UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
  FORM
10-Q
  (mark
one)
  x  QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
 EXCHANGE
ACT OF 1934
  For
the quarterly period ended September 30, 2009
  or
  o  TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THEEXCHANGE
ACT
  For the
transition period from _______to_______
  Commission
File Number 000-51123
  ROYAL
FINANCIAL, INC.
 (Exact
name of registrant specified in its charter)
  Delaware
                  20-1636029(State
      or other jurisdiction of incorporation or organization)
                  (I.R.S.
      Employer Identification Number)
  9226
S. Commercial Avenue
 Chicago,
Illinois 60617
 (Address
of principal executive offices)
  (773)
768-4800
 (Issuer’s
telephone number)
  Not
Applicable
 (Former
name, former address and former fiscal year,if
changes since last report)
  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  ̈
  Indicate
by check mark whether the registrant is a large accelerated filed, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “larger accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
  Large accelerated filer  ̈                                                                          Accelerated
filer  ̈
 Non-accelerated filer  ̈                                                                          Smaller
reporting company ý
  Indicate
by a check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes  ̈ No ý
 State the
number of shares outstanding of each of the issuer’s classes of common stock, as
of the latest practicable date:
  Class
                  Outstanding
      as of November 13, 2009Common
      Stock, $.01 par value
                  2,559,548
   Table of Contents
 ROYAL
FINANCIAL, INC. AND SUBSIDIARY
  FORM
10-Q
  For
the quarterly period ended September 30, 2009
  TABLEOF
CONTENTS
  PagePART I – FINANCIAL INFORMATIONItem 1.     Financial
      StatementsConsolidated Statements of
      Financial Condition as of September 30, 2009 and June 30,
      2009
                    1Consolidated Statements of Operations for the three months ended September 30, 2009
      and 2008
                    2Consolidated Statements of Stockholders’
      Equity for the three months ended September 30, 2009 and
      2008
                    3Consolidated Statements of Cash Flows for
      the three months ended September 30, 2009 and 2008
                    5Notes to Unaudited Financial
      Statements
                    6Item
      2.     Management’s Discussion and Analysis of
      Financial Condition and Results of Operations
                    13Item
      3.     Quantitative and Qualitative Disclosures
      about Market Risk
                    22Item 4T.   Controls and
      Procedures
                    22PART II – OTHER INFORMATIONItem 1.     Legal
      Proceedings
                    23Item 1A.  Risk Factors
                    23Item
      2.     Unregistered Sales of Equity Securities
      and Use of Proceeds
                    26Item 3.     Defaults Upon
      Senior Securities
                    26Item 4.     Submission of
      Matters to a Vote of Security Holders
                    26Item 5.     Other
      Information
                    26Item
      6.     Exhibits
                    26SIGNATURES
                    27EXHIBIT INDEX
                    28
   i
 Table of Contents
  PART
I.–FINANCIAL
INFORMATION
  Item
1.FinancialStatements.
  ROYALFINANCIAL, INC. AND
SUBSIDIARY
 CONSOLIDATED STATEMENTS OF FINANCIAL
CONDITION
 September
30, 2009 and June 30, 2009
 (Unaudited)
  September 30,
      2009
                      
                      
                      June
      30, 2009ASSETSCash
      and non-interest-bearing balances in financial
institutions
                      
                      $
                      2,969,344
                      
                      
                      $
                      2,764,827Interest-bearing
      balances in financial institutions
                      
                      
                      433,904
                      
                      
                      
                      401,098Federal
      funds sold
                      
                      
                      147,346
                      
                      
                      
                      6,329Total
      cash and cash equivalents
                      
                      
                      3,550,594
                      
                      
                      
                      3,172,254Securities
      available-for-sale
                      
                      
                      4,025,345
                      
                      
                      
                      3,996,370Loans
      receivable, net of allowance for loan losses of $5,167,330  at
      September 30, 2009 and $5,225,000  at  June 30,
      2009
                      
                      
                      78,265,367
                      
                      
                      
                      82,222,237Federal
      Home Loan Bank stock, at cost
                      
                      
                      381,300
                      
                      
                      
                      381,300Premises
      and equipment, net
                      
                      
                      3,835,590
                      
                      
                      
                      3,887,347Land
      available for sale
                      
                      
                      686,556
                      
                      
                      
                      686,556Accrued
      interest receivable
                      
                      
                      308,641
                      
                      
                      
                      346,716Other
      real estate owned
                      
                      
                      44,000
                      
                      
                      
                      44,000Other
      assets
                      
                      
                      77,942
                      
                      
                      
                      111,650Total
      assets
                      
                      $
                      91,175,335
                      
                      
                      $
                      94,848,430LIABILITIES
      AND STOCKHOLDERS’ EQUITYLiabilitiesDeposits
                      
                      $
                      68,836,895
                      
                      
                      $
                      70,486,574Advances
      from borrowers for taxes and insurance
                      
                      
                      714,970
                      
                      
                      
                      591,046Federal
      Home Loan Bank advances
                      
                      
                      1,500,000
                      
                      
                      
                      3,900,000Accrued
      interest payable and other liabilities
                      
                      
                      1,164,250
                      
                      
                      
                      1,108,203Common
      stock in ESOP subject to contingent repurchase obligation
                      
                      
                      296,504
                      
                      
                      
                      312,110Total
      Liabilities
                      
                      
                      72,512,619
                      
                      
                      
                      76,397,933Stockholders’
      equityPreferred
      stock, $.01 par value per share, authorized 1,000,000 shares; no issues
      are outstanding
                      
                      
                      —
                      
                      
                      
                      —Common
      stock, $.01 par value per share, authorized 5,000,000 shares, 2,645,000
      shares issued at  September 30, 2009 and June 30,
      2009
                      
                      
                      26,450
                      
                      
                      
                      26,450Additional
      paid-in capital
                      
                      
                      24,825,191
                      
                      
                      
                      24,783,189Retained
      deficit
                      
                      
                      (3,382,106
                      )
                      
                      
                      (3,426,399
                      )Treasury
      stock,  88,510 shares and 89,568 shares, at cost
                      
                      
                      (1,265,164
                      )
                      
                      
                      (1,280,875
                      )Accumulated
      other comprehensive income (loss), net of tax
                      
                      
                      25,345
                      
                      
                      
                      (2,396
                      )Unearned
      ESOP shares
                      
                      
                      (1,270,496
                      )
                      
                      
                      (1,337,362
                      )Reclassification
      of ESOP shares
                      
                      
                      (296,504
                      )
                      
                      
                      (312,110
                      )Total
      stockholders’ equity
                      
                      
                      18,662,716
                      
                      
                      
                      18,450,497Total
      liabilities and stockholders’ equity
                      
                      $
                      91,175,335
                      
                      
                      $
                      94,848,430
  See
accompanying notes to these unaudited consolidated financial
statements.
   1
 Table of Contents
 ROYALFINANCIAL, INC. AND
SUBSIDIARY
 CONSOLIDATED STATEMENTS OF
OPERATIONS
 Three
months ended September 30, 2009 and 2008
 (Unaudited)
  Three
      Months Ended
                          September
      30,2009
                      
                      
                      2008Interest
      incomeLoans
                      
                      $
                      1,260,582
                      
                      
                      $
                      1,520,463Securities,
      taxable
                      
                      
                      30,500
                      
                      
                      
                      61,991Federal
      funds sold and other
                      
                      
                      224
                      
                      
                      
                      8,767Total interest
      income
                      
                      
                      1,291,306
                      
                      
                      
                      1,591,221Interest
      expenseDeposits
                      
                      
                      210,191
                      
                      
                      
                      371,865Federal
      Home Loan Bank advances and other borrowings
                      
                      
                      3,645
                      
                      
                      
                      8,648Total interest
      expense
                      
                      
                      213,836
                      
                      
                      
                      380,513Net
      interest income
                      
                      
                      1,077,470
                      
                      
                      
                      1,210,708Provision
      for loan losses
                      
                      
                      —
                      
                      
                      
                      150,000Net
      interest income after provision for loan losses
                      
                      
                      1,077,470
                      
                      
                      
                      1,060,708Non-interest
      incomeService
      charges on deposit accounts
                      
                      
                      61,799
                      
                      
                      
                      84,423Earnings
      on cash surrender value of life insurance
                      
                      
                      —
                      
                      
                      
                      48,976Other
      income
                      
                      
                      9,023
                      
                      
                      
                      12,714Total non-interest
      income
                      
                      
                      70,822
                      
                      
                      
                      146,113Non-interest
      expenseSalaries
      and employee benefits
                      
                      
                      533,472
                      
                      
                      
                      630,289Occupancy
      and equipment
                      
                      
                      147,362
                      
                      
                      
                      239,109Data
      processing
                      
                      
                      70,232
                      
                      
                      
                      105,201Professional
      services
                      
                      
                      185,112
                      
                      
                      
                      184,588Director
      fees
                      
                      
                      38,400
                      
                      
                      
                      36,700Supplies
                      
                      
                      11,402
                      
                      
                      
                      10,029Marketing
                      
                      
                      11,240
                      
                      
                      
                      3,429Insurance
      premiums
                      
                      
                      39,496
                      
                      
                      
                      19,438Other
                      
                      
                      67,283
                      
                      
                      
                      98,254Total non-interest
      expense
                      
                      
                      1,103,999
                      
                      
                      
                      1,327,037Net
      income(loss)
                      
                      $
                      44,293
                      
                      
                      $
                      (120,216
                      )Basic
      and diluted earnings (loss) per share
                      
                      $
                      0.02
                      
                      
                      $
                      (0.05
                      )Comprehensive
      income(loss)
                      
                      $
                      72,034
                      
                      
                      $
                      (117,410
                      )
  See
accompanying notes to these unaudited consolidated financial
statements.
   2
 Table of Contents
  ROYALFINANCIAL, INC. AND
SUBSIDIARY
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
EQUITY
 Three months
ended September 30, 2008
 (Unaudited)
 2008
                          
                          Common
      Stock
                          
                          
                          Additional
      Paid-In Capital
                          
                          
                          Retained
      Earnings
                          
                          
                          Treasury
                              Stock
                          
                          
                          Accumulated
      Other Comprehensive Income
                          
                          
                          Unearned
      ESOP Shares
                          
                          
                          Amount
      Reclassified on ESOP Shares
                          
                          
                          TotalBalance
      at July 1, 2008
                          
                          $
                          26,450
                          
                          
                          $
                          24,672,588
                          
                          
                          $
                          8,759,470
                          
                          
                          $
                          (1,326,286
                          )
                          
                          $
                          12,376
                          
                          
                          $
                          (1,604,774
                          )
                          
                          $
                          (643,264
                          )
                          
                          $
                          29,896,560Comprehensive
      income (loss):Net
      loss
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          (120,216
                          )
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          (120,216
                          )Change
      in fair value of securities available-for-sale, net
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          2,806
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          2,806Total
      comprehensive loss
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (117,410
                          )Reclassification
      due to change in fair value of common stock in ESOP subject to contingent
      repurchase obligation
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          49,726
                          
                          
                          
                          49,726Release
      of 5,290 of unearned ESOP shares
                          
                          
                          —
                          
                          
                          
                          (25,697
                          )
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          
                          
                          
                          
                          66,853
                          
                          
                          
                          —
                          
                          
                          
                          41,156Issuance
      of 1,058 shares to RRP plan
                          
                          
                          —
                          
                          
                          
                          (15,711
                          )
                          
                          
                          —
                          
                          
                          
                          15,711
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Stock-based
      compensation
                          
                          
                          —
                          
                          
                          
                          75,528
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          75,528Balance
      at September 30, 2008
                          
                          $
                          26,450
                          
                          
                          $
                          24,706,708
                          
                          
                          $
                          8,639,254
                          
                          
                          $
                          (1,310,575
                          )
                          
                          $
                          15,182
                          
                          
                          $
                          (1,537,921
                          )
                          
                          $
                          (593,538
                          )
                          
                          $
                          29,945,560
  3
 Table of Contents
  ROYAL
FINANCIAL, INC. AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’
EQUITY
 Three months
ended September 30, 2009
 (Unaudited)
  2009
                      
                      Common
      Stock
                      
                      
                      Additional
      Paid-In Capital
                      
                      
                      Retained
      Deficit
                      
                      
                      Treasury
                          Stock
                      
                      
                      Accumulated
      Other Comprehensive Income (Loss)
                      
                      
                      Unearned
      ESOP Shares
                      
                      
                      Amount
      Reclassified on ESOP Shares
                      
                      
                      TotalBalance
      at July 1, 2009
                      
                      $
                      26,450
                      
                      
                      $
                      24,783,189
                      
                      
                      $
                      (3,426,399
                      )
                      
                      $
                      (1,280,875
                      )
                      
                      $
                      (2,396
                      )
                      
                      $
                      (1,337,362
                      )
                      
                      $
                      (312,110
                      )
                      
                      $
                      18,450,497Comprehensive
      incomeNet
      income
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      44,293
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      44,293Change
      in fair value of securities available-for-sale, net
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      27,741
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      27,741Total
      comprehensive income.
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      72,034Reclassification
      due to change in fair value of common stock in ESOP subject to contingent
      repurchase obligation
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      15,606
                      
                      
                      
                      15,606Release
      of 5,290 of unearned ESOP shares
                      
                      
                      —
                      
                      
                      
                      (49,988
                      )
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      66,866
                      
                      
                      
                      —
                      
                      
                      
                      16,878Issuance
      of 1,058 shares to RRP plan
                      
                      
                      —
                      
                      
                      
                      (15,711
                      )
                      
                      
                      —
                      
                      
                      
                      15,711
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Stock-based
      compensation
                      
                      
                      —
                      
                      
                      
                      107,701
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      107,701Balance
      at September 30, 2009
                      
                      $
                      26,450
                      
                      
                      $
                      24,825,191
                      
                      
                      $
                      (3,382,106
                      )
                      
                      $
                      (1,265,164
                      )
                      
                      $
                      25,345
                      
                      
                      $
                      (1,270,496
                      )
                      
                      $
                      (296,504
                      )
                      
                      $
                      18,662,716
  See accompanying
notes to these unaudited consolidated financial statements.
   4
 Table of Contents
  ROYALFINANCIAL, INC. AND
SUBSIDIARY
 CONSOLIDATED STATEMENTS OF CASH
FLOWS
 Three
months ended September 30, 2009 and 2008
 (Unaudited)
  2009
                      
                      
                      2008Cash
      flows from operating activitiesNet
      income(loss)
                      
                      $
                      44,293
                      
                      
                      $
                      (120,216
                      )Adjustments
      to reconcile net income (loss) to net cash from operating
      activities:Depreciation
                      
                      
                      51,757
                      
                      
                      
                      93,885Amortization
      of net deferred loan costs
                      
                      
                      (5,232
                      )
                      
                      
                      (12,473
                      )Provision
      for loan losses
                      
                      
                      —
                      
                      
                      
                      150,000Bank-owned
      life insurance income
                      
                      
                      —
                      
                      
                      
                      (48,976
                      )ESOP
      expense
                      
                      
                      16,878
                      
                      
                      
                      41,156Stock-based
      compensation
                      
                      
                      107,701
                      
                      
                      
                      75,528Change
      in accrued interest receivable and other assets
                      
                      
                      71,783
                      
                      
                      
                      47,298Change
      in other accrued interest payable and liabilities
                      
                      
                      54,813
                      
                      
                      
                      (616,245
                      )Net
      cash provided
      by (used in)operating activities
                      
                      
                      341,993
                      
                      
                      
                      (390,043
                      )Cash
      flows from investing activitiesProceeds
      from sales, maturities, calls, and pay downs of available for sale
      securities
                      
                      
                      —
                      
                      
                      
                      2,823,496Change
      in loans receivable
                      
                      
                      3,962,102
                      
                      
                      
                      (2,462,315
                      )Net
      cash provided by investing activities
                      
                      
                      3,962,102
                      
                      
                      
                      361,181Cash
      flows from financing activitiesNet
      decrease in deposits
                      
                      
                      (1,649,679
                      )
                      
                      
                      (8,198,874
                      )Proceeds
      from Federal Home Loan Bank advances
                      
                      
                      5,250,000
                      
                      
                      
                      12,500,000Repayments  of
      Federal Home Loan Bank advances
                      
                      
                      (7,650,000
                      )
                      
                      
                      (6,500,000
                      )Change
      in advances from borrowers for taxes and insurance
                      
                      
                      123,924
                      
                      
                      
                      199,123Net
      cash used in financing activities
                      
                      
                      (3,925,755
                      )
                      
                      
                      (1,999,751
                      )Net
      change in cash and cash equivalents
                      
                      
                      378,340
                      
                      
                      
                      (2,028,613
                      )Cash
      and cash equivalentsBeginning
      of the period
                      
                      
                      3,172,254
                      
                      
                      
                      5,924,849End
      of period
                      
                      $
                      3,550,594
                      
                      
                      $
                      3,896,236Supplemental
      cash flow information:Interest
      paid
                      
                      $
                      210,965
                      
                      
                      $
                      919,895Supplemental
      noncash disclosures:Common
      stock in ESOP subject to contingent repurchase obligation
                      
                      $
                      296,504
                      
                      
                      $
                      312,110


See accompanying
notes to these unaudited consolidated financial statements.






5
 Table of Contents




ROYALFINANCIAL, INC. AND
SUBSIDIARY


NOTES TO UNAUDITEDFINANCIAL
STATEMENTS




Note
1 - Nature of Business
  Royal
Financial, Inc. 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.
  Note
2 - Basis of Presentation
  The
accompanying unaudited consolidated financial statements include the accounts of
Royal Financial, Inc. (the “Company”) and its wholly owned subsidiary, the Bank,
as of and for the three month periods ended September 30, 2009 and
2008.  Significant intercompany accounts and transactions have been
eliminated in consolidation.
  The
accompanying unaudited interim consolidated financial statements have been
prepared pursuant to the rules and regulations for reporting on Form
10-Q.  Accordingly, certain disclosures required by U.S. generally
accepted accounting principles (GAAP) are not included herein.  These
interim financial statements should be read in conjunction with the audited
financial statements and accompanying notes of the Company for the fiscal years
ended June 30, 2009 and 2008.  The results of the Company’s operations
for any interim period are not necessarily indicative of the results of the
Company’s operations for any other interim period or for a full fiscal
year.
  Interim
statements are subject to possible adjustment in connection with the annual
audit of the Company’s financial statements for the fiscal year ending June 30,
2010.  In the opinion of management of the Company, the accompanying
unaudited interim consolidated financial statements reflect all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation
of the consolidated financial position and consolidated results of operations
for the periods presented.  The Company has evaluated subsequent events for
potential recognition and/or disclosure through November 16, 2009, the date the
financial statements included in this Quarterly Report on Form 10-Q were
issued.
  Note
3 - Use of Estimates and Significant Accounting Policies
  The
preparation of the consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect amounts
reported in the consolidated financial statements.  Changes in these
estimates and assumptions are considered reasonably possible and may have a
material impact on the consolidated financial statements and thus actual results
could differ from the amounts reported and disclosed herein.  The
Company considers the allowance for loan losses and valuation allowance on
deferred tax assets to be critical accounting estimates.
  Note
4 - New Accounting Pronouncements
  The
Financial Accounting Standards Board’s (“FASB”) Accounting Standards
Codification (“ASC”) became effective on July 1, 2009.  At that date,
the ASC became FASB’s officially recognized source of authoritative U.S. GAAP
applicable to all public and non-public non-governmental entities, superseding
existing FASB, American Institute of Certified Public Accountants, Emerging
Issues Task Force (“EITF”) and related literature.  Rules and
interpretive releases of the SEC under the authority of federal securities laws
are also sources of authoritative GAAP for SEC registrants.  All other
accounting literature is considered non-authoritative.  The switch to
the ASC affects the way companies refer to U.S. GAAP in financial statements and
accounting policies.  Existing GAAP prior to the effective date of the
ASC was not altered in compilation of the ASC.  Citing particular
content in the ASC involves specifying the unique numeric path to the content
through the Topic, Subtopic, Section and Paragraph structure.
   6
 Table of Contents
  ASC 810,
Consolidation.  New
authoritative guidance under ASC Topic 810 establishes accounting and reporting
standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. The new guidance clarifies that a
non-controlling interest in a subsidiary, which is sometimes referred to as
minority interest, is an ownership interest in the consolidated entity that
should be reported as a component of equity in the consolidated financial
statements. Among other requirements, this standard requires consolidated net
income to be reported at amounts that include the amounts attributable to both
the parent and the non-controlling interest. It also requires disclosure, on the
face of the consolidated income statement, of the amounts of consolidated net
income attributable to the parent and to the non-controlling interest. This
standard was effective for the Company beginning on July 1, 2009 and has no
material impact on the Company’s financial statements.
  ASC 805,
Business
Combinations.New authoritative guidance under ASC Topic 805
applies to all transactions and other events in which one entity obtains control
over one or more other businesses.   The new guidance requires an
acquirer, upon initially obtaining control of another entity, to recognize the
assets, liabilities and any non-controlling interest in the acquiree at fair
value as of the acquisition date. Contingent consideration is required to be
recognized and measured at fair value on the date of acquisition rather than at
a later date when the amount of that consideration may be determinable beyond a
reasonable doubt. This fair value approach replaces the cost-allocation process
required under the old guidance, whereby the cost of an acquisition was
allocated to the individual assets acquired and liabilities assumed based on
their estimated fair value. This standard requires acquirers to expense
acquisition-related costs as incurred rather than allocating such costs to the
assets acquired and liabilities assumed, as was previously the case under the
old guidance. This standard also identifies related disclosure requirements for
business combinations.   Additionally, the new guidance requires
that assets acquired and liabilities assumed in a business combination that
arise from contingencies be recognized at fair value if fair value can be
reasonably estimated. If fair value of such an asset or liability cannot be
reasonably estimated, the asset or liability would generally be recognized in
accordance with ASC 450,Contingencies.  The new guidance removes subsequent accounting
guidance for assets and liabilities arising from contingencies from the old
guidance and requires entities to develop a systematic and rational basis for
subsequently measuring and accounting for assets and liabilities arising from
contingencies. The new guidance eliminates the requirement to disclose an
estimate of the range of outcomes of recognized contingencies at the acquisition
date. For unrecognized contingencies, entities are required to include only the
disclosures required by ASC 450.  The new guidance also requires that
contingent consideration arrangements of an acquiree assumed by the acquirer in
a business combination be treated as contingent consideration of the acquirer
and should be initially and subsequently measured at fair value.  This
standard was effective for the Company beginning on July 1, 2009 and has no
material impact on the Company’s financial statements.
  ASC Topic
825, Financial
Instruments.  New authoritative guidance under ASC Topic 825
requires an entity to provide disclosures about fair value of financial
instruments in interim financial information and amends prior guidance, to
require those disclosures in summarized financial information at interim
reporting periods.  The new guidance requires a publicly traded
company to include disclosures about the fair value of its financial instruments
whenever it issues summarized financial information for interim reporting
periods.  In addition, entities must disclose, in the body or in the
accompanying notes of its summarized financial information for interim reporting
periods and in its financial statements for annual reporting periods, the fair
value of all financial instruments for which it is practicable to estimate that
value, whether recognized or not recognized in the balance sheet, as required
ASC Topic 825.  The adoption of this new guidance at July 1, 2009 did
not impact the results of operations or financial position of the Bank, as it
only requires additional disclosures to the financial statements.
   7
 Table of Contents
  ASC Topic
260, Earnings
per share.  New authoritative guidance under ASC Topic 260
 providesthat
unvested share-based payment awards that contain non-forfeitable rights to
dividends or dividend equivalents (whether paid or unpaid) are participating
securities and shall be included in the computation of earnings per share
pursuant to the two-class method. The new guidance is effective for the Company
beginning on July 1, 2009. The adoption of this standard did not have any impact
on the Company’s financial statements.
  Note
5 - Newly Issued But Not Yet Effective Accounting Standards
  In
June 2009, the FASB issued new guidance referenced at ASC
105-10-65-1-d-2,  Transition
Related to FASB Statement No. 168, The
FASB
Accounting Standards CodificationTM and
the Hierarchy of Generally Accepted Accounting Principles 
(subparagraph 105-10-65-1-d-2).  Subparagraph 105-10-65-1-d-2 provides that
Statement No. 166 Accounting
for the Transfer of Financial Assets and Amendment of FASB Statement
No. 140 Instruments(SFAS 166)shall
remain authoritative until such time that it is integrated into the
Codification.  SFAS 166 removes the concept of a special purpose entity
(SPE) including Variable Interest Entities that are SPEs. It limits the
circumstances in which a transferor derecognizes a financial asset.  The
statement amends the requirements for the transfer of a financial asset to meet
the requirements for “sale” accounting.  The statement is effective for all
interim and annual periods beginning after November 15, 2009. The Company
does not expect the adoption to have a material impact on the Company’s
consolidated financial position, results of operations or cash
flows.
  In
June 2009, the FASB issued new guidance referenced at ASC
105-10-65-1-d-3,  Transition
Related to FASB Statement No. 168, The
FASB
Accounting Standards CodificationTM and
the Hierarchy of Generally Accepted Accounting Principles (Subparagraph
105-10-65-1-d-3).  Subparagraph 105-10-65-1-d-3 provides that Statement
No. 167 Amendments
to FASB Interpretation No. 46(R)(SFAS 167) shall remain
authoritative until such time that it is integrated into the Codification. 
SFAS 167 Statement amends prior variable interest entity guidance and requires
an enterprise to perform an analysis to determine whether the enterprise’s
variable interest give it a controlling financial interest in the variable
interest entity.  The statement is effective for all interim and annual
periods beginning after November 15, 2009. The Company does not expect the
adoption to have a material impact on the Company’s consolidated financial
position, results of operations or cash flows.
  In August
2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05, Measuring
Liabilities at Fair Value, which is codified as ASC 820, Fair
Value Measurements and Disclosures.  This Update provides
amendments to Topic 820-10, Fair Value Measurements and Disclosures – Overall,
for the fair value measurement of liabilities.  This Update provides
clarification that in circumstances in which a quoted price in an active market
for the identical liability is not available, a reporting entity is required to
measure fair value using a valuation technique that uses the quoted price of the
identical liability when traded as an asset, quoted prices for similar
liabilities or similar liabilities when traded as assets, or that is consistent
with the principles of Topic 820.  The amendments in this Update also
clarify that when estimating the fair value of a liability, a reporting entity
is not required to include a separate input or adjustment to other inputs
relating to the existence of a restriction that prevents transfer of the
liability.  The amendments in this Update also clarify that both a
quoted price in an active market for the identical liability at the measurement
date and the quoted price for the identical liability when traded as an asset in
an active market when no adjustments to the quoted price of the asset are
required are Level 1 fair value measurements.  The guidance provided
in this Update is effective for the first reporting period (including interim
periods) beginning after issuance.  The adoption of this Update did
not have a significant impact to the Bank’s financial statements.
 
 8
 Table of Contents
  Note
6 - 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:
  Amortized
                      Cost
                  
                  
                  Fair
                      Value
                  
                  
                  Gross
                      Unrealized
                      Gains
                  
                  
                  Gross
                      Unrealized
                      LossesSeptember
      30, 2009U.S.
      government-sponsored entities
                  
                  $
                  4,000,000
                  
                  
                  $
                  4,025,345
                  
                  
                  $
                  25,345
                  
                  
                  $June
      30, 2009U.S.
      government-sponsored entities
                  
                  $
                  4,000,000
                  
                  
                  $
                  3,996,370
                  
                  
                  $
                  9,130
                  
                  
                  $
                  (12,760
                  )
  The fair value of
securities available-for-sale at September 30 by contractual maturity
follows.  Expected maturities may differ from contractual maturities
because borrowers have the right to call or prepay obligations with or without
call or prepayment penalties. Securities not due at a single maturity date,
primarily mortgage-backed securities, are shown separately.
  2009Due
      in one year or less
                  
                  $
                  502,970Due
      from one to five years
                  
                  
                  2,518,315Due
      from five to ten years
                  
                  
                  1,004,060Due
      after ten years
                  
                  
                  —Total
                  
                  $
                  4,025,345
  The Bank
had no securities with an unrealized loss at September 30,
2009.  At June 30, 2009, there were two securities with an unrealized
loss, which each had contractual maturities of less than 12
months.
  Note
7 - Loans
  At
September 30, 2009 and June 30, 2009, loans receivable consisted of the
following:
  September
      30,
                      2009
                  
                  
                  June
      30,
                      2009Real
      estate loans:One-to-four
      family
                  
                  $
                  31,302,996
                  
                  
                  $
                  31,592,926Commercial
                  
                  
                  38,887,308
                  
                  
                  
                  41,291,320Multi-family
                  
                  
                  4,230,055
                  
                  
                  
                  4,418,550Total
      real estate loans
                  
                  
                  74,420,359
                  
                  
                  
                  77,302,796Commercial
      loans
                  
                  
                  8,336,411
                  
                  
                  
                  9,512,007Consumer
      loans:Home
      equity loans
                  
                  
                  574,860
                  
                  
                  
                  514,923Other
                  
                  
                  73,337
                  
                  
                  
                  95,013Total
      consumer loans
                  
                  
                  648,197
                  
                  
                  
                  609,936Loans,
      gross
                  
                  $
                  83,404,967
                  
                  
                  $
                  87,424,739Net
      deferred loan fees
                  
                  
                  27,730
                  
                  
                  
                  22,498Allowance
      for loan losses
                  
                  
                  (5,167,330
                  )
                  
                  
                  (5,225,000
                  )Loans,
      net
                  
                  $
                  78,265,367
                  
                  
                  $
                  82,222,237
   9
 Table of Contents
  A summary
of changes in the allowance for loan losses for the three months ended September
30, 2009 and 2008 is as follows:
  2009
                  
                  
                  2008Balance
      at beginning of period
                  
                  $
                  5,225,000
                  
                  
                  $
                  2,060,000Provision
      for loan loss
                  
                  
                  —
                  
                  
                  
                  150,000Charge
      offs
                  
                  
                  (58,721
                  )
                  
                  
                  (452,731
                  )Recoveries
                  
                  
                  1,051
                  
                  
                  
                  —Balance
      at end of period
                  
                  $
                  5,167,330
                  
                  
                  $
                  1,757,269
  A summary
of impaired and non-performing loans at September 30, 2009 and June 30,
2009:
  September
      30,
                      2009
                  
                  
                  June
      30,
                      2009Loans
      with allocated allowance for loan loss at period end
                  
                  $
                  2,539,569
                  
                  
                  $
                  948,689Loans
      with no allocated  allowance for loan loss at period
      end
                  
                  
                  8,873,256
                  
                  
                  
                  9,283,828Total
      impaired and non-performing loans
                  
                  $
                  11,412,825
                  
                  
                  $
                  10,232,517Amount
      of the allowance for loan losses allocated to impaired loans at period
      end
                  
                  $
                  374,000
                  
                  
                  $
                  274,000Interest
      income recognized during impairment
                  
                  
                  —
                  
                  
                  
                  —Cash
      basis interest income recognized
                  
                  
                  —
                  
                  
                  
                  —
  Non-performing
loans were as follows at September 30, 2009 and June 30, 2009:
  September
      30,
                    2009
                
                
                June
      30,
                    2009Loans
      past due over 90 days still on accrual
                
                
                —
                
                
                $
                48,000Nonaccrual
      loans
                
                $
                10,364,488
                
                
                $
                9,178,000
  Note
8 - Income (Loss) Per Share
  Basic
earnings (loss) per share of common stock is computed on the basis of the
weighted average number of common stock shares outstanding. Diluted earnings
(loss) per share of common stock is computed on the basis of the weighted
average number of common shares outstanding plus the effect of the assumed
conversion of outstanding stock options.   The following table
presents a reconciliation of the components used to compute basic and diluted
loss per share for the three month periods ended September 30, 2009 and
2008.  ESOP shares and restricted stock are considered outstanding for
the calculations.
  Three
      Months Ended
                    September
      30, 2009
                  
                  
                  Three
      Months Ended
                    September
      30, 2008Net
      income (loss) as reported
                  
                  $
                  44,293
                  
                  
                  $
                  (120,216
                  )Weighted
      average common shares outstanding
                  
                  
                  2,452,661
                  
                  
                  
                  2,517,955Basic
      and diluted earnings (loss) per share
                  
                  $
                  0.02
                  
                  
                  $
                  (0.05
                  )
  The
effect of stock options was not included in the calculations of diluted loss per
share for the three months ended September 30, 2009 because to do so would have
been anti-dilutive for all shares given all options are underwater as of
September 30, 2009.
  The
effect of stock options was not included in the calculation of diluted loss per
share for the three months ended September 30, 2008 because to do so would have
been anti-dilutive for all shares given the Company’s losses for the
period.
   10
 Table of Contents
  Note
9 - Fair Value
  ASC
820-10defines fair value as the exchange price that would be received
for an asset or paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date.  This standard
also establishes a fair value hierarchy which requires an entity to maximize the
use of observable inputs and minimize the use of unobservable inputs when
measuring fair value.  The standard describes three levels of inputs
that may be used to measure fair
value:
  Level
1:  Quoted prices (unadjusted) for identical assets or liabilities in
active markets that the entity has the ability to access as of the measurement
date.
  Level
2:  Significant other observable inputs other than Level 1 prices such
as quoted prices for similar assets or liabilities, quoted prices in markets
that are not active, or other inputs that are observable or can be corroborated
by observable market data.
  Level
3:  Significant unobservable inputs that reflect a reporting entity’s
own assumptions about the assumptions that market participants would use in
pricing an asset or liability.
  Assets
and Liabilities Measured on a Recurring
Basis
  The fair
values of securities available-for-sale are determined by matrix pricing, which
is a mathematical technique widely used in the industry to value debt securities
without relying exclusively on quoted prices for the specific securities but
rather by relying on the securities’ relationship to other benchmark quoted
securities (Level 2 inputs).
  Assets
and liabilities measured at fair value on a recurring basis are summarized
below:
  Fair
      Value Measurements:Total
      Fair
                      Value
                  
                  
                  Quoted
      Prices in
                      Active Markets
      for
                      Identical
      Assets
                      (Level
      1)
                  
                  
                  Significant
                      Other
                      Observable
                      Inputs
                      (Level
      2)Assets
      at September 30, 2009:Securities
      available-for-sale
                  
                  $
                  4,025,345
                  
                  
                  $
                  —
                  
                  
                  $
                  4,025,345Assets
      at June 30, 2009:Securities
      available-for-sale
                  
                  $
                  3,996,370
                  
                  
                  $
                  —
                  
                  
                  $
                  3,996,370
   11
 Table of Contents
  Assets
and liabilities measured at fair value on a non-recurring basis are impaired
loans with specific allocations.
  The fair
value of impaired loans with specific allocations of the allowance for loan
losses is generally based on recent real estate appraisals.  These
appraisals may utilize a single valuation approach or a combination of
approaches including comparable sales and the income
approach.  Adjustments are routinely made in the appraisal process by
the appraisers to adjust for differences between the comparable sales and income
data available. Such adjustments are typically significant and result in a
Level 3 classification of the inputs for determining fair
value.  Collateral may be real estate and/or business assets including
equipment, inventory and/or accounts receivable and is determined based on
appraisals by qualified licensed appraisers hired by the
Company.  Appraised and reported values may be discounted based on
management’s historical knowledge, changes in market conditions from the time of
valuation, and/or management’s expertise and knowledge of the client and
client’s business.  Impaired loans are reviewed and evaluated on at
least a quarterly basis for additional impairment and adjusted accordingly,
based on the same factors identified above.
  Impaired
loans, which are measured for impairment using the fair value of the collateral
for collateral dependent loans, had a carrying amount of $431,000 with a
valuation allowance of $287,000 at September 30, 2009.  Impaired loans at
June 30, 2009 had a carrying amount of $250,000 with a valuation allowance of
$250,000.  There was a $37,000 provision for loan loss for these loans
during the three month period ended September 30, 2009.
  Carrying
amount and estimated fair values of financial instruments were as follows (in
thousands):
  September
      30, 2009
                
                
                June
      30, 2009Carrying
                    Amount
                
                
                Fair
                    Value
                
                
                Carrying
                    Amount
                
                
                Fair
                    ValueFinancial
      assetsCash
      and cash equivalents
                
                $
                3,551
                
                
                $
                3,551
                
                
                $
                3,172
                
                
                $
                3,172Securities
      available for sale
                
                
                4,025
                
                
                
                4,025
                
                
                
                3,996
                
                
                
                3,996Loans,
      net
                
                
                78,265
                
                
                
                78,072
                
                
                
                82,222
                
                
                
                81,989FHLB
      stock
                
                
                381
                
                
                
                n/a
                
                
                
                381
                
                
                
                n/aAccrued
      interest receivable
                
                
                309
                
                
                
                309
                
                
                
                347
                
                
                
                347Financial
      liabilitiesDeposits
                
                $
                (68,837
                )
                
                $
                (70,264
                )
                
                $
                (70,487
                )
                
                $
                (72,128
                )Federal
      Home Loan Bank advances
                
                
                (1,500
                )
                
                
                (1,500
                )
                
                
                (3,900
                )
                
                
                (3,900
                )Advances
      from borrowers for taxes and insurance
                
                
                (715
                )
                
                
                (715
                )
                
                
                (591
                )
                
                
                (591
                )Accrued
      interest payable
                
                
                (25
                )
                
                
                (25
                )
                
                
                (26
                )
                
                
                (26
                )
  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.  As described in more detail above, 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 without considering widening credit spreads due to market
illiquidity.  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 estimated fair value of FHLB advances is
based on estimates of the rate the Company would pay on such funds at September
30, 2009 and June 30, 2009, applied for the time period until maturity. The fair
value of off-balance-sheet items is not material.
   12
 Table of Contents
  Item
2.Management’sDiscussion and
Analysis of Financial Condition and Results of Operations.
  Forward-Looking
Information
  This
report includes forward-looking statements, including statements regarding our
strategy, effectiveness of investment programs, evaluations of future interest
rate trends and liquidity, expectations as to growth in assets, deposits and
results of operations, future operations, market position, financial position,
and prospects, plans and objectives of management.  These
forward-looking statements, which are based on certain assumptions and describe
our future plans, strategies and expectations, can generally be identified by
use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,”
“project,” or similar expressions.  Our ability to predict results or
the actual effect of future plans or strategies is inherently uncertain and
actual results may differ materially from those predicted in such
forward-looking statements.  Factors that could have a material
adverse effect on the operations and future prospects of the Company and the
Bank include, but are not limited to, changes in interest rates; the economic
health of the local real estate market; general economic conditions; credit
deterioration in our loan portfolio that would cause us to further increase our
allowance for loan losses; legislative/regulatory changes; monetary and fiscal
policies of the U.S. government, including policies of the U.S. Treasury and the
Federal Reserve Board; the quality or composition of the loan and securities
portfolios; demand for loan products in our market areas; deposit flows;
competition; demand for financial services in the Company’s market area; 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.
  Comparison
of Financial Condition at September 30, 2009 and June 30, 2009
  The
Company’s total assets decreased $3.7 million, or 3.87%, to $91.2 million at
September 30, 2009, from $94.8 million at June 30, 2009.
  Cash and
cash equivalents increased $378,000, or 11.93%, to $3.6 million at September 30,
2009 from $3.2 million at June 30, 2009, primarily as a result of an increase in
federal funds sold.
  Securities
available for sale increased $29,000, or 0.73%, to $4.0 million at September 30,
2009 from $4.0 million at June 30, 2009.  The increase is the result
of the increase in the market valuation of the securities in the portfolio
during the period.
  Loans
decreased $3.9 million, or 4.8%, to $78.3 million at September 30, 2009, from
$82.2 million at June 30, 2009.  The decrease in loans was a
result of pay offs of three large commercial credits during the quarter and a
continuing lack of loan demand given the current economy.
 Total
deposits decreased $1.6 million, or 2.34%, to $68.8 million at September 30,
2009 from $70.4 million at June 30, 2009. The decrease in deposits was partially
due to the maturity of a $1.0 million certificate of deposit held for a public
entity in which management chose not to renew due to the above market interest
rate necessary to retain the funds.
  Deposits
are detailed below:
  September
      30,
                    2009
                
                
                June
      30,
                    2009Savings
                
                $
                25,656,993
                
                
                $
                25,684,002NOW
      accounts
                
                
                4,271,637
                
                
                
                4,088,079Non-interest
      bearing checking
                
                
                5,565,381
                
                
                
                5,760,935Money
      market
                
                
                3,878,431
                
                
                
                3,466,82839,372,442
                
                
                
                38,999,844Certificates
      of deposit
                
                
                22,971,641
                
                
                
                25,013,857IRAs
                
                
                6,492,812
                
                
                
                6,472,87329,464,453
                
                
                
                31,486,730Total
      Deposits
                
                $
                68,836,895
                
                
                $
                70,486,574
   13
 Table of Contents
  Federal
Home Loan Bank advances decreased $2.4 million, or 61.5%, to $1.5 million at
September 30, 2009 from $3.9 million at June 30, 2009. Borrowed funds were paid
down as a result of loan payoff proceeds received during the
period.
  Total
stockholders’ equity increased $212,000, or 1.2%, to $18.7 million at September
30, 2009 from $18.5 million at June 30, 2009.
  Comparison
of Results of Operation for the Three Months Ended September 30, 2009 and
2008
  General.  Net
income for the three months ended September 30, 2009 was $44,000, an increase in
net income of $164,000, from the same period in 2008.  The increase in
net income for the three months ended September 30, 2009 resulted primarily from
a decrease in non interest expense of $223,000 and a decrease in the provision
for loan losses of $150,000, offset by a decrease in net interest income and non
interest income of $133,000 and $75,000, respectively.
 Net
Interest Income.  Net interest income decreased $133,000 to
$1.1 million for the three months ended September 30, 2009, from $1.2 million
for the same period in 2008.  The net interest rate spread increased
to 4.40% for the three months ended September 30, 2009, from 4.24% for the same
period in 2008. The net interest margin slightly decreased to 4.73% for the
three months ended September 30, 2008, from 4.74% for the same period in 2008.
The decline in deposits and borrowings, coupled with reduced interest rates,
partially offset by a decline in the loan yield, was the primary cause for the
increase in spread and stability in
margin.
  Interest
Income.  Total interest income was $1.3 million for the three
months ended September 30, 2009, a decrease of $300,000 from the same
period in 2008.  For the three months ended September 30, 2009,
average interest-earning assets decreased to $91.2 million from $102.0 million
for the same period in 2008.  The decrease in interest income was
primarily the result of decreases in the average balances of the loan portfolio
for the respective periods and a decrease in the loan yield due to interest rate
declines and an increase of non accrual loans in the portfolio. Foregone
interest on non accrual loans was approximately $358,000 for the three months
ended September 30, 2009, compared to $109,000 for the same period in 2008. The
yield on interest-earning assets was 5.67% for the three months ended September
30, 2009 compared to 6.23% for the same period in
2008.
  Interest
Expense.  Total interest expense decreased $167,000 to $214,000
for the three months ended September 30, 2009 as compared to $381,000 for the
three months ended September 30, 2008. The average cost of funds decreased to
1.27% for the three months ended September 30, 2009 from 1.99% for the same
period in 2008 as a result of the decreasing rate environment and a reduction of
higher yielding certificates of
deposit.
   14
 Table of Contents
  The
following table shows average balances with corresponding interest income and
interest expense as well as average yield and cost information for the three
months ending September 30, 2009 and 2008. Average balances are derived from
daily balances, and nonaccrual loans are included as interest-bearing loans for
purposes of these tables.
  Three-month
      period ended September 30,2009
                    
                    
                    2008Average
                    
                    
                    
                    
                    
                    Average
                    
                    
                    Average
                    
                    
                    
                    
                    
                    AverageBalance
                    
                    
                    Interest
                    
                    
                    Yield/Rate(1)
                    
                    
                    Balance
                    
                    
                    Interest
                    
                    
                    Yield/Rate(1)Interest-
      earning assets:Loans
      receivable, net(2)
                    
                    $
                    86,235,951
                    
                    
                    $
                    1,260,582
                    
                    
                    
                    5.85
                    %
                    
                    $
                    94,311,611
                    
                    
                    $
                    1,520,463
                    
                    
                    
                    6.45
                    %Securities
      available-for-sale(3)
                    
                    
                    3,996,462
                    
                    
                    
                    30,500
                    
                    
                    
                    3.05
                    %
                    
                    
                    5,680,657
                    
                    
                    
                    61,991
                    
                    
                    
                    4.38
                    %Interest-bearing
      balances in  financial institutions(4)
                    
                    
                    406,818
                    
                    
                    
                    165
                    
                    
                    
                    0.16
                    %
                    
                    
                    68,103
                    
                    
                    
                    331
                    
                    
                    
                    1.95
                    %Federal
      funds sold
                    
                    
                    152,088
                    
                    
                    
                    59
                    
                    
                    
                    0.16
                    %
                    
                    
                    1,669,339
                    
                    
                    
                    8,436
                    
                    
                    
                    2.02
                    %Federal
      Home Loan Bank stock(5)
                    
                    
                    381,300
                    
                    
                    
                    —
                    
                    
                    
                    —
                    %
                    
                    
                    381,300
                    
                    
                    
                    —
                    
                    
                    
                    —
                    %Total
      interest earning assets
                    
                    
                    91,172,619
                    
                    
                    
                    1,291,306
                    
                    
                    
                    5.67
                    %
                    
                    
                    102,111,010
                    
                    
                    
                    1,591,221
                    
                    
                    
                    6.23
                    %Noninterest-earning
      assets
                    
                    
                    2,367,065
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    12,591,346Total
      assets
                    
                    $
                    93,539,684
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    114,702,356Interest-bearing
      liabilities:Interest-bearing
      deposits
                    
                    
                    64,649,036
                    
                    
                    
                    210,191
                    
                    
                    
                    1.30
                    %
                    
                    
                    74,805,574
                    
                    
                    
                    371,865
                    
                    
                    
                    1.99
                    %FHLB
      advances
                    
                    
                    2,757,609
                    
                    
                    
                    3,622
                    
                    
                    
                    0.53
                    %
                    
                    
                    1,418,478
                    
                    
                    
                    8,073
                    
                    
                    
                    2.28
                    %Federal
      funds purchased
                    
                    
                    14,446
                    
                    
                    
                    23
                    
                    
                    
                    0.64
                    %
                    
                    
                    92,090
                    
                    
                    
                    575
                    
                    
                    
                    2.50
                    %Total
      interest-bearing liabilities
                    
                    
                    67,421,091
                    
                    
                    
                    213,836
                    
                    
                    
                    1.27
                    %
                    
                    
                    76,316,142
                    
                    
                    
                    380,513
                    
                    
                    
                    1.99
                    %Noninterest-bearing
      liabilities
                    
                    
                    7,641,227
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    8,337,963Total
      equity capital(6)
                    
                    
                    18,477,366
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    30,048,251Total
      liabilities and equity capital
                    
                    $
                    93,539,684
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    114,702,356Net
      average interest-earning assetsNet
      interest income; interest rate spread(7)
                    
                    
                    
                    
                    
                    $
                    1,077,470
                    
                    
                    
                    4.40
                    %
                    
                    
                    
                    
                    
                    $
                    1,210,708
                    
                    
                    
                    4.24
                    %Net
      interest margin(8)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    4.73
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    4.74
                    %
  (1)
              Yields
      and rates have been annualized where
  appropriate.
 (2)
              Includes
      non accrual loans. Interest foregone on non-accrual loans was $358,000 and
      $109,000 for three months ended September 30, 2009 and September 30, 2008,
      respectively.
 (3)
              Tax
      effective yield, assuming a 34%
rate.
 (4)
              Includes
      interest-bearing demand deposits and repurchase
  agreements.
 (5)
              The
      FHLB Chicago discontinued the payment of dividends on its stock in the
      third quarter of 2007.
 (6)
              Includes
      retained earnings (deficit) and accumulated other comprehensive
      income.
 (7)
              Interest
      rate spread represents the differences between the weighted average yield
      on interest-earning assets and the weighted average rate on
      interest-bearing liabilities.
 (8)
              Net
      interest margin is net interest income divided by average interest-earning
      assets.
  Provision
for Loan Losses.  Provisions for loan losses are charged to
earnings to bring the total allowance for loan losses to a level considered
adequate by management to cover probable incurred credit losses in the loan
portfolio.  In evaluating the level of the allowance for loan losses,
management considers historical loss experience, the types of loans and the
amount of loans in the loan portfolio, overall portfolio mix, the level of
past-due or classified loans, the status of past-due principal and interest
payments, loan-to-value ratios, adverse situations that may affect the
borrower’s ability to repay, estimated value of any underlying collateral, and
prevailing economic conditions and other factors
related
   15
 Table of Contents
  to the
collectability of the loan portfolio.  Generally, groups of smaller
balance homogenous loans, such as residential real estate, small commercial real
estate, and home equity and consumer loans, are evaluated in the aggregate using
historical loss factors and peer group data adjusted for current economic
conditions.  Certain homogenous loans may be specifically evaluated
for impairment based on the loan’s individual facts and circumstances. Large,
more complex loans, such as multi-family and larger commercial real estate
loans, are evaluated individually for impairment and specific reserves are
allocated when necessary.
  Management
assesses the allowance for loan losses quarterly.  Management uses
current available information to recognize losses on loans; therefore, future
loan loss provisions may be necessary given the volatility of economic
conditions, the effect of such conditions on the financial condition of the
borrower and the borrower’s ability to repay the loan.  In addition,
regulatory agencies, as an integral part of their examination process,
periodically review the allowance for loan losses and may require us to
recognize additional provisions based on their judgment of information available
to them at the time of their examination.
  Management
continues to evaluate the manner in which the Company estimates probable
incurred losses.  This evaluation is inherently subjective, as it
requires estimates that are susceptible to significant revision, as more
information becomes available or as projected events change.
  The
allowance for loan losses was $5.2 million, or 6.19% of total loans, at
September 30, 2009, as compared to $5.2 million, or 5.98% of total loans,
at June 30, 2009.  Included in the allowance for loan loss
balance were specific allocations to impaired loans of $374,000 at September 30,
2009 and $274,000 at June 30, 2009.  The Bank believes, as of
September 30, 2009, its allowance for loan losses was adequate to cover
probable incurred losses.
  The Bank
recorded no additional provision during the three months ended September 30,
2009.  Our evaluation of the adequacy of the allowance for loan losses for
the quarter determined that no provision was necessary for the quarter due to a
decreasing overall loan portfolio, due to payoffs, offset by an increase in
impaired loan balances.
  As of
September 30, 2009, the Company’s total impaired loans were $11.4 million compared
to $10.2 million at June 30, 2009. Non accrual impaired loans were
$10.4 million while $1.0 million impaired loans were still accruing interest,
compared to $10.2 million impaired non accrual loans and $1.0 million still
accruing interest at June 30, 2009.  Non accrual loans resulted
in foregone interest of approximately $358,000 for the three months ended
September 30, 2009, compared to $109,000 for the same period in
2008.
  At
September 30, 2009, non-performing loans (which consist of impaired loans,
accruing and non-accruing loans, and loans still accruing but past due greater
than 90 days) totaled $11.4 million, or 13.68% of the loan portfolio, compared
to $10.2 million, or 11.76%, at June 30, 2009.  At September 30, 2009,
nonperforming assets (which include other real estate owned) were $11.5 million,
or 12.57% of assets, compared to $10.3 million, or 10.86% at June 30,
2009.  In addition, the Company had $518,000 in accruing loans that
were 30 to 89 days delinquent at September 30, 2009, compared to $291,000 at
June 30, 2009.  At September 30, 2009, we held $5.2 million of loan
loss reserves, or 6.19% of total loans, and 45.27% of non-performing
loans.
 The bank
had 24 impaired credit relationships, totaling $11.4 million as of September 30,
2009, compared to 23 impaired credit relationships, totaling $10.2 million, as
of June 30, 2009.  During the three months ended September 30, 2009
three additional loans totaling $1.8 million were identified as impaired and two
loans previously
on non-accrual status totaling $440,000 were paid off.
  The
following is a discussion of select previously disclosed impaired
loans:
  ·
                Three
      relationships with an aggregate outstanding balance of $482,000 involving
      separate commercial real estate participations for property in Florida,
      all secured by ocean front properties, remain in
    foreclosure.
 ·
                Two
      separate loan participations with different lead banks both involving
      hotel and complex properties, continue to be negatively impacted by the
      current economy.  Heightened legal strategies are being
      discussed on both credits as previous attempts to restructure or provide
      some level of forbearance on each credit have been
      unsuccessful.  The aggregate outstanding balance for these two
      loans is $1.4 million.
 
 16
 Table of Contents
  ·
                A
      loan with a balance of $1.8 million at September 30, 2009, net of an
      $854,000 charge-off, was paid off in October, 2009 for $1.8
      million.  This credit involved a commercial real estate property
      near downtown Chicago previously in
foreclosure.
 ·
                The
      bank continues with its foreclosure against a single family home builder
      in the Chicagoland area.  The loan balance is approximately $1.9
      million.  A second credit with this borrower involving a secured
      commercial real estate loan with a balance of $133,000 at September 30,
      2009 continues to be paid as
agreed.
 ·
                A
      commercial multi-family loan secured by a property in Wisconsin is in
      foreclosure.  The loan balance at September 30, 2009 was
      $500,000.  The bank has agreed to a repayment agreement with one
      of the borrowers.  An initial payment of $50,000 under the
      agreed repayment arrangement was received in October,
  2009.
  The
following table represents information concerning total loans and impaired loans
by geographical area and the percentage of impaired loans by geographical area
to total impaired loans:
  Dollar
amounts in thousands
  September
      30, 2009
                  
                  
                  June
      30, 2009
                  
                  
                  September
      30, 2008Geographical
      Location
                  
                  Total Loans
                  
                  
                  Impaired
      Loans
                  
                  
                  %
                  
                  
                  Total
      Loans
                  
                  
                  Impaired
      Loans
                  
                  
                  %
                  
                  
                  Total Loans
                  
                  
                  Impaired
      Loans
                  
                  
                  %Illinois
                  
                  $
                  61,647
                  
                  
                  $
                  7,844
                  
                  
                  
                  68.73
                  %
                  
                  $
                  65,522
                  
                  
                  $
                  6,399
                  
                  
                  
                  62.54
                  %
                  
                  $
                  68,176
                  
                  
                  
                  4,365
                  
                  
                  
                  63.06
                  %Florida
                  
                  
                  899
                  
                  
                  
                  482
                  
                  
                  
                  4.22
                  
                  
                  
                  905
                  
                  
                  
                  482
                  
                  
                  
                  4.71
                  
                  
                  
                  3,009
                  
                  
                  
                  2,557
                  
                  
                  
                  36.94Michigan
                  
                  
                  1,621
                  
                  
                  
                  1,187
                  
                  
                  
                  10.40
                  
                  
                  
                  1,622
                  
                  
                  
                  1,187
                  
                  
                  
                  11.60
                  
                  
                  
                  3,437
                  
                  
                  
                  —
                  
                  
                  
                  —Indiana
                  
                  
                  15,803
                  
                  
                  
                  490
                  
                  
                  
                  4.30
                  
                  
                  
                  15,754
                  
                  
                  
                  715
                  
                  
                  
                  6.99
                  
                  
                  
                  15,003
                  
                  
                  
                  —
                  
                  
                  
                  —Wisconsin
                  
                  
                  500
                  
                  
                  
                  500
                  
                  
                  
                  4.38
                  
                  
                  
                  500
                  
                  
                  
                  500
                  
                  
                  
                  4.89
                  
                  
                  
                  1,700
                  
                  
                  
                  —
                  
                  
                  
                  —Other
      States Combined
                  
                  
                  2,935
                  
                  
                  
                  910
                  
                  
                  
                  7.97
                  
                  
                  
                  3,122
                  
                  
                  
                  949
                  
                  
                  
                  9.27
                  
                  
                  
                  3,520
                  
                  
                  
                  —
                  
                  
                  
                  —Total
      loans
                  
                  $
                  83,405
                  
                  
                  $
                  11,413
                  
                  
                  
                  100.00
                  %
                  
                  $
                  87,425
                  
                  
                  $
                  10,232
                  
                  
                  
                  100.00
                  %
                  
                  $
                  94,845
                  
                  
                  $
                  6,922
                  
                  
                  
                  100.00
                  %
  The
following table represents information concerning impaired loans by category and
the percentage of impaired loans by category to total impaired
loans:
  Dollar
amounts in thousands
  September
      30, 2009
                  
                  
                  June
      30, 2009
                  
                  
                  September
      30, 2008Loan
      Category
                  
                  Impaired
      Amount
                  
                  
                  %
      of Total Impaired
                  
                  
                  Impaired
      Amount
                  
                  
                  %
      of Total Impaired
                  
                  
                  Impaired
      Amount
                  
                  
                  %
      of Total ImpairedOne-to-four  family
      loans
                  
                  $
                  1,542
                  
                  
                  
                  13.51
                  %
                  
                  $
                  1,219
                  
                  
                  
                  11.91
                  %
                  
                  $
                  2,649
                  
                  
                  
                  38.27
                  %Commercial
      real estate loans
                  
                  
                  8,273
                  
                  
                  
                  72.49
                  
                  
                  
                  7,297
                  
                  
                  
                  71.32
                  
                  
                  
                  3,595
                  
                  
                  
                  51.94Multi-family
      loans
                  
                  
                  500
                  
                  
                  
                  4.38
                  
                  
                  
                  553
                  
                  
                  
                  5.41
                  
                  
                  
                  —
                  
                  
                  
                  —Commercial
      loans
                  
                  
                  1,072
                  
                  
                  
                  9.39
                  
                  
                  
                  1,136
                  
                  
                  
                  11.10
                  
                  
                  
                  678
                  
                  
                  
                  9.79Home
      Equity loans
                  
                  
                  26
                  
                  
                  
                  .23
                  
                  
                  
                  27
                  
                  
                  
                  .26
                  
                  
                  
                  —
                  
                  
                  
                  —Other
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Total
                  
                  $
                  11,413
                  
                  
                  
                  100.00
                  %
                  
                  $
                  10,232
                  
                  
                  
                  100.00
                  %
                  
                  $
                  6,922
                  
                  
                  
                  100.00
                  %
  Management
recognizes that the current economic environment continues to present an
extremely difficult challenge.  With the housing and credit markets
dramatically impacted by the current state of the economy, management remains
committed to taking an aggressive and proactive approach in continuing to
closely monitor our asset quality.   We remain cognizant of the
importance of building strong reserve levels in an appropriate and prudent
manner given the current unstable financial environment.  Our
evaluation of the adequacy of the allowance for loan losses for the quarter
determined that no provision was necessary for the quarter due to a decreasing
overall loan portfolio, due to payoffs, offset by an increase in impaired loan
balances.  We continue to review our methodology with the adequacy in which
we estimate probable losses in our loan portfolio given all the recent market
disruptions being experienced.
   17
 Table of Contents
  As the
tables above indicate, our nonperforming assets have steadily risen over the
three quarters presented as a result of the continued weakening of the credit
and housing markets.  Like many community banks, we relied on real
estate secured lending as a primary type of lending.  Management has
responded to the difficult economic times before us by imposing and adhering to
loan policy geographic concentration and construction lending restrictions as
well as continuing to enforce stricter underwriting and loan structuring
covenants.
  Management
identifies nonperforming loans proactively and
aggressively.   These loans include nonaccrual loans and accruing
loans that are 90 days or more delinquent.  Loans in this category
include those with risk characteristics such as past maturity more than 90 days,
those that have payments past due more than 90 days, those that have recent
adverse operating cash flow or balance sheet trends, or loans that have general
risk characteristics that management believes might jeopardize the future timely
collection of principal and interest payments.  Management does not
consider extension or renewals of credits with these characteristics in an
attempt to avoid proper nonperforming classification.
  Delinquent
Loans.We continue to monitor the performance of our loan
portfolio through regular contact with our clients, continuous management
portfolio review and careful monitoring of delinquency reports and internal
watch list and risk rating reports.  As the delinquent status of a
loan may determine its risk rating, the allowance for loan losses may be
directly affected by loans that are performing despite past due
status.
  The
following table summarizes our delinquent loans that are past due and still
accruing interest; all delinquent loans as of September 30, 2009 consist of
Illinois and Indiana market area loans.  Management has determined
that the increase in delinquencies at September 30, 2009, compared to
June 30, 2009 and September 30, 2008, are a direct result of the
rising unemployment levels impacting local residential
borrowers.  Management initiates collection activity promptly and
works closely with borrowers to evaluate the circumstances of delinquency to
determine the appropriate resolution strategy.  Resolution strategies
include (but are not limited to) collection of payments in accordance with the
loan agreement, modification or restructure of the loan, forbearance, and
foreclosure.
  Dollar
amounts in thousands
  September
      30, 2009
                  
                  
                  June
      30, 2009
                  
                  
                  September 30, 200830-89
      Days
                  
                  
                  +90
      Days
                  
                  
                  30-89
      Days
                  
                  
                  +90
      Days
                  
                  
                  30-89
      Days
                  
                  
                  +90
      DaysOne-to-four
      family loans
                  
                  $
                  393
                  
                  
                  $
                  —
                  
                  
                  $
                  291
                  
                  
                  $
                  —
                  
                  
                  $
                  753
                  
                  
                  $
                  —Commercial
      real estate loans
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Multi-family
      loans
                  
                  
                  90
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  94
                  
                  
                  
                  —Commercial  loans
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  48
                  
                  
                  
                  —
                  
                  
                  
                  —Home
      equity loans
                  
                  
                  35
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Share
      loans
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Total
      loan delinquencies
                  
                  $
                  518
                  
                  
                  $
                  —
                  
                  
                  $
                  291
                  
                  
                  $
                  48
                  
                  
                  $
                  847
                  
                  
                  $
                  —
  Allowance
for Loan Losses.At September 30, 2009, the allowance for loan
losses was $5,167,000 or 6.19% of the total loan portfolio.  The loss
allowance is maintained by management at a level considered adequate to cover
probableincurred
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.
   18
 Table of Contents
  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
September 30, 2009.
  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.
  Specific Component of the Allowance
for Loan Losses.As disclosed in the Company’s Annual Report
on Form 10-K for its fiscal year ended June 30, 2009, the Company changed the
timing of recording charge-offs of estimated loan impairments during the fourth
quarter of the 2009 fiscal year.  The Company continues to charge-off
the estimated loss for loans where management deems either the timing or the
repayment to be significantly impaired. The charge-off value is based on a
loan’s current value compared to the present value of its projected future cash
flows, collateral value or market value, as is relevant for the particular loan
pursuant to ASC 310.  Management will establish a specific reserve
through the allowance for loan losses when the loss is attributed to a troubled
debt restructuring or when the Company does not believe the loss to be
confirmed.  At September 30, 2009, the specific component of the
reserve was $374,000, an increase of $66,000 from $274,000 at June 30, 2009. The
increase was due to a newly impaired commercial credit of $1,449,000 requiring a
specific reserve allocation of $87,000, offset by a reduction of the specific
reserve allocation of $21,000 on a previously impaired loan.
  Potential Problem
Loans.In determining the adequacy of the allowance for loan
losses, the Bank regularly evaluates potential problem loans as to the ability
of the borrower to comply with the present loan repayment terms.  The
Bank has identified one previously disclosed credit relationship about which it
has concerns about the future ability of the borrower to comply with present
repayment terms.  However, those concerns do not rise to the level of
impairment at this time.  This relationship involves a commercial
retail development loan located in Northwest Indiana with an approximate loan
balance of $3.9 million at September 30, 2009.  The loan matures in
March of 2010.  This loan possesses heightened credit risks due to the
continuing overall national and local retail economy which continues to show
contraction.  The Bank is closely monitoring this credit.
 At June
30, 2009 the Bank disclosed a potential problem credit with a balance of $1.5
million.  This relationship involves a commercial real estate loan
secured by a commercial office property located in the Chicago
area.  The primary tenant in this multi-level office building was a
financial institution that recently failed, as such, this lease space is now
vacant.  The Bank has impaired this credit at September 30,
2009.  There were no potential problem credits at September 30,
2008.
  Non-interest
Income.  Non-interest income decreased $75,000 to $71,000 for
the three-month period ended September 30, 2009 compared to $146,000 for the
same period in 2008.  The decrease was primarily related to the
elimination of $49,000 in earnings related to the bank owned life insurance
policies. The policies were surrendered in January 2009. In addition, service
charges decreased $23,000 to $62,000 for the three-month period ended September
30, 2009 compared to $84,000 for the same period in
2008.
  Non-interest
Expense.  Non-interest expense decreased $223,000 to $1.1
million for the three-month period ended September 30, 2009 compared to $1.3
million for the same period in 2008. The decrease was primarily due to cost
savings in two areas: salaries expense and occupancy expense. Salaries and
employee benefits decreased $97,000 to $533,000 for the three-month period ended
September 30, 2009 from $630,000 for the same period in 2008. A decrease was
recognized for the three month
period,
   19
 Table of Contents
  even
though additional employee benefits expense of $32,000 was recorded in
September, relating to the immediate vesting of restricted stock and stock
options resulting from the death of a previous director. Occupancy and equipment
decreased $92,000 to $147,000 for the three-month period ended September 30,
2009 from $239,000 for the same period in 2008.
  As
previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal
year ended June 30, 2009, we closed our branches in Frankfort, Illinois and
Schererville, Indiana on June 30, 2009, which have decreased the Bank’s
operating expenses by approximately $73,000 per month.
 Provision
for Income Taxes.  At September 30, 2009 the Company has a
valuation allowance on 100% of the deferred tax asset as the Company believes it
is more likely than not that the deferred tax asset will not be recognized. The
Company recognized no income tax benefit for the three months ended September
30, 2008 as the Company believed it was more likely than not that the deferred
tax asset would not be
recognized.
  Liquidity
and Capital Resources
  Liquidity.  Management
carefully gauges liquidity risk by measuring and monitoring our liquidity on
both a short- and long-term basis, assessing and anticipating changes in our
balance sheet and funding sources, and developing contingency funding
plans.  After assessing actual and projected cash flow needs,
management seeks to obtain funding at the most economical cost.  Our
primary sources of funds are deposits, principal and interest payments on loans,
proceeds from maturities, calls and the sale of securities held in the Bank’s
investment portfolio, federal fund borrowings, the Federal Reserve Discount
Window, Federal Home Loan Bank (FHLB) advances, and funds provided from
operations.  While maturities and scheduled amortization of loans and
securities are relatively predictable sources of funds, deposit flows and loan
repayments are greatly influenced by general interest rates, economic
conditions, and competition.  We invest excess funds in short-term
interest-earning assets, which enable us to meet lending
requirements.  FHLB advances are borrowed when in need of
liquidity.
 At
September 30, 2009, there were $1.5 million of FHLB advances
outstanding.  As of September 30, 2009, the Bank had $18.5 million in
additional available credit with the FHLB based on parameters set by the FHLB.
Additional stock and collateral may be purchased or provided to increase overall
potential advance availability. Recently, the FHLB implemented a risk rating
process which could reduce the lines of credit extended to member
banks.  Following its most recent risk analysis of the Bank, FHLB
imposed no additional restrictions, terms or reporting requirements on our
borrowing capacity.
  In an
effort to develop alternative sources of liquidity, the Bank has established a
relationship with the Federal Reserve Bank of Chicago and has been approved for
access to the Discount Window for borrowing funds.  The funding
capacity is calculated based on the value of the collateral pledged for
borrowing. To date, no loan collateral has been pledged, but a $500,000 agency
security was pledged temporarily to test the Bank’s ability to borrow and to
process the transaction. This relationship will assist in maintaining adequate
liquidity and provide an additional source for short-term funding
needs.
  The
Company’s cash flows are comprised of three primary
classifications:  cash flows from operating activities, investing
activities, and financing activities.  Net cash from (used in)
operating activities were $342,000 and $(390,000) for September 30, 2009 and
2008, respectively.  Net cash from (used in) investing activities
consisted primarily of proceeds from loan payoffs.  Net cash from
(used in) investing activities were $4.0 million and $361,000 for September 30,
2009 and 2008, respectively.  Net cash used in financing activities
consisted primarily of the activity in deposit accounts, FHLB advances, and
advances from borrowers for taxes and insurance.  The net cash used in
financing activities was $(3.9) million and $(2.0) million at September 30, 2009
and 2008.
   20
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  At
September 30, 2009, the Company had no outstanding loan origination commitments,
$4.8 million in unfunded lines, and letters of credit outstanding of
$138,000.  In addition, as of September 30, 2009, the total amount of
certificates of deposit that were scheduled to mature in the next 12 months
equaled $23.1 million.  The Company believes that it has adequate
resources to fund all of its commitments and that it can adjust the rates paid
on certificates of deposit to retain deposits in changing interest rate
environments.  If the Company requires funds beyond its internal
funding capabilities, advances from the FHLB are available as an additional
source of funds.
  Capital.  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 September 30, 2009, the Bank
exceeded each of its capital requirements with ratios of 16.83%, 21.68%, and
23.00%,
respectively.
  Critical
Accounting Policies and Estimates
  The
accounting and reporting policies of the Company are in accordance with U.S.
generally accepted accounting principles and conform to general practices within
the banking industry.  Accounting and reporting policies for the
allowance for loan losses and income 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.
  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 non-collateral 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
   21
 Table of Contents
  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.
  Item
3.Quantitativeand Qualitative
Disclosure About Market Risk
  Not
applicable
  Item
4T.Controlsand
Procedures.
  As of the
end of the period covered by this report, we carried out an evaluation, under
the supervision, and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures as contemplated
by Exchange Act Rule 13a-15.  Based upon, and as of the date of that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company’s disclosure controls and procedures are effective, in all
material respects, in timely alerting them to material information relating to
the Company (and its consolidated subsidiary) required to be included in the
periodic reports the Company is required to file and submit to the SEC under the
Exchange Act.
  There
have been no changes in the Company’s internal control over financial reporting
during the quarter ended September 30, 2009, that have materially affected or
are reasonably likely to materially affect, the Company’s internal control over
financial reporting.




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PARTII.
– OTHERINFORMATION




Item1.LegalProceedings.




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




Item1A.RiskFactors.




The
following are certain material risks that management believes are specific to
the Company and its business. You should understand that it is not possible to
predict or identify all such potential risks and, as such, this list of risk
factors should not be viewed as all-inclusive or in any particular order. Before
deciding to make an investment decision regarding our common stock, you should
carefully consider the risks described below in conjunction with the other
information in our Annual Report on Form 10-K for our fiscal year ended June 30,
2009, and in this quarterly report on Form 10-Q for the quarter ended September
30, 2009. Our business, financial condition and results of operations could be
adversely affected by any of the following risks or by other risks that have not
been identified or that the Company may believe are immaterial or unlikely. The
risks discussed below also include forward-looking statements and our actual
results may differ substantially from those discussed in these forward-looking
statements.
  The
continuation of adverse market conditions in the U.S economy and the markets in
which we operate could adversely impact us.
  A
continued deterioration of overall market conditions, a continued economic
downturn or prolonged economic stagnation in our markets or adverse changes in
laws and regulations that impact the banking industry may have a negative impact
on our business. If the strength of the U.S. economy in general and the strength
of the economy in areas where we lend (or previously provided real estate
financing) continue to decline, this could result in, among other things, a
further deterioration in credit quality or loans. Negative conditions in the
real estate markets where we operate could adversely affect our borrowers’
ability to repay their loans and the value of the underlying collateral. Real
estate values are affected by various factors, including general economic
conditions, governmental rules or policies and natural
disasters.  These factors may adversely impact our borrowers’ ability
to make required payments, which in turn, may negatively impact our financial
results.
  Current
and further deterioration in the housing market could cause further increases in
delinquencies and non-performing assets, including loan charge-offs, and depress
our income and growth.
  The
volume of our one-to-four family residential mortgages and home equity lines of
credit (HELOCs) may decrease during economic downturns as a result of, among
other things, a decrease in real estate values, an increase in unemployment, a
slowdown in housing price appreciation or increases in interest rates. These
factors could reduce our earnings and consequently our financial condition
because:
  ·
              The
      borrowers may not be able to repay their
loans
 ·
              The
      value of the collateral securing our loans to borrowers may decline
      further
 ·
              The
      quality of our loan portfolio may decline
  further
 ·
              Customers
      may not want or need our products and
services
  Any of
these scenarios could cause an increase in delinquencies and non-performing
assets, require us to charge off a higher percentage of our loans, increase
substantially our provision for losses on loans, or make fewer loans, which
would reduce income.
  As
a result of current economic conditions, our allowance for loan losses may prove
to be insufficient to absorb losses in our loan portfolio, which could adversely
affect our operating results.
  At
September 30, 2009, non-performing loans (which consist of impaired loans,
accruing and non-accruing loans, and loans still accruing but past due greater
than 90 days) totaled $11.4 million, or 13.68% of the loan portfolio, compared
to $10.2 million, or 11.76%, at June 30, 2009.  At September 30, 2009,
nonperforming assets (which include other real estate owned) were $11.5 million,
or 12.57% of assets, compared to $10.3 million, or 10.86% at June 30,
2009.  In addition, the Company had $518,000 in accruing loans that
were 30 to 89 days delinquent at September 30, 2009, compared to $291,000 at
June 30, 2009.  At September 30, 2009, we held $5.2 million of loan
loss reserves, or 6.19% of total loans, and 45.27% of non-performing
loans.
   23
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  Until
economic and market conditions improve, we may continue to incur additional
losses relating to an increase in nonperforming loans.  We do not
record interest income on non-accrual loans or other real estate owned, thereby
adversely affecting our income, and increasing our loan administration
costs.  When we take collateral in foreclosures and similar
proceedings, we are required to mark the related loan to the then fair market
value of the collateral, which may result in a loss.  These loans and
other real estate owned also increase our risk profile and the capital our
regulators believe is appropriate in light of such risks.  As a result
of current economic conditions, additional provisions for loan losses may be
necessary.
  Determination
of the appropriate level of the allowance for loan losses involves a high degree
of subjectivity and requires significant estimates, and actual losses may vary
from current estimates.
  We
maintain an allowance for loan losses to provide for loans in out portfolio that
may not be repaid in their entirety.  The determination of the
appropriate level of the allowance for loan losses involves a high degree of
subjectivity and requires us to make significant estimates of current credit
risks and future trends, all of which may undergo material changes.
  In
evaluating the adequacy of the allowance for loan losses, we consider numerous
quantitative factors, including our historical charge-off experience, growth of
our loan portfolio, changes in the composition of our loan portfolio and the
volume of delinquent and classified loans.  In addition, we use
information about specific borrower situations, including their financial
position and estimated collateral values, to estimate the risk and amount of
loss for those borrowers.  Finally, we consider many qualitative
factors, including general and economic business conditions, duration of the
current business cycle, current general market collateral valuations, trends
apparent in any of the factors we take into account and other matters, which are
by nature subjective and fluid.  Our estimates of the risk of loss and
amount of loss on any loan are complicated by the significant uncertainties
surrounding the borrowers’ abilities to successfully execute their business
models through changing economic environments, competitive challenges and other
factors.  In considering information about specific borrower
situations, our analysis is subject to the risk that we are provided inaccurate
or incomplete information.  Because of the degree of uncertainty and
susceptibility of these factors to change, our actual losses may vary from our
current estimates.
  Additionally,
bank regulators periodically review the allowance for loan losses and may
require an increase in the provision for loan losses or recognize loan
charge-offs based upon their judgments, which may be different from
ours.  Any increase in the allowance for loan losses or loan
charge-offs required by these regulatory authorities may adversely affect our
operating results.
  We
may not be able to access sufficient and cost-effective sources of liquidity
necessary to fund our requirements.
  We depend
on access to a variety of funding sources, including deposits, to provide
sufficient liquidity to meet our commitments and business needs and to
accommodate the transaction and cash management needs of our customers,
including funding current loan commitments.  Currently, our primary
sources of liquidity are our customers’ deposits, as well as federal funds
borrowings and Federal Home Loan Bank advances.
  Across
the banking industry, access to liquidity has tightened in the form of reduced
borrowing lines and/or increased collateral requirements.  To the
extent our balance sheet (customer deposits and principal reductions on loans
and securities) is not sufficient to fund our liquidity needs, we rely on
alternative funding sources, which may be more expensive than organic
sources.  In the past, the Federal Home Loan Banks have provided
cost-effective and convenient liquidity to many community banks (like
us).  However, current economic conditions have created earnings and
capital challenges for some of the Federal Home Loan Banks, which may limit (or
preclude) their ability to provide adequate liquidity.
   24
 Table of Contents
  We test
and evaluate our liquidity sources regularly, and we continue to developing
alternative sources.  In the third quarter of fiscal 2009, the Bank
established a relationship with the Federal Reserve Bank of Chicago and has been
approved for access to the Fed’s Discount Window as an alternative source for
low cost funding.  We believe this relationship will assist us in
maintaining adequate liquidity and provide an additional source for short-term
funding. However, there is no assurance that this funding source will be or
remain available in the future.
  There
can be no assurance that recently enacted legislation will help stabilize the
U.S. financial system.
  Recent
legislative and regulatory initiatives to address difficult market and economic
conditions may not stabilize the U.S. banking system.  On October 3,
2008, the President signed into law the Emergency Economic Stabilization Act of
2008, or the Emergency Economic Stabilization Act, in response to the current
crisis in the financial sector.  The Treasury and various banking
regulators have implemented a number of programs under this legislation to
address capital and liquidity issues in the banking system.  On
February 17, 2009, the President signed into law the American Recovery and
Reinvestment Act of 2009, or the American Recovery and Reinvestment
Act.  There can be no assurance, however, as to the actual impact that
the Emergency Economic Stabilization Act or the American Recovery and
Reinvestment Act, and the various programs implemented in association with these
legislative efforts, will have on the financial markets, including the extreme
levels of volatility and limited credit availability currently being
experienced.  The failure of the Emergency Economic Stabilization Act
or American Recovery and Reinvestment Act and the associated programs to help
stabilize the financial markets and a continuation or worsening of current
financial market conditions could have a material, adverse effect on our
business, financial condition, results of operations, access to credit or the
value of our securities.
  We
are subject to extensive regulations that may limit or restrict our activities,
and the cost of compliance is high.
  We
operate in a highly regulated industry and are subject to examination,
supervision and comprehensive regulation by various regulatory agencies,
including the IDFR, the FDIC and the Federal Reserve.  Banking
regulations are primarily intended to protect the DIF and depositors, not
stockholders.  Our compliance with these regulations is costly and
restricts certain of our activities, including payment of dividends, mergers and
acquisitions, investments, loans and interest rates charged, interest rates paid
on deposits and locations of offices.  We are also subject to
regulatory capital requirements, which require us to maintain adequate capital
to support our growth.  If we fail to meet these capital and other
regulatory requirements, our ability to grow, our cost of funds and FDIC
insurance and our ability to pay dividends on our common stock could be
materially and adversely affected.
  Federal
bank regulatory agencies, as well as the U.S. Congress and the President, are in
the process of evaluating the regulation of banks, other financial institutions
and the financial markets and such changes, if any, could require us to maintain
more capital, liquidity and risk management that could adversely affect our
growth, profitability and financial condition, as well as change our charter,
regulator and/or subject us to new or additional regulations and regulators.
Furthermore, various proposals to create a uniform financial institutions
charter have been introduced in past sessions of the U.S. Congress. We are
unable to predict whether such legislation would be enacted or the extent to
which the legislation would restrict or disrupt our or the Bank’s
operations.
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 Table of Contents
  Item
2.UnregisteredSales of Equity
Securities and Use of Proceeds.
  None
  Item
3.DefaultsUpon Senior
Securities.
  None
  Item
4.Submissionof Matters to a Vote
of Security Holders.
  At the
Company’s Annual Meeting of Stockholders held on October 21, 2009, the
following matters were submitted to and approved by a vote of
stockholders:
  (1)           The
election of three Class II directors for a three-year term ending at the
Annual Meeting of Stockholders to be held in 2012:
  Directors
                  
                  Votes
      For
                  
                  
                  Votes
      WithheldAlan
      W. Bird
                  
                  
                  1,933,872
                  
                  
                  
                  223,972James
      A. Fitch, Jr.
                  
                  
                  2,003,448
                  
                  
                  
                  154,396Roger
      L. Hupe
                  
                  
                  2,003,550
                  
                  
                  
                  154,294
  The
following directors continue to serve after the Annual Meeting:
  Continuing
      Director
                  Term
      ExpiresJohn
      T. Dempsey
                  2010Leonard
      Szwajkowski
                  2010C.
      Michael McLaren
                  2011Rodolfo
      Serna
                  2011
  (2)           Ratification
of the appointment of Crowe Horwath LLP as the Company’s independent accountants
for the fiscal year ending June 30, 2010.
  Total
      votes for
                    
                    
                    2,045,795Total
      votes against
                    
                    
                    72,051Total
      votes abstaining
                    
                    
                    39,999
  Item
5.OtherInformation.
  None
  Item 6.  Exhibits.
  (a)   The
exhibits filed as part of this Form 10-Q are listed in the Exhibit Index, which
is incorporated herein by
reference.




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 Table of Contents




SIGNATURES




Pursuant to the
requirements of the Securities Exchange Act of 1934, as amended, the Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.




Date:  November
      16,
      2009
                ROYAL
      FINANCIAL,
      INC.By:
                /s/Leonard
      SzwajkowskiLeonard
      SzwajkowskiChief
      Executive Officer and President
 Date:  November
      16, 2009
                    By:
                    /s/Jodi
      A. OjedaJodi
      A. OjedaSenior
      Vice President and
                      Chief
      Financial
      Officer




27
 Table of Contents




EXHIBITINDEX




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 18
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.






28