Multi-family
      loans
                
                
                3,689
                
                
                
                3.97
                
                
                
                4,768
                
                
                
                5.67
                
                
                
                5,287
                
                
                
                6.81Total
      real estate loans
                
                
                83,389
                
                
                
                89.82
                
                
                
                74,405
                
                
                
                88.40
                
                
                
                66,958
                
                
                
                86.19Commercial
      loans
                
                
                8,739
                
                
                
                9.41
                
                
                
                9,237
                
                
                
                10.97
                
                
                
                10,174
                
                
                
                13.10Consumer
      loans:Home
      Equity loans
                
                
                591
                
                
                
                0.64
                
                
                
                343
                
                
                
                0.41
                
                
                
                363
                
                
                
                0.47Share
      loans
                
                
                119
                
                
                
                0.13
                
                
                
                187
                
                
                
                0.22
                
                
                
                192
                
                
                
                0.24Total
      consumer loans
                
                
                710
                
                
                ­ 0.77
                
                
                
                530
                
                
                
                0.63
                
                
                
                555
                
                
                
                0.71Total
      Loans
                
                $
                92,838
                
                
                
                100.00
                %
                
                $
                84,172
                
                
                
                100.00
                %
                
                $
                77,687
                
                
                
                100.00
                %Less:Deferred
      loan fees and costs, net
                
                
                3
                
                
                
                
                
                
                
                6
                
                
                
                
                
                
                
                (39
                )Allowance
      for loan losses
                
                
                2,060
                
                
                
                
                
                
                
                667
                
                
                
                
                
                
                
                400Loans
      receivable, net
                
                $
                90,775
                
                
                
                
                
                
                $
                83,499
                
                
                
                
                
                
                $
                77,326
  Loan
Concentrations:The following table sets forth the
concentrations of the loan portfolio by state as of June 30, 2008.
 
 Illinois
              
              
              71.16
              %Indiana
              
              
              16.02Michigan
              
              
              3.72Florida
              
              
              3.23Wisconsin
              
              
              1.84Other
      states combined
              
              
              4.03Total
              
              
              100.00
              %
 
 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 the Senior Vice
President-Loans and President/CEO to approve extensions of credit with
individual authority up to $500,000 and aggregate authority up to $1.0 million.
The Loan Committee, consisting of two outside directors, the Senior Vice
President-Loans and the President/CEO is authorized as a committee
to
   4
 Table of Contents
  approve
aggregate extensions of credit up to $2.5 million.  Any aggregate
extension of credit over $2.5 million requires approval of the entire Board
of Directors.
  Maturity of Loan
Portfolio.  The following table presents certain information at
June 30, 2008 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.
  At
      June 30, 2008One-
      to Four-Family
              
              
              Commercial
      Real Estate
              
              
              Multi-family
              
              
              Commercial
              
              
              Consumer
              
              
              Total
      Loans(In
      thousands)Amounts
      Due In:One
      year or less
              
              $
              4,672
              
              
              $
              13,871
              
              
              $
              342
              
              
              $
              3,022
              
              
              $
              27
              
              
              $
              21,934More
      than one year to five years
              
              
              13,590
              
              
              
              22,949
              
              
              
              2,076
              
              
              
              5,548
              
              
              
              318
              
              
              
              44,481More
      than five years
              
              
              18,101
              
              
              
              6,517
              
              
              
              1,271
              
              
              
              169
              
              
              
              365
              
              
              
              26,423Total
      amount due
              
              $
              36,363
              
              
              $
              43,337
              
              
              $
              3,689
              
              
              $
              8,739
              
              
              $
              710
              
              
              $
              92,838
 
 The
following table sets forth the dollar amount of all loans, before net items, due
after June 30, 2009, that have fixed interest rates or that have floating
or adjustable interest rates.
  Fixed-Rates
              
              
              Floating
      or Adjustable-Rates
              
              
              Total(In
      thousands)Real
      estate loans:One-
      to four-family loans
              
              $
              31,355
              
              
              $
              336
              
              
              $
              31,691Commercial
      real estate loans
              
              
              21,935
              
              
              
              7,531
              
              
              
              29,466Multi-family
      loans
              
              
              2,560
              
              
              
              787
              
              
              
              3,347Commercial
      loans
              
              
              5,464
              
              
              
              253
              
              
              
              5,717Consumer
      loans:Home
      Equity loans
              
              
              591
              
              
              
              —
              
              
              
              591Share
      loans
              
              
              1
              
              
              
              91
              
              
              
              92Total
      loans
              
              $
              61,906
              
              
              $
              8,998
              
              
              $
              70,904
 
 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, 2008, $36.4 million, or 39.2%, of the
total loan portfolio, before net items, 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
   5
 Table of Contents
  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, 2008, $33.8 million, or 92.8%, of the
Bank’s one- to four-family residential mortgage loans were fixed rate
loans.
  The
following table shows total loans originated, sold, purchased and repaid during
the periods indicated.
  Year
      Ended June 30,2008
              
              
              2007
              
              
              2006(In
      thousands)Loan
      Originations:Real
      estate loans:One-
      to four-family loans
              
              $
              4,171
              
              
              $
              12,696
              
              
              $
              11,079Commercial
      real estate loans
              
              
              8,570
              
              
              
              14,538
              
              
              
              10,485Multi-family
      loans
              
              
              1,950
              
              
              
              1,571
              
              
              
              953Commercial
      loans
              
              
              3,631
              
              
              
              13,320
              
              
              
              2,211Consumer
      loans:Home
      Equity loans
              
              
              294
              
              
              
              89
              
              
              
              286Share
      loans
              
              
              112
              
              
              
              119
              
              
              
              32Total
      Loan Originations
              
              
              18,728
              
              
              
              42,333
              
              
              
              25,046Participations
      Purchased(1)
              
              
              4,038
              
              
              
              1,847
              
              
              
              18,915Loan
      Principal Reductions
              
              
              (14,100
              )
              
              
              (37,718
              )
              
              
              (18,885
              )Increase
      (decrease) due to other items, net(2)
              
              
              (1,390
              )
              
              
              (289
              )
              
              
              (76
              )Net
      increase (decrease) in loan portfolio
              
              $
              7,276
              
              
              $
              6,173
              
              
              $
              25,000
 _____________
 (1)
              Participations
      purchased consist of commercial real estate
  loans.
 (2)
              Other
      items consist of loans in process, deferred fees, unearned interest and
      allowance for loan losses.
  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, 2008,
the Bank had $3.7 million in multi-family residential mortgage loans which
amounted to 4.0% 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 and one former Chicago area community bank now
located in Florida.  Some of the collateral securing such loans is
outside the Chicago MSA, but is still in the Midwest.  Commercial real
estate loans amounted to $43.3 million or 46.7% of the total loan portfolio
at June 30, 2008.  Participation interest in commercial real
estate loans purchased amounted to $9.4 million, or 21.6% of the commercial real
estate portfolio at June 30, 2008.  Before purchasing such loans,
the Bank utilizes the same underwriting standards and criteria as it would if it
originated the loans.
   6
 Table of Contents
  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 25 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.
  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 using
lower loan-to-value ratios in the underwriting process.
  Commercial
Loans.  At June 30, 2008, commercial loans amounted to
$8.7 million, or 9.4% 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 normally obtains personal guarantees
from the principals of the borrower with respect to all commercial
loans.  In addition, the Bank may extend loans for commercial business
purposes, which are secured by a mortgage on the proprietor’s home or the
business property.
  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, 2008, $710,000, or 0.8% 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. At June 30, 2008, home
equity loans amounted to $591,000, or 0.6% 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. Loans secured by deposit accounts in the Bank amounted to $119,000,
or 0.1% of the total loan portfolio at June 30, 2008.  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 3%.  These loans mature on or before the
maturity date of the underlying savings account and have five 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 cases, deficiencies are cured
promptly.  While the Bank generally prefers to work with borrowers
to
   7
 Table of Contents
  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. The Company
has enhanced its asset review by increased monitoring of credits by the
Board of Directors, loan committee, management and the addition of a full-time
credit analyst.  In addition, management continues to stratify the
portfolio to better understand and address any risk that may be inherent in the
portfolio.
  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,
2008.
  Delinquent
Loans.  At June 30, 2008 there were 10 loans totaling $2.4
million which were 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 30,2008
              
              
              2007
              
              
              2006(Dollars
      in thousands)Nonaccruing
      Loans:Real
      estate loans:One-
      to four-family loans
              
              $
              1,358
              
              
              $
              —
              
              
              $
              —Commercial
      real estate loans
              
              
              2,873
              
              
              
              —
              
              
              
              —Multi-family
      loans
              
              
              —
              
              
              
              —
              
              
              
              —Commercial
      loans
              
              
              1,034
              
              
              
              —
              
              
              
              —Consumer
      loans:Home
      Equity loans
              
              
              —
              
              
              
              —
              
              
              
              —Share
      loans
              
              
              —
              
              
              
              —
              
              
              
              —Total
      nonaccruing loans
              
              
              5,265
              
              
              
              —
              
              
              
              —Impaired
      loans, including nonaccruing loans
              
              
              5,265
              
              
              
              709
              
              
              
              —Real
      estate owned(1)
              
              
              —
              
              
              
              —
              
              
              
              —Total
      nonperforming assets(2)
              
              
              5,265
              
              
              
              709
              
              
              
              —Troubled
      debt restructurings
              
              
              —
              
              
              
              —
              
              
              
              —Troubled
      debt restructurings and total nonperforming assets
              
              $
              5,265
              
              
              $
              709
              
              
              $
              —Loans
      past due over 90 days still on accrual
              
              $
              —
              
              
              $
              226
              
              
              $
              —Total
      nonperforming loans(3)  and troubled debt restructurings as a percentage of
      total loans
              
              
              5.67
              %
              
              
              0.85
              %
              
              
              0.00
              %Total
      nonperforming assets and troubled debt restructurings as a percentage of
      total assets
              
              
              4.53
              %
              
              
              0.53
              %
              
              
              0.00
              %
 _____________
 (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.
 (3)
              Nonperforming
      loans consist of nonaccruing loans and impaired
  loans.
  Non-accrual loans for the year ended June 30, 2008 were $5.3
million; there were no non-accrual loans for the years ended June 30, 2007 and
2006, respectively. Foregone
interest on non-accrual loans was approximately $182,000 for the year ended June
30, 2008.
  8
 Table of Contents
 The bank
had eleven relationships that it considers to be impaired as of June 30,
2008, and two relationships as of June 30, 2007.  As previously
disclosed, at March 31, 2008, there were ten loan relationships
impaired.
  The
balance of the impaired loans at June 30, 2008 and June 30, 2007 is
$5.3 million and $709,000, respectively.  At March 31, 2008, the
balance of impaired loans was $5.1 million.
  The
specific reserve for impaired loans as of June 30, 2008 and June 30,
2007, was $1.3 million and $120,000, respectively.  At March 31,
2008, the specific reserve for total impaired loans was $1.2
million.  The Bank charged off $120,000 against a loan balance of
$244,000 at March 31, 2008 for a previously disclosed impaired
loan.
  The
increase in total impaired loans between June 30, 2008 and June 30,
2007 resulted in an additional provision for loan losses of $1.4 million for the
year ended June 30, 2008.
  Five of
the eleven relationships are separate commercial real estate participations in
Florida that have been impacted by current economic and housing conditions in
that market.  These credits total $2.5 million with a specific reserve
of $265,000.  Four of these five Florida credits are secured by ocean
front properties and the remaining credit is a participation with a former
Chicago area bank to a residential builder involving a new six unit townhouse
development in Ft. Lauderdale, Florida.  This credit had an
approximate balance of $729,000 at June 30, 2008 with a specific reserve of
$141,000.  These five participation relationships and one owner
occupied residential home with a balance of $394,000 on June 30, 2008
represent the Company’s total loan concentration to borrowers in or with respect
to property located in the state of Florida.  The residential home
loan is for a long term customer of the bank and is paying as
agreed.
  The
remaining six impaired relationships involve a 1-4 family residential loan
relationship, a non-owner occupied commercial real estate loan, two construction
and development loans, and two commercial and industrial
loans.  During the fourth quarter, the two largest of these loans, one
to a residential builder and one commercial and industrial loan, were classified
as impaired and resulted in specific reserves of $882,000.  The
following is a discussion of these two loans:
 ·
                    As
      previously disclosed, on March 31, 2008 the bank released a portion
      of the residential real estate collateral for one of these loans in
      exchange for a $576,000 principal reduction to reduce the overall exposure
      to this credit given the weakening housing market.  On
      August 20, 2008, the Bank agreed to and received a principal
      reduction in the amount of $501,000 on this construction and development
      loan which was classified as impaired at June 30,
      2008.  This principal reduction was obtained from the borrower’s
      sale of a single family home which was part of the collateral securing the
      loan relationship.  The bank continues to work with this
      particular loan customer on collecting the remaining impaired
      balance.
  ·
                    In
      addition, the second loan management identified was a commercial and
      industrial loan secured by receivables.  The balance of the loan
      at March 31, 2008 was approximately $650,000.  At
      June 30, 2008, the loan balance was approximately $590,000 as a
      result of principal payment that reduced the amount outstanding of the
      loan.  The specific reserve on this loan has been reduced from
      $470,000 as of March 31, 2008 to $442,000 at June 30,
      2008.
  9
 Table of Contents
 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 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 may, based on collateral sufficiency,
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.
  Allowance for Loan
Losses.  At June 30, 2008, the allowance for loan losses
was $2.1 million, or 2.3% 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
compares this ratio to peer group data and the FDIC state profile for Illinois
banks as a means of additional analysis.  Based on these factors, we
determined that the allocation of the allowance for loan losses for these types
of loans was appropriate at June 30, 2008.
  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.
   10
 Table of Contents
  The
following table sets forth information concerning the allocation of the
allowance for loan losses by loan category at the dates indicated.
  At
      June 30,2008
              
              
              2007
              
              
              2006Amount
              
              
              Percent
      of Loans in Each Category to Total Loans
              
              
              Amount
              
              
              Percent
      of Loans in Each Category to Total Loans
              
              
              Amount
              
              
              Percent
      of Loans in Each Category to Total Loans(Dollars
      in thousands)Real
      estate loans:One-
      to four-family loans
              
              $
              167
              
              
              
              39.17
              %
              
              $
              33
              
              
              
              43.67
              %
              
              $
              46
              
              
              
              40.73
              %Commercial
      real estate loans
              
              
              1,364
              
              
              
              46.68
              
              
              
              407
              
              
              
              39.06
              
              
              
              257
              
              
              
              38.65Multi-family
      loans
              
              
              15
              
              
              
              3.97
              
              
              
              24
              
              
              
              5.67
              
              
              
              12
              
              
              
              6.81Commercial
      loans
              
              
              512
              
              
              
              9.41
              
              
              
              203
              
              
              
              10.97
              
              
              
              84
              
              
              
              13.10Consumer
      loans:Home
      equity loans
              
              
              2
              
              
              
              0.64
              
              
              
              —
              
              
              
              0.41
              
              
              
              1
              
              
              
              0.47Share
      loans
              
              
              —
              
              
              
              0.13
              
              
              
              —
              
              
              
              0.22
              
              
              
              —
              
              
              
              0.24Total
              
              $
              2,060
              
              
              
              100.00
              %
              
              $
              667
              
              
              
              100.00
              %
              
              $
              400
              
              
              
              100.00
              %
 
 The
following table sets forth an analysis of the Bank’s allowance for loan losses
during the periods indicated.
  Year
      Ended June 30,2008
              
              
              2007
              
              
              2006(Dollars
      in thousands)Balance
      at beginning of period
              
              $
              667
              
              
              $
              400
              
              
              $
              286Charge-offs,
      net(1)
              
              
              (135
              )
              
              
              —
              
              
              
              (13
              )Provision
      for loan losses
              
              
              1,528
              
              
              
              267
              
              
              
              127Balance
      at end of period
              
              $
              2,060
              
              
              $
              667
              
              
              $
              400Allowance
      for loan losses as a percent of total loans outstanding
              
              
              2.27
              %
              
              
              0.80
              %
              
              
              0.52
              %Allowance
      for loan losses as a percent of total nonperforming loans
              
              
              39.13
              %
              
              
              94.08
              %
              
              
              n/aRatio
      of net charge-offs to average loans outstanding
              
              
              0.15
              %
              
              
              0.00
              %
              
              
              0.00
              %
 _____________
 (1)
              In
      2008, $135,000 was charged-off related to commercial
  loans.
 
 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.  Any material deviation from the investment strategy requires
approval by the Board of Directors through the Investment
Committee.  At June 30, 2008, the Company did not hold any
investment with an aggregate book value or market 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.
   11
 Table of Contents
  At
      June 30,2008
              
              
              2007
              
              
              2006Amortized
      Cost
              
              
              Fair
      Value
              
              
              Amortized
      Cost
              
              
              Fair
      Value
              
              
              Amortized
      Cost
              
              
              Fair
      Value(In
      thousands)U.S.
      Government sponsored entities
              
              $
              2,000
              
              
              $
              2,002
              
              
              $
              7,000
              
              
              $
              6,922
              
              
              $
              11,996
              
              
              $
              11,717Mortgage-backed
              
              
              688
              
              
              
              686
              
              
              
              932
              
              
              
              907
              
              
              
              1,148
              
              
              
              1,101Collateralized
      mortgage obligations
              
              
              5,040
              
              
              
              5,059
              
              
              
              7,445
              
              
              
              7,330
              
              
              
              8,470
              
              
              
              8,245Corporate
      debt
              
              
              —
              
              
              
              —
              
              
              
              436
              
              
              
              436
              
              
              
              500
              
              
              
              455Total
              
              $
              7,728
              
              
              $
              7,747
              
              
              $
              15,813
              
              
              $
              15,595
              
              
              $
              22,114
              
              
              $
              21,518
 
 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, 2008.  The amounts reflect fair value of
the securities at June 30, 2008.
  Contractually
      MaturingUnder
      1 Year
                
                
                Weighted
      Average Yield
                
                
                1-5
      Years
                
                
                Weighted
      Average Yield
                
                
                6-10
      Years
                
                
                Weighted
      Average Yield
                
                
                Over
      10 Years
                
                
                Weighted
      Average Yield
                
                
                Total(Dollars
      in thousands)U.S.
      Government sponsored entities(1)
                
                $
                2,002
                
                
                
                3.58
                %
                
                $
                —
                
                
                
                —
                %
                
                $
                —
                
                
                
                —
                %
                
                $
                —
                
                
                
                —
                %
                
                $
                2,002Mortgage-backed
                
                
                —
                
                
                
                —
                
                
                
                384
                
                
                
                4.26
                
                
                
                255
                
                
                
                5.18
                
                
                
                47
                
                
                
                5.03
                
                
                
                686Collateralized
      mortgage obligations
                
                
                9
                
                
                
                3.30
                
                
                
                195
                
                
                
                3.95
                
                
                
                3,000
                
                
                
                4.80
                
                
                
                1,855
                
                
                
                4.38
                
                
                
                5,059Total
                
                $
                2,011
                
                
                
                3.58
                %
                
                $
                579
                
                
                
                4.16
                %
                
                $
                3,255
                
                
                
                4.83
                %
                
                $
                1,902
                
                
                
                4.40
                %
                
                $
                7,747
 _____________
 (1)
              The
      weighted average yield reflects a tax-equivalent adjustment based on a
      marginal federal corporate tax rate of
34%.
  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, is 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
   12
 Table of Contents
  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.
  Neither
the Company nor the Bank holds any FNMA or FHLMC preferred
stock.
  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.
  Collateralized
mortgage obligations (CMOs), a type of mortgage-backed security, are bonds that
represent claims to specific cash flows from large pools of home
mortgages.  The streams of principal and interest payments on the
mortgages are distributed to the different classes of CMO interest, known as
tranches, according to a complicated deal structure.  Each tranche may
have different principal balances, coupon rates, prepayment risks, and maturity
dates (ranging from a few months to twenty years).
  CMOs are
often highly sensitive to changes in interest rates and any resulting change in
the rate at which homeowners sell their properties, refinance, or otherwise
pre-pay their loans.  Investors in these securities may not only be
subjected to this prepayment risk, but also exposed to significant market and
liquidity risks. Despite the
current economic environment, no major variations of pre-payment speeds have
been apparent since the majority of the remaining securities portfolio is
seasoned.  The Bank owns no private label CMOs or mortgage-backed
securities.
  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
and northwest Indiana 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.
   13
 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 30,2008
                
                
                2007
                
                
                2006Amount
                
                
                Percent
      of Deposits
                
                
                Amount
                
                
                Percent
      of Deposits
                
                
                Amount
                
                
                Percent
      of Deposits(Dollars
      in thousands)Transaction
      accounts:Demand
      depositsInterest
      bearing
                
                
                $
                8,169
                
                
                
                9.74
                %
                
                $
                9,641
                
                
                
                9.77
                %
                
                $
                9,496
                
                
                
                12.04
                %Non-interest
      bearing
                
                
                
                5,157
                
                
                
                6.15
                
                
                
                6,569
                
                
                
                6.66
                
                
                
                6,337
                
                
                
                8.03Savings
      deposits
                
                
                
                25,945
                
                
                
                30.93
                
                
                
                27,618
                
                
                
                27.99
                
                
                
                30,237
                
                
                
                38.32Total
      transaction accounts
                
                
                
                39,271
                
                
                
                46.82
                
                
                
                43,828
                
                
                
                44.42
                
                
                
                46,070
                
                
                
                58.39Certificate
      accounts:1.00%
      – 1.99
                %
                
                
                4,504
                
                
                
                5.37
                
                
                
                5
                
                
                
                —
                
                
                
                1,317
                
                
                
                1.672.00%
      – 2.99
                %
                
                
                13,011
                
                
                
                15.51
                
                
                
                2,699
                
                
                
                2.74
                
                
                
                8,551
                
                
                
                10.843.00%
      – 3.99
                %
                
                
                4,185
                
                
                
                4.99
                
                
                
                7,174
                
                
                
                7.27
                
                
                
                13,264
                
                
                
                16.814.00%
      – 4.99
                %
                
                
                8,583
                
                
                
                10.23
                
                
                
                18,033
                
                
                
                18.27
                
                
                
                9,310
                
                
                
                11.805.00%
      – 5.99
                %
                
                
                14,321
                
                
                
                17.08
                
                
                
                26,937
                
                
                
                27.30
                
                
                
                386
                
                
                
                0.49Total
      certificate accounts
                
                
                
                44,604
                
                
                
                53.18
                
                
                
                54,848
                
                
                
                55.58
                
                
                
                32,828
                
                
                
                41.61Total
      deposits
                
                
                $
                83,875
                
                
                
                100.00
                %
                
                $
                98,676
                
                
                
                100.00
                %
                
                $
                78,898
                
                
                
                100.00
                %
  The
following table sets forth the savings activities of the Bank during the periods
indicated.
  Year
      Ended June 30,2008
              
              
              2007
              
              
              2006(In
      thousands)Total
      deposits at beginning of period
              
              $
              98,676
              
              
              $
              78,898
              
              
              $
              78,107Net
      deposits (withdrawals)
              
              
              (17,191
              )
              
              
              16,956
              
              
              
              (561
              )Interest
      credited
              
              
              2,390
              
              
              
              2,822
              
              
              
              1,352Total
      deposits at end of period
              
              $
              83,875
              
              
              $
              98,676
              
              
              $
              78,898
 
 The
following table shows the interest rate and maturity information for the Bank’s
certificates of deposit at June 30, 2008.
  Maturity
      DateInterest
      Rate
              
              
              One
      Year or Less
              
              
              1-2
      Years
              
              
              2-3
      Years
              
              
              Over
      3 Years
              
              
              Total(In
      thousands)1.00%
      - 1.99
              %
              
              $
              4,505
              
              
              $
              —
              
              
              $
              —
              
              
              $
              —
              
              
              $
              4,5052.00%
      - 2.99
              %
              
              
              10,940
              
              
              
              1,371
              
              
              
              692
              
              
              
              7
              
              
              
              13,0103.00%
      - 3.99
              %
              
              
              3,774
              
              
              
              198
              
              
              
              63
              
              
              
              150
              
              
              
              4,1854.00%
      - 4.99
              %
              
              
              6,343
              
              
              
              1,163
              
              
              
              527
              
              
              
              550
              
              
              
              8,5835.00%
      - 5.99
              %
              
              
              13,516
              
              
              
              —
              
              
              
              —
              
              
              
              805
              
              
              
              14,321Total
              
              
              $
              39,078
              
              
              $
              2,732
              
              
              $
              1,282
              
              
              $
              1,512
              
              
              $
              44,604
   14
 Table of Contents
  As of
June 30, 2008, the aggregate amount of outstanding time certificates of
deposit at the Bank in amounts greater than or equal to $100,000, was
approximately $14.6 million.  The following table presents the
maturity of these time certificates of deposit at such dates.
  June 30,
      2008(In
      thousands)3
      months or
      less
              
              $
              7,726Over
      3 months through 6 months
              
              
              3,687Over
      6 months through 12 months
              
              
              1,941Over
      12
      months
              
              
              1,257$
              14,611
 
 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 30,2008
              
              
              2007
              
              
              2006(Dollars
      in thousands)Federal
      Home Loan Bank open line of credit:Average
      balance outstanding
              
              $
              1,382
              
              
              $
              —
              
              
              $
              —Maximum
      amount outstanding at any month-end during the period
              
              
              5,000
              
              
              
              —
              
              
              
              —Balance
      outstanding at end of period
              
              
              —
              
              
              
              —
              
              
              
              —Average
      interest rate during the period
              
              
              4.34
              %
              
              
              N/A
              
              
              
              N/AWeighted
      average interest rate at end of period
              
              
              N/A
              
              
              
              N/A
              
              
              
              N/A
 
 At
June 30, 2008 and 2007, 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 45 equivalent full-time employees at June 30, 2008.  None of
these employees are represented by a collective bargaining agreement, and the
Bank believes that it enjoys good relations with its personnel.
   15
 Table of Contents
  SUPERVISION
AND REGULATION
  The
following is a summary of material provisions of the statutes and regulations
applicable to the Bank and the Company.  These summaries are not
intended to be a complete explanation of such statutes and regulations and their
effect on us and are qualified in their entirety by reference to the actual
statutes and regulations.  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.
  Bank
Holding Company Regulation
  General.  Royal
Financial is 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 periodic reports 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.
  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 Illinois
Department of Financial and Professional Regulation, or IDFPR, 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:
  ·
              engage
      in certain nonbanking activities;
  ·
              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.
  A bank
holding company may only engage in and own shares of companies engaged in
certain nonbanking 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.  A bank holding company that elects to become a
financial holding company may 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.  At this time, the Company has not elected to become a
financial holding company and has no immediate plans to do so.
   16
 Table of Contents
  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
requirements for assessing the capital adequacy of bank holding
companies.  Bank holding companies with consolidated assets of more
than $500 million are required to comply with the Federal Reserve Board’s
capital guidelines on risk-based capital.  Bank holding companies that
are below this threshold and otherwise qualify as “small bank holding companies”
under applicable regulations need not comply with the Federal Reserve Board’s
risk-based capital guidelines on a consolidated basis.  Because the
Company qualifies as a small bank holding company it is not required to comply
with the Federal Reserve Board’s risk-based capital
requirements.  Instead, the Company must comply with the Federal
Reserve Board’s Small Bank Holding Company Policy Statement (“Policy
Statement”), which requires the Company to maintain a certain debt to equity
ratio.  Insured depository subsidiaries of the Company are also
expected to be well capitalized.
  Ownership
Limitations.  The Change in Bank Control Act prohibits a person
or group of persons from acquiring “control” of a depository institution or a
bank holding company unless the appropriate federal banking agency has been
given prior notice 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, the acquisition of 10% or more of a class
of voting stock of a depository institution or a bank holding company by a
person may require the prior regulatory approval of the Federal Reserve
Board.  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 bank 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
the Company’s stock may be required to obtain the prior approval of the
IDFPR.
  Bank Holding Company
Dividends.  Bank holding companies operating under the Federal
Reserve Board’s Small Bank Holding Company Policy Statement may not pay
dividends unless (i) the bank holding company’s debt to equity ratio is at
or below 1.0:1, (ii) the dividends are reasonable in amount, (iii) the
dividends do not adversely affect the ability of the bank holding company to
service its debt in an orderly manner, (iv) the dividends do not adversely
affect the ability of the holding company’s subsidiary banks to be well
capitalized, (v) the bank holding company is considered to be “well
managed” by the Federal Reserve Board, and (vi) during a specified time
period, there have been no supervisory actions taken or pending against the bank
holding company or any subsidiary bank.
   17
 Table of Contents
  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 corporate
America.  Sarbanes-Oxley’s principal provisions 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 IDFPR, 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.
   18
 Table of Contents
  In
addition, the Bank is subject to restrictions with respect to:
  ·
              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 regulate 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 IDFPR, 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 IDFPR 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.
  Bank
regulatory agencies have adopted risk-based capital guidelines applicable to
financial institutions.  These guidelines establish required levels of
capital that are monitored by certain ratios.  Capital is divided into
two components:  Tier 1 capital, which includes common stock,
non-withdrawable accounts and pledged deposits meeting certain criteria,
additional paid-in capital, retained earnings and certain types of perpetual
preferred stock, less certain items including, certain intangible assets,
serving rights and certain credit-enhancing interest-only strips; and
Tier 2 capital, which includes, among other things, perpetual preferred
stock, subordinated debt, limited amounts of unrealized gains on marketable
equity securities, and the allowance for loan losses.  These
components of capital are compared to both total assets as reported on the
balance sheet and assets that have been adjusted to compensate for associated
risk to the organization.
  Under the
FDIC’s capital requirements for insured banks, a bank is considered well
capitalized for regulatory purposes if it has a total risk-based capital of 10%
or greater; has Tier 1 risk-based capital of 6% or greater; has a leverage
ratio of 5% or greater; and is not subject to any written agreement, order,
capital directive or prompt corrective action directive.
  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 IDFPR authorizes a 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.  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.  The Bank is subject to laws and regulations
restricting or limiting transactions between a bank and an affiliated company,
including a parent bank holding company.  Specifically, 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
   19
 Table of Contents
  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.
  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.  In general, dividends may be paid by the Bank out of its net
profits.  The written approval of the IDFPR 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 IDFPR or (iii) the amount required for the
liquidation account established by the Bank in connection with the Bank’s
conversion to stock form.  The IDFPR and the FDIC also have the
authority to prohibit the payment of any dividends by the Bank if the IDFPR or
the FDIC determines that the distribution would constitute an unsafe or unsound
practice.
  Federal Reserve
Board.  The Bank is subject to Federal Reserve Board
regulations requiring depository institutions to maintain non-interest-earning
reserves against their transaction accounts (primarily NOW and regular checking
accounts).  The Federal Reserve Board regulations generally require 3%
reserves on the first $45.8 million of transaction accounts plus 10% on the
remainder.  The first $8.5 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
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, 2008, the Bank had $381,000 in FHLB stock, which was in compliance
with this requirement.  At June 30, 2008, the Bank had no FHLB
advances outstanding.
  Illinois Banking
System.  The IDFPR 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 IDFPR has established a schedule
for the assessment of “supervisory fees” upon all Illinois savings banks to fund
the operation of the IDFPR.  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 IDFPR.  The IDFPR also assesses fees for
examinations conducted by the IDFPR’s staff, based upon the number of hours
spent by the staff performing the examination.
  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
   20
 Table of Contents
  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 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.
  As of
June 30, 2008, 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.
  FDIC Deposit
Insurance.  As an FDIC-insured institution, the Bank is
required to pay deposit insurance premiums based on the risk it poses to the
Deposit Insurance Fund.  The FDIC has authority to raise or lower
assessment rates on insured deposits in order to achieve required revenue ratios
in the insurance fund and to impose special additional
assessments.  To determine an institution’s assessment rate, each
insured bank is placed in one of four risk categories using a two-step process
based on capital and supervisory information.  First, each insured
bank is assigned to one of the following three capital groups:  “well
capitalized,” “adequately capitalized,” or “undercapitalized.”  Each
institution is then assigned one of three supervisory ratings:  “A”
(institutions with minor weaknesses), “B” (institutions that demonstrate
weaknesses which, if not corrected, could result in significant deterioration of
the institution) and “C” (institutions that pose a substantial probability of
loss to the Deposit Insurance Fund unless effective corrective action is
taken).  Banks classified as strongest by the FDIC are subject to the
lowest insurance assessment rate; banks classified as weakest by the FDIC are
subject to the highest insurance
   21
 Table of Contents
  assessment
rate.  Deposit insurance may be terminated by the FDIC upon a finding
that an institution has engaged in an unsafe or unsound practice, 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.  The management of the Company does not know of any practice,
condition or violation that might lead to termination of the deposit insurance
of the Bank.
  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 as a result of its CRA examination
conducted in 2008.
  Bank Secrecy Act and PATRIOT
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.
  The
Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001, or the PATRIOT Act, contains
anti-money laundering and financial transparency laws, as well as enhanced
information collection tools and enforcement mechanisms for the U.S.
government.  PATRIOT Act provisions include the
following:  standards for verifying customer identification when
opening accounts; rules to promote cooperation among financial institutions,
regulators, and law enforcement; and due diligence requirements for financial
institutions that administer, maintain, or manage certain bank
accounts.
  The Bank
is subject to Bank Secrecy Act and PATRIOT Act requirements.  Bank
regulators carefully review an institution’s compliance with these requirements
when examining an institution and
   22
 Table of Contents
  consider
the institution’s compliance when evaluating an application submitted by an
institution.  Bank regulators may require an institution to take
various actions to ensure that it is meeting the requirements of these
acts.
  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; 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 Frankfort, Illinois and Schererville, Indiana. 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 fiscal year ended June 30, 2008.
   23
 Table of Contents
  PART II
  ITEM
      5.
              MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES
  The
Company’s common stock is traded on the Over-the-Counter Bulletin Board under
the symbol “RYFL.OB”.  At June 30, 2008, the Company had 390
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 fiscal
2008 and 2007.
  2008High
              
              
              Low
              
              
              Dividends
      DeclaredFirst
      quarter
              
              $
              15.50
              
              
              $
              12.55
              
              
              
              N/ASecond
      quarter
              
              
              16.90
              
              
              
              13.25
              
              
              
              N/AThird
      quarter
              
              
              14.25
              
              
              
              12.56
              
              
              
              N/AFourth
      quarter
              
              
              13.10
              
              
              
              7.60
              
              
              
              N/A
 
 2007High
              
              
              Low
              
              
              Dividends
      DeclaredFirst
      quarter
              
              $
              15.20
              
              
              $
              14.50
              
              
              
              N/ASecond
      quarter
              
              
              16.50
              
              
              
              15.00
              
              
              
              N/AThird
      quarter
              
              
              17.75
              
              
              
              16.00
              
              
              
              N/AFourth
      quarter
              
              
              16.35
              
              
              
              15.25
              
              
              
              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.”
   24
 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, 2008 of equity securities that are registered by the
Company under Section 12 of the Securities Exchange Act of 1934.
  Period
              
              (a)
                Total
      Number of Shares Purchased
              
              
              (b)
                Average
      Price Paid per Share
              
              
              (c)
                Total
      Number of Shares Purchased as Part of Publicly Announced Plans or
      Programs
              
              
              (d)
                Maximum
      Number of Shares That May Yet be Purchased Under the Plans/Program(1)04/01/08-04/30/08
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              96,19505/01/08-05/31/08
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —06/01/08-06/30/08
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Total
              
              
              —
              
              
              $
              —
              
              
              
              —
              
              
              
              96,195
 _____________
 (1)
              On
      September 20, 2006, the Company received regulatory approval to repurchase
      up to 5% of its outstanding shares of common stock, or 125,638 shares (the
      “Program”).  As of June 30, 2008, 29,443 shares 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,
investment securities, 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 Home Loan
Bank borrowings.  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 miscellaneous
other income, including income on rental properties.  Noninterest
expense currently consists primarily of salaries and employee benefits,
occupancy, data processing, professional services, directors’ 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.
  During fiscal
2008, our assets decreased $16.5 million with a commensurate decrease in our
deposits of $14.8 million and our stockholders equity of $1.8 million. These
decreases were due to the Company managing its interest rate risk in the current
economy by allowing higher priced deposits to runoff in an effort to lower our
cost of funds. The loan portfolio continued to increase during the
year.
   25
 Table of Contents
  Our net
interest margin increased to 4.31% at fiscal year end 2008 from 4.05% at June
30, 2007.  Additionally, our interest rate spread increased to 3.83%
during 2008 from 3.57% in 2007.
  The
Company had a net loss of $2.8 million for the year ended June 30, 2008 compared
to a net loss of $1.2 million for the year ended June 30, 2007.  The
increase in net loss was primarily due to an increase of $1.3 million in its
loan loss provision, an increase in noninterest expense of $266,000, which
included the effects of investigation costs of $540,000, and a decrease in the
Federal tax benefit of $213,000. These changes were offset to some extent by an
increase of $192,000 in net interest income and $6,000 in noninterest
income.
  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, fluctuations in market rates of interest
and loan and deposit pricing in the Company’s market areas, deterioration in
asset quality due to an economic downturn in the greater Chicago metropolitan
area, legislative or regulatory changes, changes in monetary and fiscal policies
of the U.S. Government, including policies of the U.S. Treasury and the Federal
Reserve Board, adverse developments in the Company’s loan or investment
portfolios, slower than anticipated growth of the Company’s business or
unanticipated business declines, the Company’s ability to implement its growth
strategy, higher than expected operational costs including professional fees and
expenses incurred in connection with the Audit Committee’s investigation, the
effect of the investigation or the costs incurred in connection therewith on the
Company’s financial condition or results of operations, demand for loan
products; deposit flows; competition and changes in accounting principles,
policies, and guidelines.  These risks and uncertainties should be
considered in evaluating forward-looking statements, and undue reliance should
not be placed on such statements.
  Critical
Accounting Policies and Estimates
  The
accounting and financial 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 tax 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 collectability 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.
   26
 Table of Contents
  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, future adjustments to the allowance may be necessary
and the results of operations could be significantly and adversely affected if
circumstances 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 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.
  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 30,2008
                
                
                2007
                
                
                2006(In
      thousands, except per share data)Selected
      Financial Condition Data:Total
      assets
                
                $
                116,128
                
                
                $
                132,632
                
                
                $
                114,279Cash
      and cash equivalents
                
                
                5,925
                
                
                
                21,396
                
                
                
                4,348Securities
      available for sale
                
                
                7,747
                
                
                
                15,595
                
                
                
                21,518Loans
      receivable, net
                
                
                90,775
                
                
                
                83,499
                
                
                
                77,326Deposits
                
                
                83,875
                
                
                
                98,676
                
                
                
                78,898Total
      equity
                
                
                29,897
                
                
                
                31,662
                
                
                
                32,755Book
      value per common share(1)
                
                $
                12.51
                
                
                $
                13.40
                
                
                $
                13.95
  Year
      Ended June 30,2008
                  
                  
                  2007
                  
                  
                  2006(In
      thousands, except per share data)Selected
      Operating Data:Total
      interest income
                  
                  $
                  7,198
                  
                  
                  $
                  7,377
                  
                  
                  $
                  5,834Total
      interest expense
                  
                  
                  2,453
                  
                  
                  
                  2,824
                  
                  
                  
                  1,354Net
      interest income
                  
                  
                  4,745
                  
                  
                  
                  4,553
                  
                  
                  
                  4,480Provision
      for loan losses
                  
                  
                  1,528
                  
                  
                  
                  267
                  
                  
                  
                  127Net
      interest income after provision for loan losses
                  
                  
                  3,217
                  
                  
                  
                  4,286
                  
                  
                  
                  4,353Total
      noninterest income
                  
                  
                  566
                  
                  
                  
                  560
                  
                  
                  
                  1,130Total
      noninterest expense
                  
                  
                  6,534
                  
                  
                  
                  6,268
                  
                  
                  
                  4,885Income  (loss)
      before provision for income taxes
                  
                  
                  (2,751
                  )
                  
                  
                  (1,422
                  )
                  
                  
                  598Provision
      (benefit) for income taxes
                  
                  
                  —
                  
                  
                  
                  (213
                  )
                  
                  
                  44Net
      income (loss)
                  
                  
                  (2,751
                  )
                  
                  
                  (1,209
                  )
                  
                  
                  554Basic
      and diluted earnings per share
                  
                  
                  (1.16
                  )
                  
                  
                  (0.51
                  )
                  
                  
                  0.23 _____________
 (1)
                    Book
      value per common share is total equity divided by issued shares less
      treasury stock and non-vested ESOP and RRP
  stock.
   27
 Table of Contents
  Year
      Ended June 30,2008
                
                
                2007
                
                
                2006Key
      Financial Ratios:Performance
      Ratios:Return
      on average assets
                
                
                (2.23
                )%
                
                
                (0.94
                )%
                
                
                0.49
                %Return
      on average equity
                
                
                (8.84
                )
                
                
                (3.70
                )
                
                
                1.67Interest
      rate spread(1)
                
                
                3.83
                
                
                
                3.57
                
                
                
                4.16Net
      interest margin(2)
                
                
                4.31
                
                
                
                4.05
                
                
                
                4.51Total
      noninterest expenses to average total assets
                
                
                5.29
                
                
                
                4.88
                
                
                
                4.35Efficiency
      ratio(3)
                
                
                123.02
                
                
                
                127.52
                
                
                
                96.01Asset
      Quality Ratios:Nonperforming
      loans to total loans at end of period
                
                
                5.67
                %
                
                
                0.85
                %
                
                
                0.00
                %Nonperforming
      assets to total assets at end of period
                
                
                4.53
                
                
                
                0.53
                
                
                
                0.00Allowance
      for loan losses to total loans at end of period
                
                
                2.22
                
                
                
                0.80
                
                
                
                0.52Allowance
      for loan losses to total nonperforming loans at end of
    period
                
                
                39.13
                
                
                
                94.08
                
                
                
                n/aCapital
      Ratios:Total
      capital (to risk-weighted assets)(4)
                
                
                25.17
                %
                
                
                26.88
                %
                
                
                30.04
                %Tier
      1 capital (to risk-weighted assets)(4)
                
                
                23.90
                
                
                
                26.26
                
                
                
                29.54Tier 1
      capital (to average assets)(4)
                
                
                19.05
                
                
                
                17.81
                
                
                
                21.22Equity
      to assets at end of period
                
                
                25.74
                
                
                
                23.87
                
                
                
                28.66
 _____________
 (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 and impairment charges, divided by the sum of net
      interest income, plus noninterest income, excluding net gain on sales of
      securities.
 (4)
                Regulatory
      capital ratios are disclosed at the Bank
level.
 
  28
 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 30,2008
                  
                  
                  2007
                  
                  
                  2006Average
      Balance
                  
                  
                  Interest
                  
                  
                  Average
      Yield/ Rate(1)
                  
                  
                  Average
      Balance
                  
                  
                  Interest
                  
                  
                  Average
      Yield/ Rate(1)
                  
                  
                  Average
      Balance
                  
                  
                  Interest
                  
                  
                  Average
      Yield/ Rate(1)(Dollars
      in thousands)Interest-Earning
      Assets:Loans
      receivable, net(2)
                  
                  $
                  92,303
                  
                  
                  $
                  6,443
                  
                  
                  
                  6.98
                  %
                  
                  $
                  77,233
                  
                  
                  $
                  5,625
                  
                  
                  
                  7.28
                  %
                  
                  $
                  74,791
                  
                  
                  $
                  4,610
                  
                  
                  
                  6.16
                  %Securities
      available for sale(3)
                  
                  
                  12,539
                  
                  
                  
                  533
                  
                  
                  
                  4.25
                  
                  
                  
                  17,868
                  
                  
                  
                  718
                  
                  
                  
                  4.02
                  
                  
                  
                  21,794
                  
                  
                  
                  1,009
                  
                  
                  
                  4.63Deposits
      with financial institutions(4)
                  
                  
                  4,779
                  
                  
                  
                  220
                  
                  
                  
                  4.60
                  
                  
                  
                  17,052
                  
                  
                  
                  1,024
                  
                  
                  
                  6.01
                  
                  
                  
                  2,353
                  
                  
                  
                  207
                  
                  
                  
                  8.80Federal
      Home Loan Bank stock
                  
                  
                  350
                  
                  
                  
                  2
                  
                  
                  
                  0.68
                  
                  
                  
                  337
                  
                  
                  
                  10
                  
                  
                  
                  3.11
                  
                  
                  
                  365
                  
                  
                  
                  8
                  
                  
                  
                  2.19Total
      interest-earning assets
                  
                  
                  109,971
                  
                  
                  
                  7,198
                  
                  
                  
                  6.55
                  
                  
                  
                  112,490
                  
                  
                  
                  7,377
                  
                  
                  
                  6.56
                  
                  
                  
                  99,303
                  
                  
                  
                  5,834
                  
                  
                  
                  5.88Noninterest-earning
      assets:
                  
                  
                  13,454
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  16,077
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  13,094Total
      assets
                  
                  $
                  123,425
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  128,567
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  112,397Interest-Bearing
      Liabilities:Deposits:Demand
                  
                  $
                  14,083
                  
                  
                  
                  92
                  
                  
                  
                  0.65
                  %
                  
                  $
                  14,828
                  
                  
                  $
                  133
                  
                  
                  
                  0.89
                  
                  
                  $
                  15,765
                  
                  
                  
                  109
                  
                  
                  
                  0.69Savings
                  
                  
                  26,268
                  
                  
                  
                  114
                  
                  
                  
                  0.43
                  
                  
                  
                  28,363
                  
                  
                  
                  280
                  
                  
                  
                  0.99
                  
                  
                  
                  30,156
                  
                  
                  
                  306
                  
                  
                  
                  1.02Certificates
      of Deposit
                  
                  
                  48,265
                  
                  
                  
                  2,184
                  
                  
                  
                  4.53
                  
                  
                  
                  51,211
                  
                  
                  
                  2,409
                  
                  
                  
                  4.70
                  
                  
                  
                  32,795
                  
                  
                  
                  937
                  
                  
                  
                  2.86Total
      deposits
                  
                  
                  88,616
                  
                  
                  
                  2,390
                  
                  
                  
                  2.70
                  
                  
                  
                  94,402
                  
                  
                  
                  2,822
                  
                  
                  
                  2.99
                  
                  
                  
                  78,716
                  
                  
                  
                  1,352
                  
                  
                  
                  1.72Borrowings:Federal
      Home Loan Bank advances
                  
                  
                  1,382
                  
                  
                  
                  60
                  
                  
                  
                  4.34
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Federal
      funds purchased
                  
                  
                  77
                  
                  
                  
                  3
                  
                  
                  
                  4.18
                  
                  
                  
                  36
                  
                  
                  
                  2
                  
                  
                  
                  6.00
                  
                  
                  
                  41
                  
                  
                  
                  1
                  
                  
                  
                  2.44Total
      interest-bearing liabilities
                  
                  
                  90,075
                  
                  
                  
                  2,453
                  
                  
                  
                  2.72
                  
                  
                  
                  94,438
                  
                  
                  
                  2,824
                  
                  
                  
                  2.99
                  
                  
                  
                  78,757
                  
                  
                  
                  1,353
                  
                  
                  
                  1.72Noninterest-bearing
      liabilities:
                  
                  
                  2,223
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,443
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  529Total
      liabilities
                  
                  
                  92,298
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  95,881
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  79,286Total
      equity capital(5)
                  
                  
                  31,127
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  32,686
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  33,111Total
      liabilities and equity capital
                  
                  $
                  123,425
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  128,567
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  112,397Net
      average interest-earning assets
                  
                  $
                  19,896
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  18,051
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  20,546Net
      interest income; interest rate spread(6)
                  
                  
                  
                  
                  
                  $
                  4,745
                  
                  
                  
                  3.83
                  %
                  
                  
                  
                  
                  
                  $
                  4,553
                  
                  
                  
                  3.57
                  %
                  
                  
                  
                  
                  
                  $
                  4,481
                  
                  
                  
                  4.16
                  %Net
      interest margin(7)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  4.31
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  4.05
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  4.51
                  %Average
      interest-earning assets to average interest-bearing
      liabilities
                  
                  
                  122.09
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  119.11
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  126.09
                  %
 ____________
 (1)
                Yields
      and rates have been annualized where
  appropriate.
 (2)
                Includes
      nonaccruing loans.
 (3)
                Tax
      effective yield, assuming a 34%
rate.
 (4)
                Includes
      interest-bearing demand deposits, repurchase agreements and federal funds
      sold.
 (5)
                Includes
      retained earnings and accumulated other comprehensive
      income/(loss).
 (6)
                Interest
      rate spread represents the difference between the weighted average yield
      on interest-earning assets and the weighted average rate on
      interest-bearing liabilities.
 (7)
                Net
      interest margin is net interest income divided by average interest-earning
      assets.
  
 29
 Table of Contents
 
 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 30,2008
      vs. 2007
                
                
                2007
      vs. 2006Increase
      (Decrease)
                    Due
      to
                
                
                
                
                
                Increase
      (Decrease)
                    Due
      toTotal
                    Yield/Rate
                
                
                Volume
                
                
                Total
                    Increase
                    (Decrease)
                
                
                Total
                    Yield/Rate
                
                
                Volume
                
                
                Total
                    Increase
                    (Decrease)(In
      thousands)Interest-Earning
      Assets:Loans
      receivable, net
                
                $
                (276
                )
                
                $
                1,094
                
                
                $
                818
                
                
                $
                865
                
                
                $
                150
                
                
                $
                1,015Securities
      available for sale
                
                
                29
                
                
                
                (214
                )
                
                
                (185
                )
                
                
                (109
                )
                
                
                (182
                )
                
                
                (291
                )Deposits
      with financial institutions
                
                
                (13
                )
                
                
                (791
                )
                
                
                (804
                )
                
                
                (475
                )
                
                
                1,292
                
                
                
                817Federal
      Home Loan Bank stock
                
                
                (8
                )
                
                
                —
                
                
                
                (8
                )
                
                
                2
                
                
                
                —
                
                
                
                2Total
                
                
                (268
                )
                
                
                89
                
                
                
                (179
                )
                
                
                283
                
                
                
                1,260
                
                
                
                1,543Interest-Bearing
      Liabilities:Deposits:Demand
                
                
                (34
                )
                
                
                (7
                )
                
                
                (41
                )
                
                
                30
                
                
                
                (6
                )
                
                
                24Savings
                
                
                (146
                )
                
                
                (20
                )
                
                
                (166
                )
                
                
                (8
                )
                
                
                (18
                )
                
                
                (26
                )Certificates
      of deposit
                
                
                (84
                )
                
                
                (141
                )
                
                
                (225
                )
                
                
                944
                
                
                
                528
                
                
                
                1,472Total
      deposits
                
                
                (264
                )
                
                
                (168
                )
                
                
                (432
                )
                
                
                966
                
                
                
                504
                
                
                
                1,470Borrowings:Federal
      Home Loan Bank advances
                
                
                60
                
                
                
                —
                
                
                
                60
                
                
                
                —
                
                
                
                —
                
                
                
                —Federal
      funds purchased
                
                
                (1
                )
                
                
                2
                
                
                
                1
                
                
                
                1
                
                
                
                —
                
                
                
                1Total
                
                
                (205
                )
                
                
                (166
                )
                
                
                (371
                )
                
                
                967
                
                
                
                504
                
                
                
                1,471Increase
      (decrease) in net interest income
                
                $
                (63
                )
                
                $
                255
                
                
                $
                192
                
                
                $
                (684
                )
                
                $
                756
                
                
                $
                72
 
 Comparison
of Financial Condition at June 30, 2008 and June 30, 2007
  Total
assets decreased $16.5 million, or 12.44%, to $116.1 million at
June 30, 2008 compared to $132.6 million at June 30, 2007. The
decrease in total assets resulted primarily from decreases in cash and cash
equivalents of $15.5 million, and a decrease in securities available for sale of
$7.8 million, offset by an increase in loans receivable of $7.3 million. Total
deposits decreased $14.8 million, or 15.00%,  to $83.9 million, at
June 30, 2008 compared to $98.7 million at June 30, 2007. The decrease
in cash and cash equivalents was used to fund the runoff of higher costing
deposits during the year, as the Company continued its effort to control its
interest rate risk and improve its interest rate spread. The liquidity generated
from the repayments in the securities portfolio was reinvested in loan
originations. Total stockholders’ equity decreased $1.8 million, or 5.68%,
to $30.0 million at June 30, 2008 compared to $31.7 million at
June 30, 2007, primarily due to the net loss for the year of $2.8
million.
   30
 Table of Contents
  Comparison
of Results of Operations for the Years Ended June 30, 2008 and
June 30, 2007
  General.  The
Company’s net loss amounted to $2.8 million for the year ended June 30,
2008, compared to a net loss of $1.2 million for the year ended June 30,
2007.  The increase in net loss resulted from an increase in the
provision for loan losses of $1.3 million, an increase in noninterest expense of
$266,000 and a decrease in the benefit for income taxes of $213,000. These
decreases were offset by an increase in net interest income of $192,000 and an
increase of $6,000 in noninterest income. Return on average assets was (2.23)%
for the year ended June 30, 2008 as compared to (0.94)% for the year ended June
30, 2007.  Return on average equity was (8.84)% and (3.70)% for the
years ended June 30, 2008 and 2007, respectively. Equity to assets at June 30,
2008 and 2007 was 25.74% and 23.87%, respectively.
  Interest
Income.  Interest income decreased by $179,000, or 2.42%, to
$7.2 million for the year ended June 30, 2008 from $7.4 million for the
same period in 2007.  The decrease in interest income resulted
primarily from a decrease in average total interest earning assets of $2.5
million, or 2.22%, to $110.0 million at June 30, 2008 from $112.5 million at
June 30, 2007. The average yield on interest earning assets was 6.55% and 6.56%
for 2008 and 2007, respectively.
  Interest
income on loans increased $818,000, or 14.55%, for the year ended June 30,
2008 compared to 2007.  The increase was due to a $15.1 million, or
19.51%, increase in the average balance of loans for the year ended June 30,
2008 compared to 2007, offset by a 30 basis point decrease in the average yield
on loans, reflecting the lower interest rate environment during
2008.
  Interest
income on securities available for sale decreased $185,000, or 25.72%, due
primarily to a $5.3 million decrease in the average balance of such securities
for the year ended June 30, 2008 compared to 2007, offset by an increase in
the average yield on such assets to 4.25% in 2008 from 4.02% in
2007.
  Interest
income on Federal funds sold and deposit accounts at the FHLB plus dividends on
FHLB stock decreased $813,000, or 78.55%, due to a decrease of $12.3 million in
the average balance of these securities for the year ended June 30, 2008
compared to 2007 and a decrease in the average yield to 4.33% for the year ended
June 30, 2008 from 5.95% in 2007.
  Interest
Expense.  Interest expense on deposits decreased $432,000, or
15.32%, to $2.4 million for the year ended June 30, 2008 from $2.8
million for the same period in 2007.  The decrease was due to a 29
basis point decrease in the average rates paid on such deposits, to 2.70% for
the year ended June 30, 2008 from 2.99% in 2007, in addition to a decrease of
$5.8 million, or 6.13%, in the average balance of such deposits for the year
ended June 30, 2008 from 2007. Interest expense on borrowings increased
$61,000 from $2,000 in 2007 to $63,000 in 2008 due to FHLB advances drawn in
2008.
  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, on a tax affected basis, and the rates paid on interest-bearing
liabilities) and the relative amounts of interest-earning assets and
interest-bearing liabilities.  Net interest income increased $192,000
for the year ended June 30, 2008 compared to the year ended June 30,
2007.  The increase was primarily due to an increase in the net
interest rate spread to 3.83% per annum in 2008 from 3.57% per annum in
2007.
  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, loss 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
   31
 Table of Contents
  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 makes 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, 2008 and June 30, 2007, the provision for losses
on loans totaled $1.5 million and $267,000, respectively.  The
increased provision in 2008 was the result of the changing composition of and
increase in the size of the loan portfolio, a significant increase in
non-performing loans as well as specific allocations made as a result of loans
identified as impaired during 2008. The allowance for loan losses was $2.1
million, or 2.22% of total loans, at June 30, 2008, as compared to
$667,000, or 0.80% of total loans, at June 30, 2007.  Included in
the allowance for loan loss balance were specific allocations to impaired loans
of $1.3 million at June 30, 2008 and $120,000 at June 30, 2007.  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, 2008, its
allowance for loan losses was adequate to cover probable incurred
losses.
  Management
is aware of three credits, presently not impaired, that have recently
demonstrated concern.  Two of the three credits are loan
participations in the hospitality industry.  The first is a
participation loan relating to a commercial property located in the state of
Michigan with an approximate balance of $3.0 million, and the second is also a
participation loan relating to a commercial property in the Chicagoland area
with an approximate balance of $446,000.  There is no further advance
availability to these borrowers on these two credits.  Management
believes increased credit monitoring of these loans is warranted due to the
weakening cash flows of each respective borrower as a result of current economic
conditions.  At the present time management believes these loans are
adequately secured.
  The third
credit involves a loan to a single family residential home builder in the
Chicagoland area with an approximate balance of $2.5 million as of June 30,
2008.  This credit has the potential of $268,000 in further draw
availability subject to bank approval.  The borrower is presently not
in compliance with certain loan covenants and we continue to closely monitor
this credit.  At the present time management believes this loan is
adequately secured.
 Noninterest
Income.  Noninterest income increased $6,000, or 1.16%, to
$566,000 for the year ended June 30, 2008 compared to $560,000 for the same
period in 2007.  This increase was primarily due to increases in
service charges on deposit accounts of $29,000 and a gain on the sales of
securities of $25,000, primarily offset by a $45,000 decrease in fee income from
mortgage-banking activity.
  Noninterest
Expense.  Noninterest expense increased $266,000, or 4.22%, to
$6.5 million for the year ended June 30, 2008 compared to $6.3 million for
the same period in 2007.  Salaries and employee benefits expense
decreased $290,000, or 9.8%, due to a reduction in two executive positions and
related benefits. Occupancy and equipment expense increased $3,000. Professional
services increased $126,000 primarily as a result of expenses incurred to comply
with Sarbanes-Oxley requirements. Costs totaling $540,000 were incurred due to
the investigation conducted during 2008 regarding irregularities in connection
with the Company’s stock conversion and public offering in 2005. Advertising
expenses decreased $162,000 in 2008 from 2007. In 2008 the Company incurred a
lease termination penalty of $115,000 and an impairment charge on property and
equipment as a result of the closure of the Lansing Branch.
   32
 Table of Contents
  Income Taxes Expense
(Benefits).  No tax benefit for the operating loss incurred in
2008 was recorded as the Company remains in a loss position. The benefit
recorded for 2007 was $213,000. The net deferred tax asset recorded as of June
30, 2008 and 2007 was $275,359 and $360,913.  The net deferred tax
asset represents the taxable income the Company could potentially generate
through various tax planning strategies.
  Comparison
of Financial Condition at June 30, 2007 and June 30, 2006
  Total
assets increased $18.4 million, or 16.1%, to $132.6 million at June 30,
2007 compared to $114.3 million at June 30, 2006.  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 $19.8 million, or 25.07%, to $98.7 million, at
June 30, 2007 compared to $78.9  million at year end
2006.  The increase in cash and cash equivalents of $17.0 million
between periods was due to the Company accumulating liquidity to manage its interest rate
risk in the then current economic environment. The increase in loans receivable
of $6.2 million, or 7.98%, to $83.5 million at June 30, 2007 compared to
$77.3 million at June 30, 2006, resulted from an increase in one-to-four
family loans and commercial real estate loans. The decrease in securities
available for sale of $5.9 million resulted from paydowns, calls and maturities.
Total stockholders’ equity decreased $1.0 million, or 3.34%, to $31.7 million at
June 30, 2007 compared to $32.8 million at June 30, 2006.
 Comparison
of Results of Operations for the Years Ended June 30, 2007 and
June 30, 2006
  General.  The
Company’s net income amounted to $1.2 million for the year ended June 30,
2007, compared to net income of $554,000 for the year ended June 30,
2006.  The decrease in net income reflected decreases in net interest
income and noninterest income and an increase in the provision for loan
losses.  Return on average assets was (0.94)% for the year ended
June 30, 2007 as compared to 0.49% for the year ended June 30,
2006.  Return on average equity was (3.70)% and 1.67% for the years
ended June 30, 2007 and 2006, respectively.  Equity to assets at
June 30, 2007 and 2006 was 23.93% and 28.66%,
respectively.
  Interest
Income.  Interest income increased by $1.5 million, or 26.44%,
to $7.4 million for the year ended June 30, 2007 from $5.8 million for the
same period in 2006.  The increase in interest income resulted
primarily from an increase in average yield on interest earning assets to 6.56%
per annum from 5.88% per annum in 2006 and an increase in total interest earning
assets of $13.2 million, or 13.28% to $112.5 million for the year ended June 30,
2007 from $99.3 million in 2006.
  Interest
income on loans increased by $1.0 million, or 22.0%, for the year ended
June 30, 2007 compared to 2006.  The increase was due to a $2.4
million, or 3.27%, increase in the average balance of loans for the year ended
June 30, 2007 compared to 2006, and a 112 basis point increase in the yield
on loans, reflecting a change in the mix of loan products during
2007.
  Interest
income on securities available for sale decreased by $291,000, or 28.89%, due
primarily to a $3.9 million decrease in the average balance of such securities
for the year ended June 30, 2007 compared to 2006, along with a decrease in
the yield on such assets to 4.02% per annum in 2007 from 4.63% per annum in
2006.
  Interest
income on Federal funds sold and dividend and interest income on a deposit
account at the FHLB increased $820,000, or 380.84%, due to an increase of $14.7
million in the average balance of these securities for the year ended June 30,
2007 compared to 2006. This increase was offset by a decrease in the average
yield to 6.01% for the year ended June 30, 2007 from 8.80% in 2006.
   33
 Table of Contents
  Interest
Expense.  Interest expense on deposits increased $1.5 million,
or 109.0%, to $2.8 million for the year ended June 30, 2007 from $1.4
million for the same period in 2006.  The increase was due to a 127
basis point increase in the rates paid on such deposits, to 2.99% per annum for
the year ended June 30, 2007 from 1.72% in 2006, in addition to an increase
of $15.7 million, or 19.93%, in the average balance of such deposits for the
year ended June 30, 2007 from 2006.
  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 affected and the rates paid on interest-bearing liabilities) and the
relative amounts of interest-earning assets and interest-bearing
liabilities.  Net interest income increased $72,000 for the year ended
June 30, 2007 compared to the year ended June 30, 2006.  The
increase was primarily due to an increase in volume partially offset by a
decrease in the net interest rate spread to 3.57% per annum in 2007 from 4.16%
per annum in 2006.
 Provision for Losses on
Loans.  For the years ended June 30, 2007 and
June 30, 2006, the provision for losses on loans totaled $267,000 and
$127,000, respectively.  The additional provision in 2007 was the
result of the changing composition of and increase in the size of the loan
portfolio, as well as a specific allocation made as a result of a loan
identified as impaired subsequent to fiscal 2007  year end but prior
to the filing of this report. During September 2007, the Bank was made aware of
a situation related to one of its commercial leases totaling $242,000. During
its review of the credit, the Bank determined a specific reserve of $120,000 was
required due to the uncertainty related to the expected future cash flows and
collateral liquidation values, and an additional provision was made and the loan
classified as impaired as of June 30, 2007. The Bank had only one other impaired
loan in the amount of $467,000 at June 30, 2007. No reserve was allocated to
this loan as the Company expects to collect full principal and interest. The
allowance for loan losses was $667,000, or 0.80% of total loans, at
June 30, 2007, as compared to $400,000, or 0.52% of total loans, at
June 30, 2006.
  Noninterest
Income.  Noninterest income decreased $570,000, or 50.45%, to
$560,000 for the year ended June 30, 2007 compared to $1.1 million for the
same period in 2006.  This decrease was primarily due to income
recognized in 2006 as a result of the receipt of $568,000 in death benefits from
a bank-owned life insurance policy as a result of the untimely and unfortunate
death of the Company’s former Chief Financial Officer, Neil Brodzinski, in March
2006.  Noninterest income also reflected increases in service charges
on deposit accounts of $35,000, offset by a $30,000 decrease in fee income from
mortgage-banking activity.
  Noninterest
Expense.  Noninterest expense increased $1.4 million, or
28.31%, to $6.3 million for the year ended June 30, 2007 compared to $4.9
million for the same period in 2006.  Compensation and employee
benefits expense increased $683,000 or 29.06%.  The adoption of
Statement of Financial Accounting Standards (“SFAS”) 123R effective as of July
1, 2006, resulted in increased compensation and benefit expense of $155,000
during fiscal 2007. In addition, the Bank also hired additional personnel to
staff its new branch locations in Frankfort, Illinois and Schererville, Indiana.
Operating the two new branch facilities also caused increases in various other
expense categories during 2007, including occupancy and equipment expenses. Also
impacting noninterest expense was a loss on impairment of securities available
for sale. The Bank holds a floating rate corporate bond in its securities
portfolio which had a rate of 4.66% at June 30, 2007. The bond is AA- rated by
Standard & Poor’s and matures on April 1, 2016. As a result of its
evaluation of the security for impairment in connection with the preparation of
its year end financial statements, the Company determined that the decline in
the fair value of the bond is other than temporary, as it is below market by
13%, has been below market for over two years, and the Company does not intend
to hold the security until it recovers. As a result, a $64,075 impairment charge
was recorded in the fourth quarter of fiscal 2007.
   34
 Table of Contents
  The
Company estimates that it will incur $139,000, pretax, of compensation expense
annually over the next three years and $58,000, pretax, in the fourth year in
adopting the provisions of SFAS 123R effective July 1, 2006. The amount is
related to compensation expense attributable to unvested stock
options.
  Income Taxes Expense
(Benefits).  The benefit from income taxes was $(213,000) in
2007 compared to a tax provision of $44,000 recorded for the year ended June 30,
2006. The resulting effective tax rates for 2007 and 2006 were (15.00)% and
7.36%, 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.
2007 was impacted by a valuation allowance established for deferred tax assets,
charitable contribution carryforwards, and state net operating losses, as the
Company currently believes it is more likely than not that these will not be
used. In addition, on a prospective basis, if the Company remains in
a loss position, it will not be recording the benefit of the net operating
losses generated.
  Liquidity
and Capital Resources
  The
Company’s primary sources of funds are deposits, principal and interest payments
on loans and securities, and 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 provided by (used in) operating activities were
$260,000 and $(4,000) in 2008 and 2007, 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 provided by (used in) investing
activities were $(852,000) and $(1.2) million in 2008 and 2007,
respectively.  Net cash from financing activities consisted primarily
of the activity in deposit accounts, federal funds purchased, and treasury stock
purchases.  The net cash provided by (used in) financing activities
was $(14.9) million in 2008 and $18.3 million in 2007.  The decrease
in cash flows from deposits was a direct result of the Company allowing higher
yielding certificates of deposits to mature without renewing at a rate
acceptable to the Company.
  In the
event of short-term liquidity needs, the Bank may purchase federal funds from
correspondent banks with a combined limit of $10 million.  However,
funds availability is not a committed line of credit and is dependent on lender
availability.  Funds may also be advanced from a borrowing line of
$7.6 million with the Federal Home Loan Bank of Chicago.  Potential
advance availability is based on the current position of our capital stock
holdings and eligible collateral currently pledged to FHLB
..  Additional stock and collateral may be purchased or provided to
increase overall potential advance availability.   With the
recent housing crisis developments, many funds providers, including the FHLB,
have instituted additional monitoring systems.
  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, 2008, the Bank exceeded each of
its capital requirements with ratios of 19.14%, 23.10%, and 24.26%,
respectively.
   35
 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, 2008, the Bank had outstanding commitments to originate $1.5
million in loans, customer unused lines of credit of $14.3
million.  The total amount of certificates of deposit that were
scheduled to mature in the following 12 months was $39.1
million.  Standby letters of credit equaled $505,000 at June 30,
2008.
  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
   36
 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
  None.
 ITEM
8A.                      CONTROLS AND PROCEDURES
  (a)           Evaluation
of disclosure controls and procedures.
  Under the
supervision and with the participation of our management, including our Chief
Executive Officer and President and our Chief Financial Officer, we evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end
of the period covered by this report. Based upon and as of the date of that
evaluation, the Chief Executive Officer and President and Chief Financial
Officer concluded that the Company’s disclosure controls and procedures were
effective, in all material respects, in timely alerting them to the material
information relating to the Company (or its consolidated subsidiaries) required
to be included in our periodic SEC filings.
  (b)           Management’s
annual report on internal control over financial reporting
  The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rule 13a-15(f). The Company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of the financial statements for external
purposes in accordance with accounting principles generally accepted in the
United States of America. The Company’s internal control over financial
reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the Company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Company’s assets that could have a
material effect on the financial statements.
  Management
has evaluated the effectiveness of the Company’s internal control over financial
reporting as of June 30, 2008, based on the framework set forth by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework.  Based on that evaluation, management
concluded that, as of June 30, 2008, the Company’s internal control over
financial reporting was effective based on the criteria established in the
Internal Control-Integrated Framework.
  This
annual report does not include an attestation report of the company’s registered
public accounting firm regarding internal control over financial
reporting.  Management’s report was not
   37
 Table of Contents
  subject
to attestation by the company’s registered public accounting firm pursuant to
temporary rules of the SEC that permit the Company to provide only management’s
report in this annual report.
  (c)           Changes
in Internal Control over Financial Reporting
  There
have been no changes in the Company’s internal controls over financial reporting
during the quarter ended June 30, 2008, that have materially affected or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
  ITEM
8B.                      OTHER INFORMATION
  None.
   38
 Table of Contents
 PART III
  ITEM
      9.
                DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND
      CORPORATE GOVERNANCE; 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 31, 2008, 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 “Directors’ Compensation” and “Executive
Compensation” and the information included therein is incorporated herein by
reference.
  ITEM
      11.
                SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
      AND RELATED STOCKHOLDER MATTERS
  The
information required 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.
   39
 Table of Contents
  Equity
Compensation Plan Information
  The
following table sets forth information as of June 30, 2008 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 to be issued upon exercise of outstanding options, warrants
      and rights
                    (a)
                
                
                Weighted-average
      exercise price of outstanding options, warrants and rights
                    (b)
                
                
                Number
      of securities remaining for future issuance under equity compensation
      plans (excluding securities reflected in columns
                    (a)
      and (b))
                    (c)Equity
      compensation plans approved by security holders
                
                
                139,605
                
                
                $
                13.93
                
                
                
                122,250Equity
      compensation plans not approved by security holders
                
                
                —
                
                
                
                —
                
                
                
                —Total
                
                
                139,605
                
                
                $
                13.93
                
                
                
                122,250
 
 ITEM
      12.
                CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
  The
information required in response to this item will be contained in the Proxy
Statement under the captions “Transactions with Related Persons” and “Election
of Directors—Director Independence” and the information included therein is
incorporated herein by reference.
  ITEM
      13.
                EXHIBITS
  The
exhibits included 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 caption “Proposal 2 – Ratification of Independent Public
Accountants” and the information included therein is incorporated herein by
reference.
  
 40
 Table of Contents
 
 INDEX TO FINANCIAL STATEMENTS
  Page
  REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
                  F-2CONSOLIDATED
      STATEMENTS OF FINANCIAL CONDITION AS OF JUNE 30, 2008 AND
      2007
                  F-3CONSOLIDATED
      STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2008 AND
      2007
                  F-4CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE YEARS ENDED JUNE 30, 2008
      AND 2007
                  F-5CONSOLIDATED
      STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2008 AND
      2007
                  F-7NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                  F-8
  
 F-1
 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 as of June 30, 2008 and 2007, and
the related consolidated statements of operations, 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.  The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting.  Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting.  Accordingly, we express no
such opinion.  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, 2008 and 2007, 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 Horwath
LLP
  Oak
Brook, Illinois
 September
29, 2008
  
 F-2
 Table of Contents
 
 ROYAL
FINANCIAL, INC. AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION
 June 30,
2008 and 2007
  Assets
                
                2008
                
                
                2007Cash
      and noninterest bearing balances in financial institutions
                
                $
                3,692,777
                
                
                $
                3,629,356Interest
      bearing balances in financial institutions
                
                
                68,126
                
                
                
                5,140,346Federal
      funds sold
                
                
                2,163,946
                
                
                
                12,626,252Total
      cash and cash equivalents
                
                
                5,924,849
                
                
                
                21,395,954Securities
      available for sale
                
                
                7,747,047
                
                
                
                15,595,283Loans
      receivable, net of allowance for loan losses of $2,060,000 in 2008 and
      $667,105 in 2007
                
                
                90,775,183
                
                
                
                83,498,883Federal
      Home Loan Bank stock, at cost
                
                
                381,300
                
                
                
                340,500Cash
      surrender value of life insurance
                
                
                4,933,722
                
                
                
                4,741,698Premises
      and equipment, net
                
                
                5,534,815
                
                
                
                5,933,862Accrued
      interest receivable
                
                
                454,922
                
                
                
                508,835Other
      assets
                
                
                376,277
                
                
                
                616,696Total
      assets
                
                $
                116,128,115
                
                
                $
                132,631,711
 
 Liabilities
      and Stockholders’ EquityLiabilitiesDeposits
                
                $
                83,875,204
                
                
                $
                98,675,891Advances
      from borrowers for taxes and insurance
                
                
                545,518
                
                
                
                571,730Accrued
      interest payable and other liabilities
                
                
                1,167,569
                
                
                
                753,988Common
      stock in ESOP subject to contingent repurchase obligation
                
                
                643,264
                
                
                
                968,070Total
      liabilities
                
                
                86,231,555
                
                
                
                100,969,679Stockholders’
      equityPreferred
      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
      shares issued at June 30, 2008 and 2007
                
                
                26,450
                
                
                
                26,450Additional
      paid-in capital
                
                
                24,672,588
                
                
                
                24,169,282Retained
      earnings
                
                
                8,759,470
                
                
                
                11,510,299Treasury
      stock, 89,568 shares and 69,498 shares, at cost
                
                
                (1,326,286
                )
                
                
                (1,057,698
                )Accumulated
      other comprehensive income (loss), net of tax
                
                
                12,376
                
                
                
                (143,372
                )Unearned
      ESOP shares
                
                
                (1,604,774
                )
                
                
                (1,874,859
                )Reclassification
      of ESOP shares
                
                
                (643,264
                )
                
                
                (968,070
                )Total
      stockholders’ equity
                
                
                29,896,560
                
                
                
                31,662,032Total
      liabilities and stockholders’ equity
                
                $
                116,128,115
                
                
                $
                132,631,711
 
 See
accompanying notes to consolidated financial statements.
  
 F-3
 Table of Contents
 
 ROYAL
FINANCIAL, INC. AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 Years
ended June 30, 2008 and 2007
  2008
                
                
                2007Interest
      incomeLoans
                
                $
                6,443,127
                
                
                $
                5,624,628Securities,
      taxable
                
                
                532,986
                
                
                
                717,516Federal
      funds sold and other
                
                
                221,931
                
                
                
                1,034,770Total
      interest income
                
                
                7,198,044
                
                
                
                7,376,914Interest
      expenseDeposits
                
                
                2,389,667
                
                
                
                2,821,984Borrowings
                
                
                63,531
                
                
                
                2,151Total
      interest expense
                
                
                2,453,198
                
                
                
                2,824,135Net
      interest income
                
                
                4,744,846
                
                
                
                4,552,779Provision
      for loan losses
                
                
                1,527,971
                
                
                
                267,105Net
      interest income after provision for loan losses
                
                
                3,216,875
                
                
                
                4,285,674Noninterest
      incomeService
      charges on deposit accounts
                
                
                287,696
                
                
                
                258,555Gain
      on sales of securities, net
                
                
                25,325
                
                
                
                —Mortgage-banking
      fees
                
                
                11,067
                
                
                
                55,567Earnings
      on bank-owned life insurance
                
                
                192,024
                
                
                
                187,977Other
                
                
                50,014
                
                
                
                57,563Total
      noninterest income
                
                
                566,126
                
                
                
                559,662Noninterest
      expenseSalaries
      and employee benefits
                
                
                2,737,505
                
                
                
                3,034,293Occupancy
      and equipment
                
                
                1,250,715
                
                
                
                1,247,280Data
      processing
                
                
                422,650
                
                
                
                404,682Professional
      services
                
                
                703,506
                
                
                
                577,546Investigation
      costs
                
                
                540,483
                
                
                
                —Director
      fees
                
                
                131,000
                
                
                
                136,800Supplies
                
                
                60,733
                
                
                
                108,849Advertising
                
                
                101,963
                
                
                
                263,959Insurance
      premiums
                
                
                79,599
                
                
                
                80,115Loss
      on impairment of securities available for sale
                
                
                —
                
                
                
                64,075Lease
      termination penalty
                
                
                115,000
                
                
                
                —Loss
      on property and equipment impairment
                
                
                34,001
                
                
                
                —Other
                
                
                356,675
                
                
                
                350,230Total
      noninterest expense
                
                
                6,533,830
                
                
                
                6,267,829Loss
      before income taxes
                
                
                (2,750,829
                )
                
                
                (1,422,493
                )Benefit
      for income taxes
                
                
                —
                
                
                
                (213,485
                )Net
      loss
                
                $
                (2,750,829
                )
                
                $
                (1,209,008
                )Basic
      and diluted loss per share
                
                $
                (1.16
                )
                
                $
                (0.51
                )
 
 See
accompanying notes to consolidated financial statements.
  
 F-4
 Table of Contents
  ROYAL
FINANCIAL, INC. AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
 Years
ended June 30, 2008 and 2007
  Common
      Stock
                
                
                Additional
      Paid-In Capital
                
                
                Retained
      Earnings
                
                
                Treasury
      Stock
                
                
                Accumulated
      Other
                    Comprehensive
      Income
                    (Loss)
                
                
                Unearned
      RRP Shares
                
                
                Unearned
      ESOP
                    Shares
                
                
                Amount
      Reclassified on ESOP Shares
                
                
                TotalBalance
      at July 1, 2006
                
                $
                26,450
                
                
                $
                24,739,005
                
                
                $
                12,719,307
                
                
                $
                (783,611
                )
                
                $
                (393,231
                )
                
                $
                (897,072
                )
                
                $
                (2,140,299
                )
                
                $
                (617,872
                )
                
                $
                32,652,677Comprehensive
      income (loss)Net
      loss
                
                
                –
                
                
                
                –
                
                
                
                (1,209,008
                )
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                (1,209,008
                )Net
      increase in fair value of securities classified as available for sale, net
      of income taxes and reclassification adjustments
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                249,859
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                249,859Total
      comprehensive loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (959,149
                )Reclassification
      due to release and change in fair value of common stock in ESOP subject to
      contingent repurchase obligation of ESOP shares
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                (350,198
                )
                
                
                (350,198
                )Reclassification
      of RRPS in conjunction with adoption of SFAS 123(R)
                
                
                –
                
                
                
                (897,072
                )
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                897,072
                
                
                
                –
                
                
                
                –
                
                
                
                –Release
      of  21,160 of unearned ESOP shares
                
                
                –
                
                
                
                57,250
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                265,440
                
                
                
                –
                
                
                
                322,690Issuance
      of 5,000 shares to RRP plan
                
                
                –
                
                
                
                (74,250
                )
                
                
                –
                
                
                
                74,250
                
                
                
                
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –Tax
      benefit on RRP shares vested
                
                
                –
                
                
                
                8,529
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                
                
                
                
                8,529Exercise
      of 2,645 stock options, including the realization of tax benefits of
      $1,844
                
                
                –
                
                
                
                (668
                )
                
                
                –
                
                
                
                39,278
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                38,610Purchase
      of 24,243 Treasury shares at cost
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                (387,615
                )
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                (387,615
                )Stock-based
      compensation
                
                
                –
                
                
                
                336,488
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                336,488Balance
      at June 30, 2007
                
                
                26,450
                
                
                
                24,169,282
                
                
                
                11,510,299
                
                
                
                (1,057,698
                )
                
                
                (143,372
                )
                
                
                –
                
                
                
                (1,874,859
                )
                
                
                (968,070
                )
                
                
                31,662,032
   F-5
 Table of Contents
  Common
      Stock
                
                
                Additional
      Paid-In Capital
                
                
                Retained
      Earnings
                
                
                Treasury
      Stock
                
                
                Accumulated
      Other
                    Comprehensive
      Income
                    (Loss)
                
                
                Unearned
      ESOP
                    Shares
                
                
                Amount
      Reclassified on ESOP Shares
                
                
                TotalBalance
      at June 30, 2007
                
                $
                26,450
                
                
                $
                24,169,282
                
                
                $
                11,510,299
                
                
                $
                (1,057,698
                )
                
                $
                (143,372
                )
                
                $
                (1,874,859
                )
                
                $
                (968,070
                )
                
                $
                31,662,032Comprehensive
      income (loss)Net
      loss
                
                
                –
                
                
                
                –
                
                
                
                (2,750,829
                )
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                (2,750,829
                )Net
      increase in fair value of securities classified as available for sale, net
      of income taxes and reclassification adjustments
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                155,748
                
                
                
                –
                
                
                
                –
                
                
                
                155,748Total
      comprehensive loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (2,379,950
                )Reclassification
      due to release and change in fair value of common stock in ESOP subject to
      contingent repurchase obligation of ESOP shares
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                324,806
                
                
                
                324,806Release
      of  21,160 of unearned ESOP shares
                
                
                –
                
                
                
                9,863
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                270,085
                
                
                
                –
                
                
                
                279,948Issuance
      of 6,290  shares to RRP plan
                
                
                
                
                
                
                (93,406
                )
                
                
                –
                
                
                
                93,406
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –Forfeiture
      of 21,160 shares from the RRP plan
                
                
                –
                
                
                
                309,994
                
                
                
                –
                
                
                
                (309,994
                )
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –Purchase
      of  5,200 Treasury shares at cost
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                (52,000
                )
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                (52,000
                )Stock-based
      compensation
                
                
                –
                
                
                
                276,855
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                276,855Balance
      at June 30, 2008
                
                $
                26,450
                
                
                $
                24,672,588
                
                
                $
                8,759,470
                
                
                $
                (1,326,286
                )
                
                $
                12,376
                
                
                $
                (1,604,774
                )
                
                $
                (643,264
                )
                
                $
                29,896,560
 
 See
accompanying notes to consolidated financial statements.
  
 F-6
 Table of Contents
  ROYAL
FINANCIAL, INC. AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 Years
ended June 30, 2008 and 2007
  2008
                
                
                2007Cash
      flows from operating activitiesNet
      loss
                
                $
                (2,750,829
                )
                
                $
                (1,209,008
                )Adjustments
      to reconcile net loss to net cash from operating
activitiesDepreciation
                
                
                462,206
                
                
                
                440,536Net
      amortization of securities
                
                
                20,191
                
                
                
                (29,172
                )Amortization
      of net deferred loan costs
                
                
                (3,538
                )
                
                
                44,930Provision
      for loan losses
                
                
                1,527,971
                
                
                
                267,105Bank-owned
      life insurance income
                
                
                (192,024
                )
                
                
                (187,977
                )ESOP
      expense
                
                
                279,948
                
                
                
                322,690Gain
      on sale of securities, net
                
                
                (25,325
                )
                
                
                —Loss
      on impairment of securities available for sale
                
                
                —
                
                
                
                64,075Lease
      termination penalty
                
                
                115,000
                
                
                
                —Loss
      on property and equipment impairment
                
                
                34,001
                
                
                
                —Loss
      on sale of equipment
                
                
                2,815
                
                
                
                —Stock-based
      compensation
                
                
                276,855
                
                
                
                336,488Change
      in accrued interest receivable and other assets
                
                
                214,097
                
                
                
                (364,199
                )Change
      in other accrued interest payable and liabilities
                
                
                298,581
                
                
                
                310,170Net
      cash from operating activities
                
                
                259,949
                
                
                
                (4,362
                )Cash
      flows from investing activitiesProceeds
      from maturities, calls, and paydowns of securities available for
      sale
                
                
                7,628,103
                
                
                
                8,211,016Proceeds
      from the sale of securities available for sale
                
                
                461,250
                
                
                
                —Purchase
      of securities available for sale
                
                
                —
                
                
                
                (2,003,129
                )Purchase
      of Federal Home Loan Bank stock
                
                
                (40,800
                )
                
                
                (17,508
                )Redemption
      of Federal Home Loan Bank stock
                
                
                —
                
                
                
                22,921Change
      in loans receivable
                
                
                (4,762,665
                )
                
                
                (4,638,421
                )Purchase
      of loan participations
                
                
                (4,038,068
                )
                
                
                (1,846,563
                )Purchase
      of premises and equipment, net of disposals
                
                
                (99,975
                )
                
                
                (971,979
                )Net
      cash from investing activities
                
                
                (852,155
                )
                
                
                (1,243,663
                )Cash
      flows from financing activitiesNet
      increase (decrease) in deposits
                
                
                (14,800,687
                )
                
                
                19,778,144Net
      decrease in federal funds purchased
                
                
                —
                
                
                
                (1,225,404
                )Purchase
      of treasury stock
                
                
                (52,000
                )
                
                
                (387,615
                )Proceeds
      from the exercise of stock options, including tax benefits
                
                
                —
                
                
                
                38,610Net
      increase (decrease) in advances from borrowers for taxes and
                  insurance
                
                
                (26,212
                )
                
                
                92,024Net
      cash from financing activities
                
                
                (14,878,899
                )
                
                
                18,295,759Net
      change in cash and cash equivalents
                
                
                (15,471,105
                )
                
                
                17,047,734Cash
      and cash equivalents:Beginning
      of the year
                
                
                21,395,954
                
                
                
                4,348,220End
      of the year
                
                $
                5,924,849
                
                
                $
                21,395,954Supplemental
      cash flow information:Interest
      paid
                
                $
                1,885,701
                
                
                $
                2,825,016Supplemental
      noncash disclosure:Common
      stock in ESOP subject to contingent repurchase obligation
                
                $
                643,264
                
                
                $
                968,070
 
 See
accompanying notes to consolidated financial statements.
  F-7
 Table of Contents
  ROYAL
FINANCIAL, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2008 and 2007
  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.
  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 Frankfort, Illinois, and its third
branch in Schererville, Indiana.  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 federal funds purchased.
  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: the length of time and extent that
fair value has been less than cost or adjusted cost, as applicable, the
financial condition and near term prospects of the issuer, and the
Company’s ability and intent to hold the security for a period sufficient to
allow for any anticipated recovery in fair value.
  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 deferred loan fees and costs and an allowance for loan losses.
  Participations
purchased consist primarily of commercial and commercial real estate loans in
Chicago, Northwest Indiana, Michigan, and Florida.  The Bank utilizes
the same underwriting standards and criteria as it would if it originated the
loans.
  
 F-8
 Table of Contents
 
 NOTE
1 – SIGNIFICANT ACCOUNTING POLICIES (continued)
  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.  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.
  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.
  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, less estimated costs to sell, 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.  Upon adoption of EITF 06-5, which is discussed further
below, Bank owned life insurance is recorded at the amount that can be realized
under the insurance contract at the balance sheet date, which is the cash
surrender value adjusted for other charges or other amounts due that are
probable at settlement. Prior to adoption of EITF 06-5, we recorded owned life
insurance at its cash surrender value.
 
 In
September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-5,
Accounting for Purchases of Life Insurance - Determining the Amount That Could
Be Realized in Accordance with FASB Technical Bulletin No. 85-4 (Accounting for
Purchases of Life Insurance). This Issue requires that a policyholder consider
contractual terms of a life insurance policy in determining the amount that
could be realized under the insurance contract. It also requires that if the
contract provides for a greater surrender value if all individual policies in a
group are surrendered at the same time, that the surrender value be determined
based on the assumption that policies will be surrendered on an individual
basis. Lastly, the Issue requires disclosure when there are contractual
restrictions on the Company’s ability to
 
 F-9
 Table of Contents
 
 NOTE
1 – SIGNIFICANT ACCOUNTING POLICIES (continued)
  surrender a policy. The
adoption of EITF 06-5 on July 1, 2008 had no impact on our company’s financial
condition or results of operation.
  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.  Buildings and improvements are depreciated using the
straight-line method with useful lives ranging from 5 to 40
years.  Leasehold improvements are depreciated using the straight-line
method over the lesser of the lease term or useful life of the
improvement.  Furniture and equipment are depreciated using the
straight-line method with useful lives ranging from 3 to 10 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.
  Stock Compensation:
The Company records stock-based compensation using the fair value method and
amortizes the expense over the vesting period in accordance with Statement of
Financial Accounting Standards (SFAS) No. 123(R), Share-Based
Payment.
  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 to
liabilities.  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 stockholders’
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.
  
 F-10
 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. ESOP shares and restricted stock are considered outstanding for this
calculation unless unearned.  Diluted earnings (loss) per share shows
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.
  Adoption of New Accounting
Standards:  The Company adopted FASB Interpretation 48, Accounting for Uncertainty in Income
Taxes (“FIN 48”), as of July 1, 2007.  A tax position is
recognized as a benefit only if it is “more likely than not” that the tax
position would be sustained in a tax examination, with a tax examination being
presumed to occur.  The amount recognized is the largest amount of tax
benefit that is greater than 50% likely of being realized on examination. For
tax positions not meeting the “more likely than not” test, no tax benefit is
recorded.  The adoption had no effect on the Company’s consolidated
financial statements.
  The
Company and its subsidiaries are subject to U.S. federal income tax as well as
income tax of the state of Illinois and Indiana. The Company is no longer
subject to examination by taxing authorities for years before 2005.
  The
Company recognizes interest and/or penalties related to income tax matters in
income tax expense. The Company did not have any amounts accrued for interest
and penalties at July 1, 2007.
  On
November 5, 2007, the SEC issued Staff Accounting Bulletin No. 109, Written Loan Commitments
Recorded at Fair Value through
Earnings (“SAB 109”). Previously, SAB 105, Application of Accounting Principles
to Loan Commitments, stated that in measuring the fair value of a
derivative loan commitment, a company should not incorporate the expected net
future cash flows related to the associated servicing of the loan. SAB 109
supersedes SAB 105 and indicates that the expected net future cash flows related
to the associated servicing of the loan should be included in measuring fair
value of all written loan commitments that are accounted for a fair value
through earnings. SAB 105 also indicated that internally-developed intangible
assets should not be recorded as part of the fair value of a derivative loan
commitment, and SAB 109 retains that view. SAB 109 is effective for derivative
loan commitments issued or modified in fiscal quarters beginning after December
15, 2007. The impact of the adoption did not have a material impact on the
Company’s consolidated financial position or results of operations.
  Effect of Newly Issued But
Not Yet Effective Accounting Standards:  In September
2006, the FASB issued Statement No. 157, Fair Value
Measurements.  This Statement defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements.  This Statement establishes a fair value hierarchy about
the assumptions used to measure
  
 F-11
 Table of Contents
  NOTE
1 – SIGNIFICANT ACCOUNTING POLICIES (continued)
 fair value and
clarifies assumptions about risk and the effect of a restriction on the sale or
use of an asset.  The standard is effective for fiscal years beginning
after November 15, 2007.  In February 2008, the FASB issued Staff Position
(“FSP”) 157-2,Effective Date of FASB Statement No. 157.This FSP delays the
effective date of FAS 157 for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value on a
recurring basis (at least annually) to fiscal years beginning after November 15,
2008, and interim periods within those fiscal years.  The impact of
adoption on July 1, 2008, did not have a material impact on the Company’s
consolidated financial position or results of operations.
 In
February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities.  The standard provides
companies with an option to report selected financial assets and liabilities at
fair value and establishes presentation and disclosure requirements designed to
facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities.  The new
standard is effective for the Company on July 1, 2008.  The impact of
adoption on July 1, 2008, did not have a material impact on the Company’s
consolidated financial position or results of operations.
  In March
2008, the FASB issued Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities(“SFAS 161”).  SFAS 161
amends Statement 133 by requiring expanded disclosures about an entity’s
derivative instruments and hedging activities, but does not change Statement
133’s scope or accounting.  This statement requires increased
qualitative, quantitative, and credit-risk disclosures.  SFAS 161 also
amends Statement No. 107 to clarify that derivative instruments are subject to
Statement 107’s concentration-of-credit-risk
disclosures.  SFAS 161 is effective for fiscal years beginning on
or after November 15, 2008.  The Company does not expect the adoption
to have a material impact on the Company’s consolidated financial position or
results of operations.
  NOTE
2 – CASH AND CASH EQUIVALENTS
  Cash and
cash equivalents included the following accounts as of June 30 with amounts
in excess of Federal Deposit Insurance Corporation (FDIC) limits of $100,000.
Balances in excess of $100,000 do not have insurance coverage. Balances as of
June 30 approximated:
  2008
                  
                  
                  2007Bank
      of America
                  
                  $
                  1,111,000
                  
                  
                  $
                  7,560,000Zions
      Bank
                  
                  
                  3,558,000
                  
                  
                  
                  7,346,000Federal
      Home Loan Bank of Chicago
                  
                  
                  68,000
                  
                  
                  
                  5,140,000
   F-12
 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 at June 30, 2008 and 2007:
  Fair
      Value
                  
                  
                  Gross
                      Unrealized
      Gains
                  
                  
                  Gross
                      Unrealized
      Losses2008U.S.
      government-sponsored entity
                  
                  $
                  2,001,640
                  
                  
                  $
                  1,640
                  
                  
                  $
                  —Mortgage-backed
                  
                  
                  686,282
                  
                  
                  
                  1,647
                  
                  
                  
                  (4,114
                  )Collateralized
      mortgage obligations
                  
                  
                  5,059,125
                  
                  
                  
                  20,148
                  
                  
                  
                  (568
                  )Total
                  
                  $
                  7,747,047
                  
                  
                  $
                  23,435
                  
                  
                  $
                  (4,682
                  )2007U.S.
      government-sponsored entity
                  
                  $
                  6,922,120
                  
                  
                  $
                  —
                  
                  
                  $
                  (77,743
                  )Mortgage-backed
                  
                  
                  907,072
                  
                  
                  
                  323
                  
                  
                  
                  (24,954
                  )Collateralized
      mortgage obligations
                  
                  
                  7,330,166
                  
                  
                  
                  120
                  
                  
                  
                  (114,976
                  )Corporate
                  
                  
                  435,925
                  
                  
                  
                  —
                  
                  
                  
                  —Total
                  
                  $
                  15,595,283
                  
                  
                  $
                  443
                  
                  
                  $
                  (217,673
                  )
 The fair
value of securities available for sale at year-end 2008 by contractual maturity
was as follows.  Securities not due at a single maturity date,
mortgage-backed securities and collateralized mortgage obligations, are shown
separately.
  Fair
      ValueDue
      in one year or less
                
                $
                2,001,640Due
      from one to five years
                
                
                —Due
      from five to ten years
                
                
                —Mortgage-backed
                
                
                686,282Collateralized
      mortgage obligations
                
                
                5,059,125Total
                
                $
                7,747,047
 
 Sales of
securities available for sale were as follows:
  2008
                
                
                2007Proceeds
                
                $
                461,250
                
                
                $
                —Gross
      gains
                
                
                25,325
                
                
                
                —Gross
      losses
                
                
                —
                
                
                
                —
 
  F-13
 Table of Contents
  NOTE
3 – SECURITIES (continued)
  Securities
with unrealized losses at June 30, 2008 and 2007, aggregated by investment
category and length of time that individual securities have been in a continuous
unrealized loss position, are as follows:
  Less
      Than 12 Months
                
                
                12
      Months or More
                
                
                TotalFair
      Value
                
                
                Unrealized
      Loss
                
                
                Fair
      Value
                
                
                Unrealized
      Loss
                
                
                Fair
      Value
                
                
                Unrealized
      Loss2008U.S.
      government-sponsored entity
                
                $
                —
                
                
                $
                —
                
                
                $
                —
                
                
                $
                —
                
                
                $
                —
                
                
                $
                —Mortgage-backed
                
                
                —
                
                
                
                —
                
                
                
                481,465
                
                
                
                (4,114
                )
                
                
                481,465
                
                
                
                (4,114
                )Collateralized
      mortgage obligations
                
                
                —
                
                
                
                —
                
                
                
                537,760
                
                
                
                (568
                )
                
                
                537,760
                
                
                
                (568
                )$
                —
                
                
                $
                —
                
                
                $
                1,019,225
                
                
                $
                (4,682
                )
                
                $
                1,019,225
                
                
                $
                (4,682
                )2007U.S.
      government-sponsored entity
                
                $
                —
                
                
                $
                —
                
                
                $
                6,922,120
                
                
                $
                (77,743
                )
                
                $
                6,922,120
                
                
                $
                (77,743
                )Mortgage-backed
                
                
                —
                
                
                
                —
                
                
                
                827,868
                
                
                
                (24,954
                )
                
                
                827,868
                
                
                
                (24,954
                )Collateralized
      mortgage obligations
                
                
                1,670,503
                
                
                
                (14,263
                )
                
                
                5,614,491
                
                
                
                (100,713
                )
                
                
                7,284,994
                
                
                
                (114,976
                )$
                1,670,503
                
                
                $
                (14,263
                )
                
                $
                13,364,479
                
                
                $
                (203,410
                )
                
                $
                15,034,982
                
                
                $
                (217,673
                )
 
 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 interest 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 result of reviews of
the issuer’s financial condition.
  Unrealized
losses on mortgage-backed and collateral mortgage obligation 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 and liquidity in the capital markets.  The fair value is
expected to recover as the securities approach their maturity date.
   F-14
 Table of Contents
  NOTE
4 – LOANS
  At
June 30, 2008 and 2007, loans receivable consisted of the
following:
  2008
                
                
                2007Real
      estate loansOne-to-four-family
                
                $
                36,362,454
                
                
                $
                36,756,599Commercial
                
                
                43,337,424
                
                
                
                32,880,378Multi-family
                
                
                3,688,999
                
                
                
                4,768,442Total
      real estate loans
                
                
                83,388,877
                
                
                
                74,405,419Commercial
      loans
                
                
                8,738,738
                
                
                
                9,237,266Consumer
      loansHome
      equity loans
                
                
                591,347
                
                
                
                342,492Other
                
                
                119,067
                
                
                
                187,195Total
      consumer loans
                
                
                710,414
                
                
                
                529,687Less:Net
      deferred loan fees
                
                
                2,846
                
                
                
                6,384Allowance
      for loan losses
                
                
                2,060,000
                
                
                
                667,105Loans,
      net
                
                $
                90,775,183
                
                
                $
                83,498,883
 
  A summary
of changes in the allowance for loan losses for the years ended June 30,
2008 and 2007 is as follows:
  2008
                
                
                2007Balance
      at beginning of year
                
                $
                667,105
                
                
                $
                400,000Provision
      for loan loss
                
                
                1,527,971
                
                
                
                267,105Chargeoffs
                
                
                (135,076
                )
                
                
                —Recoveries
                
                
                —
                
                
                
                —Balance
      at end of year
                
                $
                2,060,000
                
                
                $
                667,105
  
   The
following is a summary of information pertaining to impaired and nonaccrual
loans at June 30:
  2008
                  
                  
                  2007Year-end
      loans with allocated allowance for loan losses
                  
                  $
                  3,745,680
                  
                  
                  $
                  242,000Year-end
      loans with no allocated allowance for loan losses
                  
                  
                  1,519,334
                  
                  
                  
                  467,000Total
                  
                  $
                  5,265,014
                  
                  
                  $
                  709,000Amount
      of the allowance for loan losses allocated
                  
                  $
                  1,285,000
                  
                  
                  $
                  120,000
  2008
                  
                  
                  2007Average
      of individually impaired loans during the year
                  
                  $
                  2,564,173
                  
                  
                  $
                  59,083Interest
      income recognized during impairment
                  
                  
                  —
                  
                  
                  
                  6,718Cash-basis
      interest income recognized
                  
                  
                  —
                  
                  
                  
                  3,682
  Nonaccrual
loans and loans past due 90 days still on accrual were as follows:
  2008
                  
                  
                  2007Loans
      past due 90 days still on accrual
                  
                  $
                  —
                  
                  
                  $
                  225,733Nonaccrual
      loans
                  
                  
                  5,265,014
                  
                  
                  
                  —
   F-15
 Table of Contents
 
 NOTE
5 – PREMISES AND EQUIPMENT
  Premises
and equipment as of June 30, 2008 and 2007 are as follows:
  2008
                
                
                2007Land
                
                $
                1,044,286
                
                
                $
                1,014,635Buildings
      and improvements
                
                
                5,053,496
                
                
                
                5,049,121Furniture
      and equipment
                
                
                2,157,135
                
                
                
                2,223,027Leasehold
      improvements
                
                
                773,721
                
                
                
                773,721Total
      cost
                
                
                9,028,638
                
                
                
                9,060,504Less
      accumulated depreciation
                
                
                3,493,823
                
                
                
                3,126,642$
                5,534,815
                
                
                $
                5,933,862
 
 Depreciation
expense was $462,000 and $441,000 for the years ended June 30, 2008 and
2007, respectively.
  The
Company leased an office facility in Lansing, Illinois from an unrelated third
party, the terms of which were terminated by the Company in June 2008.
Insurance, real estate taxes, and certain other operating expenses applicable to
the leased premises, in addition to the monthly minimum payments, were paid by
the Company. The contractual lease term was set to expire February 2009 with
renewal options available at the discretion of the Company. During June 2008,
the Company gave notice to the lessor that it intended to terminate the lease
early. In conjunction with that lease termination, the Company incurred a
termination fee equal to the base rent, real estate taxes, and certain other
operating expenses applicable to the leased premises for the six-month period
succeeding the effective termination date, or approximately
$115,000.  In conjunction with that lease termination, certain
leasehold improvements and furniture and fixtures became impaired during June
2008. These assets had a net book value of approximately $34,000 and were
written off. Assets with a net book value of approximately $19,000 at June 30,
2008 were transferred to other Bank facilities.
  During
2008, the Bank leased two additional (other than Lansing) branch
locations:  Frankfort, Illinois and Schererville, Indiana, under
noncancelable operating leases with lease terms which expire in 2009 and
2011.  The Frankfort lease has two one-year options and a five-year
option remaining, and the Schererville lease has one five-year option
remaining.  Rent expense was $328,000 and $346,000 for the year ended
June 30, 2008 and 2007, respectively.  The leases provide that
the Bank pays real estate taxes, insurance, and certain other operating expenses
applicable to the leased premises in addition to the monthly minimum
payments.
  Rent
commitments under noncancelable operations leases were as follows, assuming
exercise of certain renewable options through 2016, for the 12 months ended June
30:
  2009
                
                $
                159,0002010
                
                
                166,0002011
                
                
                175,0002012
                
                
                182,0002013
                
                
                189,000Thereafter
                
                
                570,000Total
                
                $
                1,441,000
   F-16
 Table of Contents
  NOTE
6 – DEPOSITS
  Deposit
account balances as of June 30, 2008 and 2007 are summarized as
follows:
  2008
                
                
                2007Savings
                
                $
                25,944,633
                
                
                $
                27,618,061NOW
      accounts
                
                
                4,804,409
                
                
                
                5,449,016Non-interest-bearing
      checking
                
                
                5,157,209
                
                
                
                6,568,545Money
      market
                
                
                3,364,538
                
                
                
                4,191,97339,270,789
                
                
                
                43,827,595Certificates
      of deposit
                
                
                38,010,315
                
                
                
                47,114,018Individual
      retirement accounts
                
                
                6,594,100
                
                
                
                7,734,27844,604,415
                
                
                
                54,848,296$
                83,875,204
                
                
                $
                98,675,891
 
 Time
deposits of $100,000 and over totaled $14,610,950 and $17,800,978 at
June 30, 2008 and 2007, respectively.
  At
June 30, 2008, scheduled maturities of certificates of deposit and
individual retirement accounts are as follows for the 12 months ended June 30,
2008:
  2009
                
                $
                39,077,8472010
                
                
                2,732,1762011
                
                
                1,282,4912012
                
                
                987,0282013
                
                
                523,658Over
      5 Years
                
                
                1,215Total
                
                $
                44,604,415
 
 NOTE
7 – INCOME TAXES
  The
components of the provision (benefit) for income taxes are as
follows:
   2008
                  
                  
                  2007CurrentFederal
                  
                  $
                  (5,320
                  )
                  
                  $
                  20,670State
                  
                  
                  —
                  
                  
                  
                  —(5,320
                  )
                  
                  
                  20,670Deferred
                  
                  
                  (1,070,789
                  )
                  
                  
                  (500,361
                  )Change
      in valuation allowance
                  
                  
                  1,076,109
                  
                  
                  
                  266,206$
                  —
                  
                  
                  $
                  (213,485
                  )
   F-17
 Table of Contents
  NOTE
7 – INCOME TAXES (continued)
  Deferred
tax assets (liabilities) are comprised of the following at
June 30:
  2008
                
                
                2007Federal
      net operating loss carryforward
                
                $
                718,722
                
                
                $
                237,598Bad
      debts
                
                
                700,400
                
                
                
                226,816Deferred
      compensation
                
                
                16,689
                
                
                
                19,494Charitable
      contribution carryover
                
                
                209,706
                
                
                
                209,411Impairment
      of securities available for sale
                
                
                -
                
                
                
                21,786Stock
      option and RRP
                
                
                155,085
                
                
                
                120,531State
      NOL carryforward
                
                
                303,681
                
                
                
                245,457Accrued
      rent, vacation and other
                
                
                5,415
                
                
                
                84,228Unrealized
      loss on securities available for sale
                
                
                —
                
                
                
                73,858Gross
      deferred tax assets
                
                
                2,109,698
                
                
                
                1,239,179Depreciation
      and other
                
                
                (72,048
                )
                
                
                (196,691
                )FHLB
      stock dividends
                
                
                (32,643
                )
                
                
                (34,412
                )Unrealized
      gain on securities available for sale
                
                
                (6,376
                )
                
                
                —Gross
      deferred tax liabilities
                
                
                (111,067
                )
                
                
                (231,103
                )Valuation
      allowance for deferred tax assets
                
                
                (1,723,272
                )
                
                
                (647,163
                )Net
      deferred tax assets (liabilities)
                
                $
                275,359
                
                
                $
                360,913
 
  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 30,2008
                
                
                2007Income
      taxes (benefit) computed at the statutory rate
                
                $
                (935,282
                )
                
                $
                (483,648
                )Valuation
      allowance
                
                
                1,076,109
                
                
                
                266,206Earnings
      on life insurance and other, net
                
                
                (140,827
                )
                
                
                3,957Total
      provision (benefit) for income taxes
                
                $
                —
                
                
                $
                (213,485
                )
  At
June 30, 2008, the Company had federal and state net operating loss
carryforwards of approximately $2.1 million and $6.4 million, respectively,
expiring between 2008 and 2027.  At June 30, 2007 these amounts
approximated $699,000 and $5.1 million, respectively.  A valuation
allowance has been established for the state net operating loss carryforwards as
the Company believes it is more likely than not that they will not be
realized.
  Also at
June 30, 2008 and 2007, the Company has charitable contribution
carryforwards of approximately $617,000 and $616,000.  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 $210,000 and $209,000
is appropriate as of June 30, 2008 and 2007.
  In
addition at June 30, 2008, the Company has established a valuation
allowance in the amount of $1,209,000 for the majority of the remaining net
deferred tax assets based on all analysis that shows at this point in time it is
more likely than not that a portion of these deferred tax assets will not be
realized.  The Company will continue to evaluate its deferred tax
position and make adjustments as necessary.
   F-18
 Table of Contents
  NOTE
7 – INCOME TAXES (continued)
  Prior to
1997, the Bank had qualified under provisions of the Internal Revenue Code that
permitted 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, 2008 include
approximately $1.3 million for which no deferred federal income tax liability
has been recorded.  This deferred federal income tax liability
approximates $445,000.  If the Bank were liquidated or otherwise
ceases to be a bank or if tax laws change, the $445,000 would be recorded as
expense.
  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
2008 and 2007, 21,160 shares and 21,160 shares, with a fair value of $13.23 and
$15.25 per share, were committed to be released, resulting in ESOP compensation
expense of $280,000 and $323,000, respectively.  Contributions to the
ESOP for repayment of principal and interest were $403,000 and $423,000 for 2008
and 2007, respectively.
  June 30,
      2008
                
                
                June
      30, 2007Allocated
      shares
                
                
                84,640
                
                
                
                63,480Unallocated
      shares
                
                
                126,960
                
                
                
                148,120Total
      ESOP shares
                
                
                211,600
                
                
                
                211,600Fair
      value of unallocated shares
                
                $
                964,896
                
                
                $
                2,258,830Fair
      value of allocated shares subject to repurchase obligation
                
                $
                643,264
                
                
                $
                968,070
 
 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 2008 and 2007.
  The Bank
has a deferred compensation plan pursuant to which a current director of the
Company and the Bank is entitled to receive $1,000 per month for life as a
former employee of the Bank and a director of the Bank prior to its stock
conversion.  The present value of these agreements was recorded based
on life expectancy and a discount rate of 7%.  At June 30, 2008
and 2007, a liability of approximately $49,000 and $57,000 remained and was
included in accrued interest payable and other liabilities in the consolidated
statements of financial condition.
  
 F-19
 Table of Contents
 
 NOTE
9 – STOCK-BASED COMPENSATION
  The
Company has two share-based compensation plans as described
below.  Total compensation cost that has been charged against income
for those plans was $277,000 and $336,000 for 2008 and 2007. The total income
tax benefit was $94,000 and $114,000, respectively.
  Stock
Option Plan:
  The
Company’s 2005 stock option plan (the Plan), which is stockholder-approved,
permits the grant of options to purchase shares of the Company’s common stock to
its employees and directors of up to 264,500 shares of common
stock.  At June 30, 2008, there are 122,250 of shares available
for future grants under this plan.  The Company believes that such
awards better align the interests of its employees with those of its
stockholders.  Option awards are generally granted with an exercise
price equal to the market price of the Company’s common stock at the date of
grant; those option awards generally have vesting periods of 5 years and have
10-year contractual terms.  The Company has a policy of using shares
held as treasury stock to satisfy option exercises.  Currently, the
Company has a sufficient number of treasury shares to satisfy expected option
exercises.
  The fair
value of each option award is estimated on the date of grant using a closed form
option valuation (Black-Scholes) model that uses the assumptions noted in the
table below.  Expected volatilities are based on historical
volatilities of the Company’s common stock.  The risk-free interest
rate for the expected term of the option is based on the U.S. Treasury yield
curve in effect at the time of the grant.
  The fair
value of options granted was determined using the following weighted-average
assumptions as of grant date.
  2008
                
                
                2007Risk-free
      interest rate
                
                
                4.65
                %
                
                
                5.10
                %Expected
      term
                
                
                7
                
                
                
                7Expected
      stock volatility
                
                
                13
                
                
                
                20Dividend
      yield
                
                
                0
                %
                
                
                0
                %
 
 A summary
of the activity in the stock option plan for 2008 follows:
  Shares
                
                
                Weighted
      Average Exercise Price
                
                
                Weighted
      Average Remaining Years of Contractual Term
                
                
                Aggregate
      Intrinsic ValueOutstanding
      at beginning of year
                
                
                163,410
                
                
                $
                13.99Granted
                
                
                13,225
                
                
                
                13.15Exercised
                
                
                —Forfeited
      or expired
                
                
                (37,030
                )
                
                
                13.90Outstanding
      at end of year
                
                
                139,605
                
                
                
                13.93
                
                
                
                7.58
                
                
                $
                —Exercisable
      at end of year
                
                
                46,965
                
                
                
                13.98
                
                
                
                7.39
                
                
                $
                —Vested
      or expected to vest at end of year
                
                
                139,605
                
                
                $
                13.93
                
                
                
                7.58
                
                
                $
                —
 
 
 F-20
 Table of Contents
 
 NOTE
9 – STOCK-BASED COMPENSATION (continued)
  Information
related to the stock option plan during each year follows:
  2008
                
                
                2007Intrinsic
      value of options exercised
                
                $
                —
                
                
                $
                3,571Cash
      received from option exercises
                
                
                —
                
                
                
                36,766Tax
      benefit realized from option exercises
                
                
                —
                
                
                
                1,844Weighted
      average fair value of options granted
                
                
                4.00
                
                
                
                5.33
 
 As of
June 30, 2008, there was approximately $350,000 of total unrecognized
compensation cost related to nonvested stock options granted under the
Plan.  The cost is expected to be recognized over a weighted-average
period of 2.7 years.
  Forfeitures
for options granted prior to 2007 were recognized as they
occurred.  Beginning July 1, 2007, the Company is estimating the
impact of future forfeitures consistent with the provision of
FAS 123(R).
  Share
Award Plan:
  A
Recognition and Retention Plan (“RRP”) provides for issue of shares of
restricted stock to directors, officers, and employees. Compensation expense is
recognized over the vesting period of the shares based on the market value of
the Company’s common stock at the issue date. Pursuant to the RRP, the Company
can award up to 105,800 shares of restricted stock.  These shares vest
over a five-year period.  Prior to July 1, 2007, the unamortized
cost of shares not yet earned (vested) was reported as a reduction of
shareholders’ equity.  Upon adoption of FAS 123(R), the unamortized
cost of shares not yet awarded was reclassified to additional paid-in
capital.  As of June 30, 2008, 36,320 shares could still be
granted under the plan.
  A summary
of changes in the Company’s nonvested shares for the year follows:
  Nonvested
      Shares
                
                Shares
                
                
                Weighted-Average
      Grant-Date Fair ValueNonvested
      at June 30, 2007
                
                
                47,320
                
                
                $
                14.03Granted
                
                
                6,290
                
                
                
                13.21Vested
                
                
                (10,522
                )
                
                
                14.02Forfeited
                
                
                (4,232
                )
                
                
                13.90Nonvested
      at June 30, 2008
                
                
                38,856
                
                
                $
                13.91
 
 As of
June 30, 2008, there was approximately $428,000 of total unrecognized
compensation cost related to outstanding nonvested shares granted under the
Plan.  The cost is expected to be recognized over a weighted-average
period of 2.7 years.  The total fair value of shares vested during the
years ended June 30, 2008 and 2007 was $80,000 and $226,000,
respectively.
  
 F-21
 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 2007:
  2008
                
                
                2007Basic
      and diluted loss per shareNet
      loss for the year ended June 30
                
                $
                (2,750,829
                )
                
                $
                (1,209,008
                )Weighted
      average common shares outstanding
                
                
                2,367,822
                
                
                
                2,357,228Basic
      and diluted loss per share
                
                $
                (1.16
                )
                
                $
                (0.51
                )
 
 The
effect of stock options and stock awards was not included in the calculation of
diluted loss per share because to do so would have been anti-dilutive for all
shares.
  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, 2008 and 2007, commitments to extend credit were
approximately:
  2008
                
                
                2007Fixed
                    Rate
                
                
                Variable
                    Rate
                
                
                Fixed
                    Rate
                
                
                Variable
                    RateUnused
      lines of
      credit
                
                $
                300,000
                
                
                $
                14,000,000
                
                
                $
                390,000
                
                
                $
                9,970,000Commitment
      to fund
      loans
                
                
                1,500,000
                
                
                
                —
                
                
                
                3,254,000
                
                
                
                11,680,000
 
 Fixed
rate commitments have rates ranging from 5.50% to 6.50% and 7.38% to 9.25% at
June 30, 2008 and 2007, respectively.  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, 2008 and 2007, the Company had standby letters of credit of
$505,000 and $136,000.  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.  In
addition, the Company has loans in the states of Michigan, Florida, and
Wisconsin.  Most loans are secured by specific collateral, including
residential and commercial real estate.
   F-22
 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
                
                
                Minimum
      Required
                    for
      Capital
                    Adequacy
      Purposes
                
                
                Minimum
                    Required
      to Be Well
                    Capitalized
      Under
                    Prompt
      Corrective
                    Action
      RegulationsAmount
                
                
                Ratio
                
                
                Amount
                
                
                Ratio
                
                
                Amount
                
                
                Ratio2008Total
      capital (to risk-weighted assets)
                
                $
                23,439
                
                
                
                25.17
                %
                
                $
                7,451
                
                
                
                8.00
                %
                
                $
                9,680
                
                
                
                10.00
                %Tier
      I capital (to risk-weighted assets)
                
                
                22,264
                
                
                
                23.90
                
                
                
                3,725
                
                
                
                4.00
                
                
                
                5,808
                
                
                
                6.00Tier
      I capital (to average assets)
                
                
                22,264
                
                
                
                19.05
                
                
                
                4,674
                
                
                
                4.00
                
                
                
                5,841
                
                
                
                5.00
 2007Total
      capital (to risk-weighted assets)
                
                $
                23,881
                
                
                
                26.88
                %
                
                $
                7,108
                
                
                
                8.00
                %
                
                $
                8,885
                
                
                
                10.00
                %Tier
      I capital (to risk-weighted assets)
                
                
                23,334
                
                
                
                26.26
                
                
                
                3,554
                
                
                
                4.00
                
                
                
                5,331
                
                
                
                6.00Tier
      I capital (to average assets)
                
                
                23,334
                
                
                
                17.81
                
                
                
                5,241
                
                
                
                4.00
                
                
                
                6,551
                
                
                
                5.00
 
 The Bank
was categorized by its regulators as well capitalized at June 30, 2008 and
2007.  Management is not aware of any conditions or events since the
most recent notification that would change the Bank’s category at June 30,
2008.
   F-23
 Table of Contents
  NOTE
13 – OTHER COMPREHENSIVE INCOME (LOSS)
  Other
comprehensive income (loss) components were as follows:
  2008
                
                
                2007Unrealized
      holding gains (losses) on securities available for sale
                
                $
                261,308
                
                
                $
                314,500Less
      reclassification adjustments for net gains recognized in
      income
                
                
                (25,325
                )
                
                
                —Net
      unrealized gains (losses)
                
                
                235,983
                
                
                
                314,500Loss
      on impairment of securities available for sale
                
                
                —
                
                
                
                64,075Tax
      expense
                
                
                80,235
                
                
                
                128,716Other
      comprehensive income
                
                $
                155,748
                
                
                $
                249,859
 
 NOTE
14 – RELATED-PARTY TRANSACTIONS
  Loans to
principal officers, directors, and their affiliates during the fiscal year ended
June 30, 2008 were as follows:
  Beginning
      balance
                
                $
                180,703New
      loans
                
                
                —Repayments
                
                
                (29,783
                )Ending
      balance
                
                $
                150,965
 
 Deposits
from principal officers, directors, and their affiliates at year-end 2008 and
2007 were $474,000 and $1,186,000, respectively.
  
 F-24
 Table of Contents
 
 NOTE
15 – FAIR VALUES OF FINANCIAL INSTRUMENTS
  Carrying
amount and estimated fair values of financial instruments were as follows at
year end (in thousands):
  2008
                
                
                2007Carrying
                    Amount
                
                
                Fair
                    Value
                
                
                Carrying
                    Amount
                
                
                Fair
                    ValueFinancial
      assetsCash
      and cash equivalents
                
                $
                5,925
                
                
                $
                5,925
                
                
                $
                21,396
                
                
                $
                21,396Securities
      available for sale
                
                
                7,747
                
                
                
                7,747
                
                
                
                15,595
                
                
                
                15,595Loans,
      net
                
                
                90,775
                
                
                
                90,715
                
                
                
                83,499
                
                
                
                82,219FHLB
      stock
                
                
                381
                
                
                
                n/a
                
                
                
                341
                
                
                
                n/aAccrued
      interest receivable
                
                
                455
                
                
                
                455
                
                
                
                509
                
                
                
                509Financial
      liabilitiesDeposits
                
                $
                (83,875
                )
                
                $
                (81,304
                )
                
                $
                (98,676
                )
                
                $
                (98,711
                )Advances
      from borrowers for taxes and insurance
                
                
                (546
                )
                
                
                (546
                )
                
                
                (572
                )
                
                
                (572
                )Accrued
      interest payable
                
                
                (649
                )
                
                
                (649
                )
                
                
                (81
                )
                
                
                (81
                )
 
 The
methods and assumptions used to estimate fair value are described as
follows:
  Carrying
amount is the estimated fair value for cash and cash equivalents, accrued
interest receivable and payable, demand deposits, advances from borrowers for
taxes and insurance, 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.  The
allowance for loan losses is considered to be a reasonable estimate of discount
for credit risk on loans.  It was not practicable to determine the
fair value of FHLB stock due to restrictions placed on its
transferability.  The fair value of off-balance-sheet items is not
material.
  
 F-25
 Table of Contents
 
 NOTE
16 – PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
  Condensed
financial information of Royal Financial, Inc. follows:
  CONDENSED
BALANCE SHEETS
  June
      30, 2008
                
                
                June
      30, 2007ASSETSCash
      and cash equivalents
                
                $
                5,984,012
                
                
                $
                6,909,650Investment
      in bank subsidiary
                
                
                22,424,890
                
                
                
                23,191,074ESOP
      loan
                
                
                1,604,484
                
                
                
                1,871,898Land
                
                
                686,556
                
                
                
                656,904Other
      assets
                
                
                126,058
                
                
                
                157,024Total
      assets
                
                $
                30,826,000
                
                
                $
                32,786,550LIABILITIES
      AND STOCKHOLDERS’ EQUITYOther
      liabilities
                
                $
                286,176
                
                
                $
                156,448Common
      stock in ESOP subject to contingent repurchase obligation
                
                
                643,264
                
                
                
                968,070Stockholders’
      equity
                
                
                29,896,560
                
                
                
                31,662,032Total
      liabilities and stockholders’ equity
                
                $
                30,826,000
                
                
                $
                32,786,550
 
 CONDENSED
STATEMENT OF INCOME
  Year
      Ended June 30, 2008
                
                
                Year
      Ended June 30, 2007IncomeInterest
      on ESOP loan
                
                $
                136,084
                
                
                $
                155,100Other
      income
                
                
                5,000
                
                
                
                —Total
      income
                
                
                141,084
                
                
                
                155,100ExpenseSalaries
      and employee benefits
                
                
                162,920
                
                
                
                —Occupancy
      and equipment
                
                
                32,079
                
                
                
                —Data
      processing
                
                
                832
                
                
                
                —Professional
      fees
                
                
                588,253
                
                
                
                278,895Investigation
      costs
                
                
                540,483
                
                
                
                —Director
      fees
                
                
                161,700
                
                
                
                —Other
                
                
                5,854
                
                
                
                1,406Total
      expense
                
                
                1,492,121
                
                
                
                280,301Loss
      before income tax expense
                  and undistributed subsidiary loss
                
                
                (1,351,037
                )
                
                
                (125,201
                )Income
      tax expense
                
                
                —
                
                
                
                (57,615
                )Equity
      in undistributed subsidiary loss
                
                
                (1,399,792
                )
                
                
                (1,026,192
                )Net
      loss
                
                $
                (2,750,829
                )
                
                $
                (1,209,008
                )
 
 
 F-26
 Table of Contents
 
 NOTE
16 – PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
 (continued)
  CONDENSED
STATEMENT OF CASH FLOWS
  Year
      Ended June 30, 2008
                
                
                Year
      Ended June 30, 2007Cash
      flows from operating activitiesNet
      loss
                
                $
                (2,750,829
                )
                
                $
                (1,209,008
                )Adjustments:Equity
      in undistributed subsidiary loss
                
                
                1,399,792
                
                
                
                1,026,192Change
      in other assets
                
                
                30,966
                
                
                
                26,649Change
      in other liabilities
                
                
                208,671
                
                
                
                29,639Net
      cash from operating activities
                
                
                (1,111,400
                )
                
                
                (126,528
                )Cash
      flows from investing activitiesRepayment
      of ESOP loan
                
                
                267,414
                
                
                
                267,414Purchase
      of land
                
                
                (29,652
                )
                
                
                (656,904
                )Net
      cash from investing activities
                
                
                237,762
                
                
                
                (389,490
                )Cash
      flows from financing activitiesPurchase
      of treasury stock
                
                
                (52,000
                )
                
                
                (387,615
                )Proceeds
      from the exercise of stock options
                
                
                —
                
                
                
                38,610Net
      cash from financing activities
                
                
                (52,000
                )
                
                
                (349,005
                )Net
      change in cash and cash equivalents
                
                
                (925,638
                )
                
                
                (865,023
                )Beginning
      cash and cash equivalents
                
                
                6,909,650
                
                
                
                7,774,673Ending
      cash and cash equivalents
                
                $
                5,984,012
                
                
                $
                6,909,650
 
 NOTE
17 – INVESTIGATION
  As
previously disclosed in the Company’s Annual Report on Form 10-KSB for its
fiscal year ended June 30, 2007, filed with the SEC on September 28, 2007,
during the course of a special investigation conducted by the Audit Committee of
the Board, which included engaging a team of outside specialists and advisors to
assist in the investigation, evidence of irregularities in connection with the
Company’s stock conversion and initial public offering in 2005, including the
alleged unauthorized receipt by certain investors of shares of stock in the
offering, was uncovered. On January 31, 2008, the Company announced that its
Board of Directors concluded the investigation.   The Company has
not uncovered credible evidence of fraud or illegal acts in the connection of
the conversion and offering.  The investigation identified two
instances in which certain investors who purchased shares in the conversion were
later determined to not be eligible to do so.  As a result, 5,200
shares of stock were repurchased from these certain investors at the initial
public offering price of $10 in January, 2008.  For the year ended
June 30, 2008, the Company incurred costs of $540,483 related to this
investigation.
  
 F-27
 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 29th day of
September 2008.
  ROYAL FINANCIAL,
      INC.By:
                  /s/Leonard
      SzwajkowskiLeonard
      SzwajkowskiChief
      Executive Officer
  
 KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby
constitutes and appoints James A. Fitch Jr. and Leonard Szwajkowski, 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/James
      A. Fitch, Jr.
                  
                  Chairman
      of the Board
                  
                  September
      29, 2008James
      A. Fitch, Jr./s/Leonard
      Szwajkowski
                  
                  Chief
      Executive Officer
                  
                  September
      29, 2008Leonard
      Szwajkowski
                  
                  (principal
      executive officer)/s/Jodi
      A. Ojeda
                  
                  Chief
      Financial Officer
                  
                  September
      29, 2008Jodi
      A. Ojeda
                  
                  (principal
      accounting officer)
 /s/Alan
      W. Bird
                  
                  Director
                  
                  September
      29, 2008Alan
      W. Bird/s/John
      T. Dempsey
                  
                  Director
                  
                  September
      29, 2008John
      T. Dempsey/s/C.
      Michael McLaren
                  
                  Director
                  
                  September
      29, 2008C.
      Michael McLaren
 /s/Barbara
      K. Minster
                
                Director
                
                September
      29, 2008Barbara
      K. Minster/s/Rodolfo
      Serna
                
                Director
                
                September
      29, 2008Rodolfo
      Serna
  
 S-1
 Table of Contents
 
 EXHIBIT INDEX
  Exhibit No.
                Description
      of Exhibit3.1
                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
                Separation
      Agreement and Release dated September 26, 2007, between Donald A.
      Moll, Royal Financial, Inc. and Royal Savings Bank (filed as an exhibit to
      the Company’s Annual Report on Form 10-KSB for the fiscal year ended June
      30, 2007 and incorporated herein by reference).*10.3
                Employment
      Agreement dated as of January 20, 2005, 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 dated as of February 21, 2006, 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
                Employment
      Agreement dated as of January 20, 2005, by and between Royal Financial,
      Inc., Royal Savings Bank and Andrew Morua (filed as an exhibit to the
      Company’s Annual Report on Form 10-KSB for the fiscal year ended June 30,
      2007 and incorporated herein by reference).*10.6
                Employment
      Agreement dated as of January 20, 2005, by and among Royal Financial,
      Inc., Royal Savings Bank and Kelly Wilson.*10.7
                Employment
      Agreement dated as of January 3, 2008, by and among Royal Financial,
      Inc., Royal Savings Bank and Jodi A. Ojeda.*10.8
                Agreement
      dated as of March 1, 1995 between Royal Savings Bank and
      Barbara K. Minster.*10.9
                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).*10.10
                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).*10.11
                Royal
      Financial, Inc. Severance Benefits Plan.*
   
  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).23.1
                Consent
      of Crowe Horwath LLP.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.