UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
  FORM
10-Q
  (mark
one)
  ý  QUARTERLY REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES
 EXCHANGE
ACT OF 1934
  For
the quarterly period ended March 31, 2009
  or
   ̈TRANSITION REPORT UNDER
SECTION 13 OR 15(d) OF THE EXCHANGE
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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  Yes  ̈ No  ̈
 Indicate
by check mark whether the registrant is a large accelerated filer, 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 May 14, 2009Common
      Stock, $.01 par value
                2,558,490
   Table of Contents
 ROYAL
FINANCIAL, INC. AND SUBSIDIARY
  FORM
10-Q
  For
the quarterly period ended March 31, 2009
  TABLE OF CONTENTS
    PagePART I. – FINANCIAL
      INFORMATIONItem 1. Financial Statements
                          1Consolidated Statements of Financial
      Condition as of March 31, 2009 and June 30, 2008
                          1Consolidated Statements of Operations for
      the three months and nine months ended March 31, 2009 and
      2008
                          2Consolidated Statements of Stockholders’
      Equity for the nine months ended March 31, 2009 and
    2008
                          3Consolidated Statements of Cash Flows for
      the nine months ended March 31, 2009 and 2008
                          5Notes to Unaudited Financial Statements
                          6Item 2. Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
                          12Item 3. Quantitative and Qualitative Disclosure About Market
      Risk
                          23Item 4T. Controls and Procedures
                          23PART II. – OTHER INFORMATIONItem 1. Legal Proceedings
                          23Item 1A. Risk Factors
                          24Item 2. Unregistered Sales of Equity Securities and Use of
      Proceeds
                          25Item 3. Defaults Upon Senior
Securities
                          25Item 4. Submission of Matters to a Vote of Security
      Holders
                          25Item 5. Other Information
                          25Item 6. Exhibits
                          26SIGNATURES
                          27EXHIBIT INDEX
 
 Table of Contents
   PART I. – FINANCIAL
INFORMATION
  Item1.                      Financial
Statements.
  ROYALFINANCIAL, INC. AND SUBSIDIARY
 Consolidated
Statements of Financial Condition
 March 31,
2009 and June 30, 2008 (Unaudited)
  March
      31, 2009
                    
                    
                    June
      30, 2008(Unaudited)ASSETSCash
      and non-interest-bearing balances in financial
institutions
                    
                    $
                    2,885,367
                    
                    
                    $
                    3,692,777Interest-bearing
      balances in financial institutions
                    
                    
                    216,804
                    
                    
                    
                    68,126Federal
      funds sold
                    
                    
                    80,344
                    
                    
                    
                    2,163,946Total
      cash and cash equivalents
                    
                    
                    3,182,515
                    
                    
                    
                    5,924,849Securities
      available-for-sale
                    
                    
                    4,012,100
                    
                    
                    
                    7,747,047Loans
      receivable, net of allowance for loan losses of $4,129,000 at March 31,
      2009 and $2,060,000 at June 30, 2008
                    
                    
                    87,087,203
                    
                    
                    
                    90,775,183Federal
      Home Loan Bank stock, at cost
                    
                    
                    460,000
                    
                    
                    
                    381,300Cash
      surrender value of life insurance
                    
                    
                    -
                    
                    
                    
                    4,933,722Premises
      and equipment, net
                    
                    
                    5,290,208
                    
                    
                    
                    5,534,815Accrued
      interest receivable
                    
                    
                    332,696
                    
                    
                    
                    454,922Other
      real estate owned
                    
                    
                    434,250
                    
                    
                    
                    -Other
      assets
                    
                    
                    432,945
                    
                    
                    
                    376,277Total
      assets
                    
                    $
                    101,231,917
                    
                    
                    $
                    116,128,115LIABILITIES
      AND STOCKHOLDERS’ EQUITYLiabilitiesDeposits
                    
                    $
                    70,920,634
                    
                    
                    $
                    83,875,204Advances
      from borrowers for taxes and insurance
                    
                    
                    299,394
                    
                    
                    
                    545,518Federal
      Home Loan Bank advances
                    
                    
                    1,600,000
                    
                    
                    
                    -Accrued
      interest payable and other liabilities
                    
                    
                    611,667
                    
                    
                    
                    1,167,569Common
      stock in ESOP subject to contingent repurchase obligation
                    
                    
                    381,938
                    
                    
                    
                    643,264Total
      liabilities
                    
                    
                    73,813,633
                    
                    
                    
                    86,231,555Stockholders’
      equityPreferred
      stock, $.01 par value per share, authorized 1,000,000 shares; no shares
      are outstanding
                    
                    
                    -
                    
                    
                    
                    -Common
      stock, $.01 par value per share, authorized 5,000,000 shares, 2,645,000
      shares issued at March 31, 2009 and June 30, 2008
                    
                    
                    26,450
                    
                    
                    
                    26,450Additional
      paid-in capital
                    
                    
                    24,752,427
                    
                    
                    
                    24,672,588Retained
      earnings
                    
                    
                    5,698,450
                    
                    
                    
                    8,759,470Treasury
      stock, 86,510 shares and 89,568 shares, at cost
                    
                    
                    (1,280,875
                    )
                    
                    
                    (1,326,286
                    )Accumulated
      other comprehensive income, net of tax
                    
                    
                    7,986
                    
                    
                    
                    12,376Unearned
      ESOP shares
                    
                    
                    (1,404,216
                    )
                    
                    
                    (1,604,774
                    )Reclassification
      of ESOP shares
                    
                    
                    (381,938
                    )
                    
                    
                    (643,264
                    )Total
      stockholders’ equity
                    
                    
                    27,418,284
                    
                    
                    
                    29,896,560Total
      liabilities and stockholders’ equity
                    
                    $
                    101,231,917
                    
                    
                    $
                    116,128,115
 
 See
accompanying notes to these unaudited consolidated financial
statements.
   1
 Table of Contents
 ROYALFINANCIAL, INC. AND
SUBSIDIARY
 Consolidated
Statements of Operations
 Three
months and nine months ended March 31, 2009 and 2008
 (Unaudited)
  Three
      Months Ended
                        March
      31,
                    
                    
                    Nine
      Months Ended
                        March
      31,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Interest
      incomeLoans
                    
                    $
                    1,232,627
                    
                    
                    $
                    1,593,024
                    
                    
                    $
                    4,187,274
                    
                    
                    $
                    4,902,444Securities,
      taxable
                    
                    
                    32,164
                    
                    
                    
                    136,669
                    
                    
                    
                    144,949
                    
                    
                    
                    445,523Federal
      funds sold and other
                    
                    
                    269
                    
                    
                    
                    6,164
                    
                    
                    
                    9,502
                    
                    
                    
                    207,738Total
      interest income
                    
                    
                    1,265,060
                    
                    
                    
                    1,735,857
                    
                    
                    
                    4,341,725
                    
                    
                    
                    5,555,705Interest
      expenseDeposits
                    
                    
                    235,786
                    
                    
                    
                    541,800
                    
                    
                    
                    884,099
                    
                    
                    
                    1,915,851Federal
      Home Loan Bank advances and other borrowings
                    
                    
                    4,860
                    
                    
                    
                    40,104
                    
                    
                    
                    33,949
                    
                    
                    
                    62,933Total
      interest expense
                    
                    
                    240,646
                    
                    
                    
                    581,904
                    
                    
                    
                    918,048
                    
                    
                    
                    1,978,784Net
      interest income
                    
                    
                    1,024,414
                    
                    
                    
                    1,153,953
                    
                    
                    
                    3,423,677
                    
                    
                    
                    3,576,921Provision
      for loan losses
                    
                    
                    1,939,493
                    
                    
                    
                    1,101,076
                    
                    
                    
                    2,840,100
                    
                    
                    
                    1,244,797Net
      interest income (loss)  after provision for loan
      losses
                    
                    
                    (915,079
                    )
                    
                    
                    52,877
                    
                    
                    
                    583,577
                    
                    
                    
                    2,332,124Non-interest
      incomeService
      charges on deposit accounts
                    
                    
                    64,130
                    
                    
                    
                    79,551
                    
                    
                    
                    218,897
                    
                    
                    
                    211,084Earnings
      on cash surrender value of life insurance
                    
                    
                    16,683
                    
                    
                    
                    48,291
                    
                    
                    
                    114,866
                    
                    
                    
                    143,353Gain
      on sale of securities
                    
                    
                    53,364
                    
                    
                    
                    -
                    
                    
                    
                    53,364
                    
                    
                    
                    -Other
      income
                    
                    
                    10,069
                    
                    
                    
                    19,421
                    
                    
                    
                    41,622
                    
                    
                    
                    46,167Total
      non-interest income
                    
                    
                    144,246
                    
                    
                    
                    147,263
                    
                    
                    
                    428,749
                    
                    
                    
                    400,604Non-interest
      expenseSalaries
      and employee benefits
                    
                    
                    590,916
                    
                    
                    
                    689,746
                    
                    
                    
                    1,828,167
                    
                    
                    
                    2,056,673Occupancy
      and equipment
                    
                    
                    256,022
                    
                    
                    
                    355,145
                    
                    
                    
                    747,243
                    
                    
                    
                    934,318Data
      processing
                    
                    
                    94,610
                    
                    
                    
                    102,601
                    
                    
                    
                    293,624
                    
                    
                    
                    318,464Professional
      services
                    
                    
                    163,425
                    
                    
                    
                    162,394
                    
                    
                    
                    537,447
                    
                    
                    
                    532,726Investigation
      costs
                    
                    
                    -
                    
                    
                    
                    59,958
                    
                    
                    
                    -
                    
                    
                    
                    474,815Director
      fees
                    
                    
                    38,400
                    
                    
                    
                    33,300
                    
                    
                    
                    113,500
                    
                    
                    
                    99,400Supplies
                    
                    
                    13,514
                    
                    
                    
                    14,816
                    
                    
                    
                    30,240
                    
                    
                    
                    42,019Advertising
                    
                    
                    992
                    
                    
                    
                    29,595
                    
                    
                    
                    8,596
                    
                    
                    
                    81,617Insurance
      premiums
                    
                    
                    86,527
                    
                    
                    
                    18,581
                    
                    
                    
                    134,743
                    
                    
                    
                    60,039Other
                    
                    
                    192,109
                    
                    
                    
                    89,658
                    
                    
                    
                    379,786
                    
                    
                    
                    272,691Total
      non-interest expense
                    
                    
                    1,436,515
                    
                    
                    
                    1,555,794
                    
                    
                    
                    4,073,346
                    
                    
                    
                    4,872,762Loss
      before income tax expense
                    
                    
                    (2,207,348
                    )
                    
                    
                    (1,355,654
                    )
                    
                    
                    (3,061,020
                    )
                    
                    
                    (2,140,034
                    )Income
      tax benefit
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Net
      loss
                    
                    $
                    (2,207,348
                    )
                    
                    $
                    (1,355,654
                    )
                    
                    $
                    (3,061,020
                    )
                    
                    $
                    (2,140,034
                    )Basic
      and diluted loss per share
                    
                    $
                    (.92
                    )
                    
                    $
                    (.57
                    )
                    
                    $
                    (1.28
                    )
                    
                    $
                    (.90
                    )Comprehensive
      loss
                    
                    $
                    (2,224,488
                    )
                    
                    $
                    (1,283,422
                    )
                    
                    $
                    (3,065,410
                    )
                    
                    $
                    (1,941,043
                    )
 
 See
accompanying notes to these unaudited consolidated financial
statements.
  
 2
 Table of Contents
  ROYALFINANCIAL, INC. AND
SUBSIDIARY
 Consolidated
Statements of Stockholders’ Equity
 Nine
months ended March 31, 2008
  2007
                    
                    Common
      Stock
                    
                    
                    Additional
      Paid-In Capital
                    
                    
                    Retained
      Earnings
                    
                    
                    Accumulated
      Other Comprehensive Income (Loss)
                    
                    
                    Unearned
      ESOP Shares
                    
                    
                    Amount
      Reclassified on ESOP Shares
                    
                    
                    Treasury
      Stock
                    
                    
                    TotalBalance
      at July 1, 2007
                    
                    $
                    26,450
                    
                    
                    $
                    24,169,282
                    
                    
                    $
                    11,510,299
                    
                    
                    $
                    (143,372
                    )
                    
                    $
                    (1,874,859
                    )
                    
                    $
                    (968,070
                    )
                    
                    $
                    (1,057,698
                    )
                    
                    $
                    31,662,032Comprehensive
      lossNet
      loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (2,140,034
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (2,140,034
                    )Change
      in fair value of securities available-for-sale, net
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    198,991
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    198,991Total
      comprehensive loss
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (1,941,043
                    )Reclassification
      due to change in fair value of common stock in ESOP subject to contingent
      repurchase obligation
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (43,643
                    )
                    
                    
                    -
                    
                    
                    
                    (43,643
                    )Release
      of 15,867 of unearned ESOP shares
                    
                    
                    -
                    
                    
                    
                    19,640
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    200,559
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    220,199Issuance
      of 6,290 shares to RRP plan
                    
                    
                    -
                    
                    
                    
                    (93,406
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    93,406
                    
                    
                    
                    -Forfeiture
      of 21,160 shares from the RRP plan
                    
                    
                    -
                    
                    
                    
                    309,994
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (309,994
                    )
                    
                    
                    -Tax
      benefit on RRP shares vested
                    
                    
                    -
                    
                    
                    
                    4,865
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    4,865Purchase
      of 5,200 Treasury shares at cost
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (52,000
                    )
                    
                    
                    (52,000
                    )Stock-based
      compensation
                    
                    
                    -
                    
                    
                    
                    201,711
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    201,711Balance
      at March 31, 2008
                    
                    $
                    26,450
                    
                    
                    $
                    24,612,086
                    
                    
                    $
                    9,370,265
                    
                    
                    $
                    55,619
                    
                    
                    $
                    (1,674,300
                    )
                    
                    $
                    (1,011,713
                    )
                    
                    $
                    (1,326,286
                    )
                    
                    $
                    30,052,121
 
 See
accompanying notes to these unaudited consolidated financial
statements.
  
 3
 Table of Contents
 
 ROYAL
FINANCIAL, INC. AND SUBSIDIARY
 Consolidated
Statements of Stockholders’ Equity
 Nine
months ended March 31, 2009
  2008
                    
                    Common
      Stock
                    
                    
                    Additional
      Paid-In Capital
                    
                    
                    Retained
      Earnings
                    
                    
                    Accumulated
      Other Comprehensive Income (Loss)
                    
                    
                    Unearned
      ESOP Shares
                    
                    
                    Amount
      Reclassified on ESOP Shares
                    
                    
                    Treasury
      Stock
                    
                    
                    TotalBalance
      at July 1, 2008
                    
                    $
                    26,450
                    
                    
                    $
                    24,672,588
                    
                    
                    $
                    8,759,470
                    
                    
                    $
                    12,376
                    
                    
                    $
                    (1,604,774
                    )
                    
                    $
                    (643,264
                    )
                    
                    $
                    (1,326,286
                    )
                    
                    $
                    29,896,560Comprehensive
      income (loss)Net
      loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (3,061,020
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (3,061,020
                    )Change
      in fair value of securities available-for-sale, net
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (4,390
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (4,390
                    )Total
      comprehensive loss
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (3,065,410
                    )Reclassification
      due to change in fair value of common stock in ESOP subject to contingent
      repurchase obligation
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    261,326
                    
                    
                    
                    -
                    
                    
                    
                    261,326Release
      of 15,870 of unearned ESOP shares
                    
                    
                    -
                    
                    
                    
                    (102,800
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    200,558
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    97,758Issuance
      of 3,058 shares to RRP plan
                    
                    
                    -
                    
                    
                    
                    (45,411
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    45,411
                    
                    
                    
                    -Stock-based
      compensation
                    
                    
                    -
                    
                    
                    
                    228,050
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    228,050Balance
      at March 31, 2009
                    
                    $
                    26,450
                    
                    
                    $
                    24,752,427
                    
                    
                    $
                    5,698,450
                    
                    
                    $
                    7,986
                    
                    
                    $
                    (1,404,216
                    )
                    
                    $
                    (381,938
                    )
                    
                    $
                    (1,280,875
                    )
                    
                    $
                    27,418,284
 
 See
accompanying notes to these unaudited consolidated financial
statements.
  
 4
 Table of Contents
 
 ROYALFINANCIAL, INC. AND
SUBSIDIARY
 Consolidated
Statements of Cash Flows
 Nine
months ended March 31, 2009 and 2008
 (Unaudited)
  Nine
      Months Ended
                        March
      31,2009
                    
                    
                    2008Cash
      flows from operating activitiesNet
      loss
                    
                    $
                    (3,061,020
                    )
                    
                    $
                    (2,140,034
                    )Adjustments
      to reconcile net loss to net cash from operating
    activities:Depreciation
                    
                    
                    277,728
                    
                    
                    
                    353,469Provision
      for loan losses
                    
                    
                    2,840,100
                    
                    
                    
                    1,244,797Earnings
      on bank-owned life insurance
                    
                    
                    (114,866
                    )
                    
                    
                    (143,353
                    )Gain
      on sale of securities
                    
                    
                    (53,364
                    )ESOP
      expense
                    
                    
                    97,759
                    
                    
                    
                    220,199Stock-based
      compensation
                    
                    
                    228,050
                    
                    
                    
                    201,711Change
      in accrued interest receivable and other assets
                    
                    
                    14,456
                    
                    
                    
                    203,447Change
      in other accrued interest payable and liabilities
                    
                    
                    (555,902
                    )
                    
                    
                    227,681Net
      cash from operating activities
                    
                    
                    (327,059
                    )
                    
                    
                    167,917Cash
      flows from investing activitiesProceeds
      from maturities, calls, and pay downs of available for sale
      securities
                    
                    
                    4,146,030
                    
                    
                    
                    6,677,349Proceeds
      from sale of available for sale securities
                    
                    
                    3,688,992Purchase
      of available for sale securities
                    
                    
                    (4,000,000
                    )
                    
                    
                    -Change
      in loans receivable
                    
                    
                    413,630
                    
                    
                    
                    (8,438,335
                    )Purchase
      of loan participations
                    
                    
                    -
                    
                    
                    
                    (3,000,000
                    )Purchase
      of Federal Home Loan Bank stock
                    
                    
                    (78,700
                    )
                    
                    
                    -Proceeds
      from surrender of bank-owned life insurance
                    
                    
                    5,048,588
                    
                    
                    
                    -Purchase
      of premises and equipment
                    
                    
                    (33,121
                    )
                    
                    
                    (41,940
                    )Net
      cash from investing activities
                    
                    
                    9,185,419
                    
                    
                    
                    (4,802,926
                    )Cash
      flows from financing activitiesNet
      decrease in deposits
                    
                    
                    (12,954,570
                    )
                    
                    
                    (13,618,212
                    )Federal
      Home Loan Bank advances
                    
                    
                    1,600,000
                    
                    
                    
                    1,500,000Change
      in advances from borrowers for taxes and insurance
                    
                    
                    (246,124
                    )
                    
                    
                    (248,801
                    )Purchase
      of treasury stock
                    
                    
                    -
                    
                    
                    
                    (52,000
                    )Net
      cash from financing activities
                    
                    
                    (11,600,694
                    )
                    
                    
                    (12,419,013
                    )Net
      change in cash and cash equivalents
                    
                    
                    (2,742,334
                    )
                    
                    
                    (17,054,022
                    )Cash
      and cash equivalentsBeginning
      of the year
                    
                    
                    5,924,849
                    
                    
                    
                    21,395,954End
      of period
                    
                    $
                    3,182,515
                    
                    
                    $
                    4,341,932Supplemental
      cash flow information:Interest
      paid
                    
                    $
                    1,502,045
                    
                    
                    $
                    1,558,576Supplemental
      non cash disclosures:Transfer
      from  loan portfolio to real estate owned
                    
                    $
                    434,250
                    
                    
                    
                    -
 
 See
accompanying notes to these unaudited consolidated financial
statements.
  
 5
 Table of Contents
 
 
  ROYALFINANCIAL, INC. AND SUBSIDIARY
 NOTES
TO UNAUDITED FINANCIAL STATEMENTS
  Note
1 – Nature of Business
  Royal
Financial, Inc. was incorporated under the laws of the state 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 and nine month periods ended March 31, 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, 2008 and 2007.  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, 2009.  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.
  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 – Significant Accounting Policies
  Significant
accounting policies we follow are presented in Note 1 to the consolidated
financial statements included in our Annual Report on Form 10-KSB for the
fiscal year ended June 30, 2008.  Effective July 1, 2008, we
have adopted Financial Accounting Standards Boards (“FASB”) No. 157 and
No. 159 as described below.
  In
September 2006, the FASB issued Statement No. 157, Fair Value Measurements (FAS
157).  This Statement defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value
measurements.  This Statement establishes a fair value hierarchy about
the assumptions used to measure fair value and clarifies assumptions about risk
and the effect of a restriction on the sale or use of an asset.  The
standard was effective for fiscal years beginning after November 15,
2007.  In February 2008, the FASB issued Staff Position (FSP)
157-2, Effective Date of FASB
Statement
   6
 Table of Contents
  No. 157.  This
FSP delays the effective date of FAS 157 for all non-financial assets and
non-financial liabilities, except those that are recognized or disclosed at fair
value on a recurring basis (at least annually) to fiscal years beginning after
November 15, 2008, and interim periods within those fiscal
years.  The impact of adoption was not material.  In
October 2008, the FASB issued Staff Position (FSP) 157-3, Determining the Fair Value of a
Financial Asset when the Market for That Asset Is Not
Active.  This FSP clarifies the application of FAS 157 in
a market that is not active.  The impact of adoption was not material
to the Company’s financial statements.
  In
February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities.  The standard provides
companies with an option to report selected financial assets and liabilities at
fair value and establishes presentation and disclosure requirements designed to
facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities.  The Company
did not elect the fair value option for any financial assets or financial
liabilities as of July 1, 2008.
  SFAS
160,“Non-controlling Interest
in Consolidated Financial Statements, an amendment of ARB Statement No. 51.”SFAS 160 amends Accounting Research Bulletin (“ARB”) No. 51,
“Consolidated Financial Statements,” to establish accounting and reporting
standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS 160 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, SFAS 160 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. SFAS 160 is
effective for the Company beginning on July 1, 2009 and the impact is not
expected to be material to the Company’s financial statements.
 
 SFAS
141R, “Business Combination
(Revised 2007).”SFAS 141R replaces SFAS 141, “Business Combinations,”
and applies to all transactions and other events in which one entity obtains
control over one or more other businesses. SFAS 141R 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 SFAS 141, whereby the cost of an acquisition was allocated to the
individual assets acquired and liabilities assumed based on their estimated fair
value. SFAS 141R 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 SFAS 141. SFAS 141R also
identifies related disclosure requirements for business combinations. For the
Company this Statement is effective for business combinations closing on or
after July 1, 2009.
 
 FASB
Staff Position (FSP) no. EITF 03-6-1,“Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating
Securities.” FSP
EITF 03-6-1 provides that 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. FSP EITF 03-6-1 is
effective for the Company beginning on July 1, 2009. All previously reported
earnings per share data will be retrospectively adjusted to conform to the
provisions of FSP EITF 03-6-1 when adopted.
  FSP SFAS
157-4 “Determining Fair Value
When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly.”FSP SFAS
   7
 Table of Contents
  157-4
affirms that the objective of fair value when the market for an asset is not
active is the price that would be received to sell the asset in an orderly
transaction, and clarifies and includes additional factors for determining
whether there has been a significant decrease in market activity for an asset
when the market for that asset is not active. FSP SFAS 157-4 requires an entity
to base its conclusion about whether a transaction was not orderly on the weight
of the evidence.  FSP SFAS 157-4 also amended SFAS 157, “Fair
Value Measurements,” to expand certain disclosure requirements.  The
Company intends to adopt the provisions of FSP SFAS 157-4 during the fourth
quarter of 2009.  The adoption of FSP SFAS 157-4 is not expected to
materially impact the Company’s financial statements.
 
 FSP SFAS
115-2 and SFAS 124-2,“Recognition and Presentation of
Other-Than-Temporary Impairments.”FSP SFAS 115-2 and SFAS 124-2 (i)
change existing guidance for determining whether an impairment is other than
temporary to debt securities and (ii) replaces the existing requirement that the
entity’s management assert it has both the intent and ability to hold an
impaired security until recovery with a requirement that management assert: (a)
it does not have the intent to sell the security; and (b) it is more likely than
not it will not have to sell the security before recovery of its cost
basis.  Under FSP SFAS 115-2 and SFAS 124-2, declines in the fair
value of held-to-maturity and available-for-sale securities below their cost
that are deemed to be other than temporary are required to be reflected in
earnings as realized losses to the extent the impairment is related to credit
losses.  The amount of the impairment related to other factors is
recognized in other comprehensive income.  The Company intends to
adopt the provisions of FSP SFAS 115-2 and SFAS 124-2 during the fourth quarter
of 2009.  The adoption of FSP SFAS 115-2 and SFAS 124-2 is not
expected to materially impact the Company’s financial statements.
 
 FSP SFAS
107-1 and APB 28-1,“Interim
Disclosures about Fair Value of Financial Instruments.”FSP SFAS 107-1
and APB 28-1 amend SFAS 107, “Disclosures about Fair Value of Financial
Instruments,” to require an entity to provide disclosures about fair value of
financial instruments in interim financial information and amends Accounting
Principles Board (APB) Opinion No. 28, “Interim Financial Reporting,” to require
those disclosures in summarized financial information at interim reporting
periods.  Under FSP SFAS 107-1 and APB 28-1, a publicly traded company
shall 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 consolidated balance sheet,
as required by SFAS 107.  The new interim disclosures required by FSP
SFAS 107-1 and APB 28-1 will be included in the Company’s interim financial
statements beginning with the first quarter of fiscal year 2010.
  FSP SFAS
141R-1,“Accounting for Assets
Acquired and Liabilities Assumed in a Business Combination That Arise from
Contingencies.”  FSP SFAS 141R-1 amends the guidance in SFAS
141R to require 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 SFAS 5, “Accounting for Contingencies,” and FASB
Interpretation (FIN) No. 14, “Reasonable Estimation of the Amount of a Loss.”
FSP SFAS 141R-1 removes subsequent accounting guidance for assets and
liabilities arising from contingencies from SFAS 141R and requires entities to
develop a systematic and rational basis for subsequently measuring and
accounting for assets and liabilities arising from contingencies. FSP SFAS
141R-1 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
SFAS 5.  FSP SFAS 141R-1 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
   8
 Table of Contents
  at fair
value in accordance with SFAS 141R.  FSP SFAS 141R-1 is
effective for assets or liabilities arising from contingencies the Company
acquires in business combinations occurring after July 1,
2009.
  Note
5 – Loans
  At
March 31, 2009 and June 30, 2008, loans receivable consisted of the
following:
  March
      31,
                        2009
                    
                    
                    June
      30,
                        2008Real
      estate loansOne-to-four
      family
                    
                    $
                    33,487,185
                    
                    
                    $
                    36,362,454Commercial
                    
                    
                    43,707,729
                    
                    
                    
                    43,337,424Multi-family
                    
                    
                    3,601,853
                    
                    
                    
                    3,688,999Total
      real estate loans
                    
                    
                    80,796,767
                    
                    
                    
                    83,388,877Commercial
      loans
                    
                    
                    9,751,657
                    
                    
                    
                    8,738,738Consumer
      loansHome
      equity loans
                    
                    
                    577,981
                    
                    
                    
                    591,347Other
                    
                    
                    74,105
                    
                    
                    
                    119,067Total
      consumer loans
                    
                    
                    652,086
                    
                    
                    
                    710,414Net
      deferred loan fees
                    
                    
                    15,693
                    
                    
                    
                    (2,846
                    )Total
      Loans
                    
                    
                    91,216,203
                    
                    
                    
                    92,835,183Less:Allowance
      for loan losses
                    
                    
                    4,129,000
                    
                    
                    
                    2,060,000Loans,
      net
                    
                    $
                    87,087,203
                    
                    
                    $
                    90,775,183
 
 A summary
of changes in the allowance for loan losses for the nine months ended March 31,
2009 and 2008 is as follows:
  2009
                    
                    
                    2008Balance
      at beginning of period
                    
                    $
                    2,060,000
                    
                    
                    $
                    667,105Provision
      for loan loss
                    
                    
                    2,840,100
                    
                    
                    
                    1,244,797Charge
      offs
                    
                    
                    (771,100
                    )
                    
                    
                    (8,902
                    )Balance
      at end of period
                    
                    $
                    4,129,000
                    
                    
                    $
                    1,903,000
 
 The
following is a summary of information pertaining to impaired and non-performing
loans at:
  March
      31,
                        2009
                    
                    
                    June
      30,
                        2008Loans
      with allocated allowance for loan loss at period end
                    
                    $
                    11,271,215
                    
                    
                    $
                    3,745,680Loans
      with no allocated  allowance for loan loss at period
      end
                    
                    
                    2,846,208
                    
                    
                    
                    1,519,334Total
      impaired and non-performing loans
                    
                    $
                    14,117,423
                    
                    
                    $
                    5,265,014Amount
      of the allowance for loan losses allocated to impaired loans at period
      end
                    
                    $
                    2,955,000
                    
                    
                    $
                    1,285,000Interest
      income recognized during impairment
                    
                    
                    -
                    
                    
                    
                    -
 
 Non-performing
loans were as follows at March 31, 2009 and June 30,
2008:
  March
      31,
                        2009
                    
                    
                    June
      30,
                        2008Loans
      past due over 90 days still on accrual
                    
                    
                    -
                    
                    
                    
                    -Non-accrual
      loans
                    
                    $
                    14,117,423
                    
                    
                    $
                    5,265,014
   9
 Table of Contents
  Note
6 – Loss Per Share
  The
following table presents a reconciliation of the components used to compute
basic and diluted earnings (loss) per share for the three and nine month periods
ended March 31, 2009 and 2008.  Weighted average common shares
outstanding exclude unallocated ESOP shares.
  Three
      Months
                        Ended
                        March
      31, 2009
                    
                    
                    Three
      Months
                        Ended
                        March
      31, 2008
                    
                    
                    Nine
      Months
                        Ended
                        March
      31, 2009
                    
                    
                    Nine
      Months
                        Ended
                        March
      31, 2008Basic
      and diluted loss per shareNet
      loss as reported
                    
                    $
                    (2,207,348
                    )
                    
                    $
                    (1,355,654
                    )
                    
                    $
                    (3,061,020
                    )
                    
                    $
                    (2,140,034
                    )Weighted
      average common shares outstanding
                    
                    
                    2,400,778
                    
                    
                    
                    2,395,311
                    
                    
                    
                    2,396,524
                    
                    
                    
                    2,381,781Basic
      and diluted loss per share
                    
                    
                    (.92
                    )
                    
                    
                    (.57
                    )
                    
                    
                    (1.28
                    )
                    
                    
                    (.90
                    )
 
 The
effect of outstanding stock options and stock awards was not included in the
calculation of diluted loss per share because to do so would have been
anti-dilutive for all shares given the Company’s losses for each
period.
  Note
7 – Fair Value
  FASB
Statement 157 defines 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.  Statement 157
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.
  
 10
 Table of Contents
 
 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 at March 31, 2009 Using:Total
                      
                      
                      Quoted
      Prices in Active Markets for Identical Assets
                          (Level
      1)
                      
                      
                      Significant
      Other Observable Inputs
                          (Level
      2)Asset:Securities
      available-for-sale
                      
                      $
                      4,012,100
                      
                      
                      $
                      -
                      
                      
                      $
                      4,012,100
 Assets
and liabilities measured at fair value on a non-recurring basis are summarized
below:
  Fair
      Value Measurements at March 31, 2009 UsingTotal
                    
                    
                    Quoted
      Prices in Active Markets for Identical Assets (Level
    1)
                    
                    
                    Significant
      Other Observable Inputs (Level 2)
                    
                    
                    Significant
      Unobservable Inputs (Level 3)Assets:Impaired
      loans
                    
                    $
                    6,956,215
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    6,956,215
 
 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.
  The
following represent impairment charges recognized during the
period:
  Impaired
loans, which are measured for impairment using the fair value of the collateral
for collateral dependent loans, had a carrying amount of $9,571,215, with a
valuation allowance of $2,615,000 resulting in an additional provision for loan
losses of $1,098,000 for the nine month period.
  
 11
 Table of Contents
 
 Item2.                      Management’s Discussion 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;
legislative/regulatory provisions; monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board; the quality or composition of the loan and securities portfolios; demand
for loan products; deposit flows; competition; demand for financial services in
the Company’s market area; and accounting principles, policies, and
guidelines.  These risks and uncertainties should be considered in
evaluating forward-looking statements, and undue reliance should not be placed
on such statements.
  Comparison
of Financial Condition at March 31, 2009 and June 30, 2008
  The
Company’s total assets decreased $14.9 million, or 12.8%, to $101.2 million at
March 31, 2009, from $116.1 million at June 30, 2008.
  Cash and
cash equivalents decreased $2.7 million to $3.2 million at March 31, 2009
from $5.9 million at June 30, 2008, as a result of the Company using
the excess liquidity from federal funds sold and proceeds received as a result
of maturities and repayments of the securities in its investment portfolio to
fund maturing certificates of deposit.
  Securities
available for sale decreased $3.7 million, or 48.2%, to $4.0 million at
March 31, 2009 from $7.7 million at June 30, 2008.  The
decrease is the result of securities maturing or being repaid during the nine
months ended March 31, 2009.  The proceeds received as a result
of these maturities or repayments were used to fund maturing certificates of
deposit. In the third quarter 2009, management restructured the investment
portfolio in order to provide the company with higher quality assets to enable
the security portfolio to be pledged for liquidity purposes. The entire mortgage
backed securities portfolio of $3.7 million was sold and $4.0 million of agency
securities were purchased.
  Net loans
decreased $3.7 million, or 4.1%, to $87.1 million at March 31, 2009, from $90.8
million at June 30, 2008. The decline is related to a decrease of $2.9
million in one-to-four family loans and an increase of $2.1 million in the
allowance for loan loss, partially offset by an increase of $1.4 million in
commercial loans.
  Total
deposits decreased $12.0 million, or 15.5%, to $70.9 million at March 31,
2009 from $83.9 million at June 30, 2008 as a result of a deliberate
attempt by the Bank to manage its interest costs and, accordingly, not renew
certain maturing certificates of deposit at above market interest
rates.  A large portion of these certificates were originally issued
during the promotion of the Bank’s opening of its Frankfort, Illinois and
Schererville, Indiana branch locations during fiscal 2007. The certificates
which had subsequently renewed at above market rates have since matured
throughout this fiscal year.
   12
 Table of Contents
  Deposits
are detailed as below:
  March
      31,
                                2009
                            
                            
                            June
      30,
                                2008Savings
                            
                            $
                            25,513,162
                            
                            
                            $
                            25,944,633NOW
      accounts
                            
                            
                            4,271,168
                            
                            
                            
                            4,804,409Non-interest
      bearing checking
                            
                            
                            5,489,608
                            
                            
                            
                            5,157,209Money
      market
                            
                            
                            3,200,072
                            
                            
                            
                            3,364,53838,474,010
                            
                            
                            
                            39,270,789Certificates
      of deposit
                            
                            
                            25,846,749
                            
                            
                            
                            38,010,315IRAs
                            
                            
                            6,599,875
                            
                            
                            
                            6,594,10032,446,624
                            
                            
                            
                            44,604,415Total
      Deposits
                            
                            $
                            70,920,634
                            
                            
                            $
                            83,875,204
 
 Federal
Home Loan Bank advances increased to $1.6 million at March 31, 2009 from $0
at June 30, 2008, as a result of the need to replace the maturing
certificates of deposit as a source of liquidity.
  Total
stockholders’ equity decreased $2.5 million, or 8.3%, to $27.4 million at
March 31, 2009, compared to $29.9 million at June 30,
2008.  This decrease was primarily the result of a year-to-date net
loss of $3.1 million offset by the reclassification of ESOP shares with a value
of $261,000 and the release of 15,870 unearned ESOP shares with a value of
$98,000 during the period.
  Comparison
of Results of Operation for the Three Months and Nine Months Ended March 31,
2009 and 2008
  General.  The net
loss for the three months ended March 31, 2009 was $2.2 million, an
increase in net loss of $852,000, from the same period in 2008.  The
net loss for the nine months ended March 31, 2009 was $3.1 million, an
increase in net loss of $921,000, from the same period in 2008.  The
increase in the net loss for the three months ended March 31, 2009 resulted
primarily from an increase in the provision for loan losses of
$838,000.  The increase in net loss for the nine months ended
March 31, 2009 resulted primarily from an increase in the provision for
loan losses of $1.6 million offset by a decrease in non interest expense of
$799,000.
  Net Interest
Income.  Net interest income decreased $130,000 for the three
months ended March 31, 2009, compared to the same period in
2008.  Net interest income decreased $153,000 for the nine months
ended March 31, 2009 compared to the same period in 2008.  The
net interest rate spread increased to 3.87% and 4.19% for the three and nine
months ended March 31, 2009, respectively, from 3.63% and 3.57% for the
same periods in 2008.  The net interest margin remained steady at
4.27% for the three months ended March 31, 2009 and March 31, 2008. The net
interest margin increased to 4.63% from 4.28% for the nine months ended March
31, 2009 compared to the same period in 2008.  The reduction in high
yielding deposits, offset by a lesser decline in the loan yield, was the primary
reason for the increase in spread and margin.
  Interest
Income.  Total interest income was $1.3 million for the three
months ended March 31, 2009, a decrease of $471,000 from the same period in
2008.  Total interest income was $4.3 million for the nine months
ended March 31, 2009, a decrease of $1.2 million from the same period in
2008.  For the three and nine months ended March 31, 2009,
average interest-earning assets decreased to $96.0 million and $98.7 million,
respectively, from $108.2 million and $111.7 million for the same periods in
2008.  The decrease in interest income was primarily due a decline in
the loan yields resulting from lower interest rates and an increase in loans
being placed on non accrual status and a reversal of the related interest income
as a result. Non-accrual loans resulted in foregone interest for the three and
nine month
   13
 Table of Contents
  periods
ended March 31, 2009 of $100,000 and $419,000, respectively, compared to $53,000
and $248,000 for the same periods in 2008. Declining average balances of the
securities portfolio and federal funds sold for the respective periods also had
a negative impact to interest income.  Average non accrual loans
during the nine month period ended March 31, 2009 and 2008 was $9.6 million
and $3.1 million, respectively, with an average rate of 8.61% and 10.65%,
respectively. The yield on interest-earning assets was 5.27% and 5.87% for the
three and nine months ended March 31, 2009, respectively, compared to 6.42%
and 6.64% for the same periods in 2008.
  Interest
Expense.  Total interest expense decreased $341,000 to $241,000
for the three months ended March 31, 2009 as compared to $582,000 for the
three months ended March 31, 2008.  Interest expense decreased $1.1
million to $918,000 for the nine months ended March 31, 2009 as compared to
$2.0 million for the nine months ended March 31, 2008.  The
average cost of funds decreased to 1.40% and 1.68% for the three and nine months
ended March 31, 2009, respectively, compared to 2.79% and 3.07% for the
same periods in 2008.  The reduction in interest expense is a direct
result of the decreasing rate environment and the reduction in the amount of
high yielding certificates of deposit.
  The
following tables show average balances with corresponding interest income and
interest expense as well as average yield and cost information for the three and
nine months ending March 31, 2009 and 2008.  Average balances are
derived from daily balances, and non-accrual loans are included as
interest-bearing loans for purposes of these tables.
  Three
      months ended March 31,2009
                    
                    
                    2008Average
      Balance
                    
                    
                    Interest
                    
                    
                    Average
      Yield/Rate(1)
                    
                    
                    Average
      Balance
                    
                    
                    Interest
                    
                    
                    Average
      Yield/Rate(1)Interest-earning
      assets:Loans
      receivable, net(2)
                    
                    $
                    92,103,614
                    
                    
                    $
                    1,232,627
                    
                    
                    
                    5.35
                    %
                    
                    $
                    94,843,825
                    
                    
                    $
                    1,593,024
                    
                    
                    
                    6.72
                    %Securities
      available-for-sale(3)
                    
                    
                    3,231,893
                    
                    
                    
                    32,164
                    
                    
                    
                    3.98
                    
                    
                    
                    12,658,267
                    
                    
                    
                    136,669
                    
                    
                    
                    4.32Interest-bearing
      balances in financial institutions(4)
                    
                    
                    63,607
                    
                    
                    
                    12
                    
                    
                    
                    0.08
                    
                    
                    
                    35,704
                    
                    
                    
                    278
                    
                    
                    
                    3.11Federal
      funds sold and other
                    
                    
                    558,683
                    
                    
                    
                    257
                    
                    
                    
                    0.18
                    
                    
                    
                    662,091
                    
                    
                    
                    5,886
                    
                    
                    
                    3.56Total
      interest earning assets
                    
                    
                    95,957,797
                    
                    
                    
                    1,265,060
                    
                    
                    
                    5.27
                    %
                    
                    
                    108,199,887
                    
                    
                    
                    1,735,857
                    
                    
                    
                    6.42
                    %Non-interest-earning
      assets
                    
                    
                    9,130,824
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    13,911,724Total
      assets
                    
                    $
                    105,088,621
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    122,111,611Interest-bearing
      liabilities:Interest-bearing
      deposits
                    
                    $
                    65,048,078
                    
                    
                    
                    235,786
                    
                    
                    
                    1.45
                    %
                    
                    $
                    79,598,266
                    
                    
                    
                    541,800
                    
                    
                    
                    2.72
                    %FHLB
      advances
                    
                    
                    3,533,889
                    
                    
                    
                    4,818
                    
                    
                    
                    .55
                    
                    
                    
                    3,626,374
                    
                    
                    
                    38,700
                    
                    
                    
                    4.27Federal
      funds purchased
                    
                    
                    16,670
                    
                    
                    
                    2
                    
                    
                    
                    1.00
                    
                    
                    
                    164,246
                    
                    
                    
                    1,404
                    
                    
                    
                    3.42Total
      interest-bearing liabilities
                    
                    
                    68,598,637
                    
                    
                    
                    240,646
                    
                    
                    
                    1.40
                    %
                    
                    
                    83,388,886
                    
                    
                    
                    581,904
                    
                    
                    
                    2.79
                    %Non-interest-bearing
      liabilities
                    
                    
                    7,056,261
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    7,421,303Total
      equity capital(5)
                    
                    
                    29,433,723
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    31,301,422Total
      liabilities and equity capital
                    
                    $
                    105,088,621
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    122,111,611Net
      average interest-earning assets
                    
                    $
                    27,359,160
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    24,811,001Net
      interest income; interest rate spread(6)
                    
                    
                    
                    
                    
                    $
                    1,024,414
                    
                    
                    
                    3.87
                    %
                    
                    
                    
                    
                    
                    $
                    1,153,953
                    
                    
                    
                    3.63
                    %Net
      interest margin(7)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    4.27
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    4.27
                    %
   14
 Table of Contents
  Nine
      months ended March 31,2009
                    
                    
                    2008Average
      Balance
                    
                    
                    Interest
                    
                    
                    Average
      Yield/Rate(1)
                    
                    
                    Average
      Balance
                    
                    
                    Interest
                    
                    
                    Average
      Yield/Rate(1)Interest-earning
      assets:Loans
      receivable, net(2)
                    
                    $
                    93,329,244
                    
                    
                    $
                    4,187,274
                    
                    
                    
                    5.98
                    %
                    
                    $
                    91,977,745
                    
                    
                    $
                    4,902,444
                    
                    
                    
                    7.12
                    %Securities
      available-for-sale(3)
                    
                    
                    4,497,254
                    
                    
                    
                    144,949
                    
                    
                    
                    4.30
                    
                    
                    
                    13,917,527
                    
                    
                    
                    445,523
                    
                    
                    
                    4.27Interest-bearing
      balances in financial institutions(4)
                    
                    
                    56,755
                    
                    
                    
                    397
                    
                    
                    
                    0.93
                    
                    
                    
                    1,527,800
                    
                    
                    
                    48,592
                    
                    
                    
                    4.24Federal
      funds sold and other
                    
                    
                    815,178
                    
                    
                    
                    9,105
                    
                    
                    
                    1.49
                    
                    
                    
                    4,255,938
                    
                    
                    
                    159,146
                    
                    
                    
                    4.99Total
      interest earning assets
                    
                    
                    98,698,431
                    
                    
                    
                    4,341,725
                    
                    
                    
                    5.87
                    %
                    
                    
                    111,679,010
                    
                    
                    
                    5,555,705
                    
                    
                    
                    6.64
                    %Non-interest-earning
      assets
                    
                    
                    11,629,245
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    14,025,372Total
      assets
                    
                    $
                    110,327,676
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    125,704,382Interest-bearing
      liabilities:Interest-bearing
      deposits
                    
                    $
                    68,855,202
                    
                    
                    
                    884,099
                    
                    
                    
                    1.71
                    %
                    
                    $
                    84,042,846
                    
                    
                    
                    1,915,851
                    
                    
                    
                    3.04
                    %FHLB
      advances
                    
                    
                    4,031,586
                    
                    
                    
                    32,898
                    
                    
                    
                    1.09
                    
                    
                    
                    1,809,154
                    
                    
                    
                    59,715
                    
                    
                    
                    4.40Federal
      funds purchased
                    
                    
                    75,020
                    
                    
                    
                    1,051
                    
                    
                    
                    1.87
                    
                    
                    
                    102,701
                    
                    
                    
                    3,218
                    
                    
                    
                    4.18Total
      interest-bearing liabilities
                    
                    
                    72,961,808
                    
                    
                    
                    918,048
                    
                    
                    
                    1.68
                    %
                    
                    
                    85,954,701
                    
                    
                    
                    1,978,784
                    
                    
                    
                    3.07
                    %Non-interest-bearing
      liabilities
                    
                    
                    7,503,245
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    8,448,259Total equity
      capital(5)
                    
                    
                    29,862,623
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    31,301,422Total
      liabilities and equity capital
                    
                    $
                    110,327,676
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    125,704,382Net
      average interest-earning assets
                    
                    $
                    25,736,622
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    25,724,309Net
      interest income; interest rate spread(6)
                    
                    
                    
                    
                    
                    $
                    3,423,677
                    
                    
                    
                    4.19
                    %
                    
                    
                    
                    
                    
                    $
                    3,576,821
                    
                    
                    
                    3.57
                    %Net
      interest margin(7)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    4.63
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    4.28
                    %
 _______________
 (1)
                  Yields
      and rates have been annualized where
  appropriate.
 (2)
                  Includes
      non-accruing loans.
 (3)
                  Tax
      effective yield, assuming a 34%
rate.
 (4)
                  Includes
      interest-bearing demand deposits, repurchase agreements, and federal funds
      sold.
 (5)
                  Includes
      retained earnings.
 (6)
                  Interest
      rate spread represents the difference between the weighted average yield
      on interest-earning assets and the weighted average rate on
      interest-bearing liabilities.
 (7)
                  Net
      interest margin is annualized 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 to the collectability
of the loan portfolio.  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.  While management
uses available information to recognize losses on loans, future loan loss
provisions may be necessary based on changes in economic conditions and the
effect of such conditions on the financial condition of the borrower and his
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.  As a result, management is in the process of
enhancing the allowance for loan loss methodology, specifically related to 1-4
family mortgage loans. Current changes under evaluation include adding certain
   15
 Table of Contents
  loan
characteristics to the allowance for loan loss analysis that directly impacts
management’s expectations of probable incurred losses.  These
characteristics include, among others, the borrowers FICO score and loan to
value. 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 as a percentage of total loans outstanding increased
to 4.53% at March 31, 2009, from 2.22% at June 30, 2008. At March 31,
2009, the general reserve allowance using FASB Statement 5 measurements was
$1,174,000, representing 1.52% of the total non-impaired loans, compared to
$775,000, or .70%, at June 30, 2008.
  The
Company recorded a provision of $1.9 million and $2.8 million during the three
and nine months ended March 31, 2009, respectively, based on management’s
estimate of probable incurred losses in the portfolio, which was reflective of a
continued increase in classified and impaired credits, as described below, and
continued deterioration in economic conditions along with declining values in
real estate and continually rising unemployment levels in the Bank’s market
areas. As of March 31, 2009, all loans considered impaired are on non
accrual status.
  Non-accrual
loans at March 31, 2009, were $14.1 million, compared to $5.3 million at
June 30, 2008.  Non accrual loans resulted in foregone interest
for the three and nine month periods ended March 31, 2009 of $100,000 and
$419,000, respectively, compared to $53,000 and $248,000 for the same periods in
2008.
  During
the quarter ending March 31, 2009 six additional loan relationships, totaling
$3.4 million, were identified as impaired.  One of these relationships
was previously disclosed at December 31, 2008 as a potential problem
asset.  This credit, with an outstanding balance of $1.7 million at
March 31, 2009, is a full recourse mortgage loan that matured in January 2009,
on a commercial multi-family property located in the state of
Wisconsin.  All efforts to consummate a renewal or extension have been
unsuccessful to date. Workout negotiations continue with the respective
individual borrowers.  Management has established a specific reserve
allowance of $340,000 for this credit.
  The five
remaining impaired loan relationships with an aggregate amount of approximately
$1.7 million, all involve residential mortgage loans, with two of these
relationships having filed for bankruptcy protection.  The Bank has
negotiated a loan modification with one borrower and is in the process of
considering a similar workout arrangement with a second
borrower.  Foreclosure proceedings have been initiated on the
remaining three borrowers.  Management has established an aggregate
specific reserve allowance of $115,000 for these five relationships based on
continuing declining collateral values of each respective property.
  The
Company has previously disclosed recent satisfactory repayment results involving
an impaired commercial and industrial loan secured by
receivables.  The outstanding loan balance was $454,000 at December
31, 2008, with a restructured loan repayment schedule
forthcoming.  The current recession has continued to cause further
weakening of this borrower’s operating results resulting in stalled
restructuring efforts.  The balance during the quarter was reduced to
$446,000 at March 31, 2009.  Previous partial reductions to the
respective specific reserve allowance for this loan based on past principal
reductions have been suspended.  Management continues to maintain a
specific reserve allowance of $382,000 for this credit.
  As
previously disclosed during the quarter ending December 31, 2008, a loan
participation involving a hotel and complex in the state of Michigan was
impaired due to negative operating results directly attributed to the weak
economy and downturn in discretionary consumer spending in that
market.  The lead bank and all participants have since provided the
borrower with a forbearance agreement with the anticipation that a revised
business plan will produce improved results in the near term.  As of
   16
 Table of Contents
  March 31,
2009, management has increased the specific reserve allowance to $962,000 from
$166,000 at December 31, 2008, against its $2.9 million participation in
this credit based on an updated appraisal of the collateral received during the
quarter which reflects a significant decline in the market value of the
collateral.
  A second
loan also previously disclosed as impaired during the quarter ending December
31, 2008 involves a commercial real estate loan on property near downtown
Chicago.  The loan is in the process of legal collection.  A
junior lien holder has initiated foreclosure against the subject
collateral.  The borrower in the interim has commenced submitting
payments to the Bank pursuant to our present legal collection
actions.  Management has increased the specific reserve allowance to
$373,000 at March 31, 2009, increasing from $197,000 at December 31, 2008,
against our $2.6 million indebtedness based on continuing declining commercial
real estate market values.
 
 Management
recommended and the board approved the charge off during the quarter of a
previously disclosed impaired loan involving a construction development loan
secured by a newly constructed single family residence located in the western
suburbs of Chicago.  As a result of the Company accepting a deed in
lieu of foreclosure on the subject collateral and placing this property into
real estate owned, approximately $56,000 was charged off during this quarter
based on an updated appraisal.  Management had previously established
a specific reserve allowance of $73,000.
 
  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 thousandsMarch
      31, 2009
                    
                    
                    June
      30, 2008
                    
                    
                    March
      31, 2008Geographical
      Location
                    
                    Total Loans
                    
                    
                    Impaired
      Loans
                    
                    
                    %
                    
                    
                    Total
      Loans
                    
                    
                    Impaired
      Loans
                    
                    
                    %
                    
                    
                    Total Loans
                    
                    
                    Impaired
      Loans
                    
                    
                    %Illinois
                    
                    $
                    66,465
                    
                    
                    $
                    7,352
                    
                    
                    
                    52.09
                    %
                    
                    $
                    65,872
                    
                    
                    $
                    2,735
                    
                    
                    
                    51.95
                    %
                    
                    $
                    68,333
                    
                    
                    $
                    3,022
                    
                    
                    
                    59.65
                    %Florida
                    
                    
                    1,808
                    
                    
                    
                    1,374
                    
                    
                    
                    9.73
                    
                    
                    
                    2,989
                    
                    
                    
                    2,530
                    
                    
                    
                    48.05
                    
                    
                    
                    2,873
                    
                    
                    
                    1,801
                    
                    
                    
                    35.55Michigan
                    
                    
                    3,412
                    
                    
                    
                    2,939
                    
                    
                    
                    20.82
                    
                    
                    
                    3,441
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,442
                    
                    
                    
                    -
                    
                    
                    
                    -Indiana
                    
                    
                    14,573
                    
                    
                    
                    752
                    
                    
                    
                    5.32
                    
                    
                    
                    14,645
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    14,993
                    
                    
                    
                    -
                    
                    
                    
                    -Wisconsin
                    
                    
                    1,700
                    
                    
                    
                    1,700
                    
                    
                    
                    12.04
                    
                    
                    
                    1,700
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,700
                    
                    
                    
                    -
                    
                    
                    
                    -Other
      States Combined
                    
                    
                    3,242
                    
                    
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    4,188
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    4,280
                    
                    
                    
                    243
                    
                    
                    
                    4.80Total
      loans
                    
                    $
                    91,200
                    
                    
                    $
                    14,117
                    
                    
                    
                    100.00
                    %
                    
                    $
                    92,835
                    
                    
                    $
                    5,265
                    
                    
                    
                    100.00
                    %
                    
                    $
                    95,621
                    
                    
                    $
                    5,066
                    
                    
                    
                    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 thousandsMarch
      31, 2009
                    
                    
                    June
      30, 2008
                    
                    
                    March
      31, 2008Loan
      Category
                    
                    Impaired
      Amount
                    
                    
                    %
      of Total Impaired
                    
                    
                    Impaired
      Amount
                    
                    
                    %
      of Total Impaired
                    
                    
                    Impaired
      Amount
                    
                    
                    %
      of Total ImpairedOne-to-four family
      loans
                    
                    $
                    3,955
                    
                    
                    
                    27.21
                    %
                    
                    $
                    1,358
                    
                    
                    
                    25.79
                    %
                    
                    $
                    1,729
                    
                    
                    
                    34.13
                    %Commercial
      real estate loans
                    
                    
                    7,850
                    
                    
                    
                    56.61
                    
                    
                    
                    2,873
                    
                    
                    
                    54.57
                    
                    
                    
                    2,257
                    
                    
                    
                    44.55Multi-family
      loans
                    
                    
                    1,700
                    
                    
                    
                    12.04
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Commercial
      loans
                    
                    
                    445
                    
                    
                    
                    4.14
                    
                    
                    
                    1,034
                    
                    
                    
                    19.64
                    
                    
                    
                    1,080
                    
                    
                    
                    21.32Home
      Equity loans
                    
                    
                    167
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Other
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Total
                    
                    $
                    14,117
                    
                    
                    
                    100.00
                    %
                    
                    $
                    5,265
                    
                    
                    
                    100.00
                    %
                    
                    $
                    5,066
                    
                    
                    
                    100.00
                    %
 
 Management
recognizes that the current economic environment continues to present an
extremely difficult challenge for many of our borrowers.  With the
housing and credit markets dramatically impacted by the current state of the
economy, management remains committed to taking an aggressive
   17
 Table of Contents
  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.  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.
  Our
impaired loans have significantly risen over the last three quarters as a result
of the continued weakening of the credit and housing markets.  Like
many community banks, we rely on real estate secured lending as a primary type
of lending.  Management has responded to this challenge by imposing
and adhering to loan policy geographic concentrations and construction lending
restrictions as well as continuing to enforce stricter underwriting and loan
structuring covenants.
  In direct
response to the increased asset quality issues within our loan portfolio,
management has reallocated personnel resources to our continuing loss mitigation
efforts by assigning a fully dedicated special asset person to manage these
efforts.
  Delinquent
Loans.  We continue to emphasize our loss mitigation through
regular contact with our borrowers, 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. Management has determined that the increase in delinquencies
at March 31, 2009, compared to June 30, 2008 and March 31, 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)March
      31, 2009
                      
                      
                      June
      30, 2008
                      
                      
                      March
      31, 200830-59
      Days
                      
                      
                      60-89
      Days
                      
                      
                      30-59
      Days
                      
                      
                      60-89
      Days
                      
                      
                      30-59
      Days
                      
                      
                      60-89
      DaysOne-to-four
      family loans
                      
                      $
                      1,227
                      
                      
                      
                      -
                      
                      
                      $
                      136
                      
                      
                      $
                      56
                      
                      
                      $
                      708
                      
                      
                      $
                      56Commercial
      real estate loans
                      
                      
                      90
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      764
                      
                      
                      
                      -Multi-family
      loans
                      
                      
                      -
                      
                      
                      
                      82
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Commercial  loans
                      
                      
                      1,070
                      
                      
                      
                      
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Home
      equity loans
                      
                      
                      
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Share
      loans
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      2
                      
                      
                      
                      -Total
      loan delinquencies
                      
                      $
                      2,387
                      
                      
                      $
                      82
                      
                      
                      $
                      136
                      
                      
                      $
                      56
                      
                      
                      $
                      1,474
                      
                      
                      $
                      56
  Allowance for Loan
Losses.  At March 31, 2009, the allowance for loan losses
was $4,129,000, or 4.53% of the total loan portfolio.  The loan loss
allowance is maintained by management at a level considered adequate to cover
probable incurred losses inherent in the existing portfolio based on prior loan
loss experience, known and probable risks in the portfolio, adverse situations
that may affect the
   18
 Table of Contents
  borrower’s
ability to repay, the estimated value of any underlying collateral, general
economic conditions, and other factors and estimates that are subject to change
over time.
  The Bank
relies, among other things, on its experienced senior management in determining
the appropriate allowance for loan losses on the commercial and commercial real
estate loan portfolio, as the Bank does not have a seasoned portfolio of
commercial and commercial real estate loans.  Management reviews the
composition of the commercial and commercial real estate loan portfolio on a
quarterly basis.  This includes reviewing delinquency trends, impaired
loans, loan-to-value ratios, and types of collateral.  Management then
compares this ratio to peer group data and the FDIC state profile for Illinois
banks as a means of additional analysis. Based on these factors, we believe that
the allocation of the allowance for loan losses for these types of loans was
appropriate at March 31, 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 Reserve Component of the
Allowance for Loan Losses.  For loans where management deems
either the timing or the repayment to be impaired, there are specific reserve
allocations established.  The specific reserve is established 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 SFAS 114, Accounting by Creditors for
Impairment of a Loan.  At March 31, 2009, the specific
reserve component of the allowance for loan losses was $2,955,000, an increase
of $1,670,000 from $1,285,000 at June 30, 2008.  The increase was
primarily due to an increase in the provision for loan losses of $2,840,100 for
impaired loans offset by charge-offs of $771,100 and reductions of specific
reserves on impaired loans of $80,000 due to the receipt of principal
payments.
  The
following table shows our allocation for the specific reserve component of the
allowance for loan losses as of March 31, 2009:
  (Dollar
      amounts in thousands)Number
      of loans
                        
                        
                        Specific
      Reserve AllocationIllinois
                        
                        
                        6
                        
                        
                        $
                        1,034Indiana
                        
                        
                        3
                        
                        
                        
                        35Michigan
                        
                        
                        1
                        
                        
                        
                        962Wisconsin
                        
                        
                        1
                        
                        
                        
                        340Florida
                        
                        
                        3
                        
                        
                        
                        584Total .
                        
                        
                        14
                        
                        
                        $
                        2,955
 
 Potential Problem
Assets.  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 three previously undisclosed credit relationships about
which it has concerns about the future ability of the borrowers to comply with
present loan repayment terms.  However, those concerns do not rise to
a level of impairment at this time.
  The
first, involves residential real estate investors with residential properties
located in Illinois and Indiana consisting of five separate loans with an
aggregate balance of approximately $443,000.  The Bank is closely
monitoring these loans.
 
 Two
separate commercial lease transactions, one with a loan balance of $251,000
involving a wholesale jeweler located in the state of New Jersey, and the other
involving an information technology manufacturer in the state of Kansas with a
loan balance of $712,000 have recently experienced first time
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  payment
delinquency.  For each credit the Bank is currently considering short
term repayment modification arrangements with the expectation that economic
conditions will eventually improve.
 
 Another
potential problem asset, previously disclosed at December 31, 2008 involves a
retail development loan located in Northwest Indiana with a balance of $2.1
million and total availability up to $4.1 million. This loan is in the process
of renewal subject to receipt and review of an updated appraisal providing
adequate collateral coverage.  This loan continues to possess
heightened credit risks due to the overall national and local retail
economy.  Upon satisfactory completion of all due diligence, the Bank
intends to allow the remaining available funds to be disbursed as the
construction on this commercial project has been completed.  The Bank
continues to closely monitor this credit.
 
  Non-interest
Income.  Non-interest income remained steady with a slight
decrease of $3,000 to $144,000 for the three-month period ended March 31,
2009 from the same period in 2008.  Non-interest income increased
$28,000 to $429,000 for the nine-month period ended March 31, 2009 from the
same period in 2008.  The increase in the nine month periods was
primarily related to the restructuring of deposit fees in January 2008
coupled with an increased level of overdraft activity.
  Non-interest
Expense.  Non-interest expense decreased $119,000 to $1.4
million for the three months ended March 31, 2009 from $1.5 million for the
same period in 2008.  Non-interest expense decreased $799,000 to $4.1
million for the nine months ended March 31, 2009 from $4.9 million for the same
period in 2008.
  As
previously disclosed, we closed the Bank’s branch located at 17130 Torrence
Avenue, in Lansing, Illinois effective June 30, 2008.  Most of
the accounts at that branch have been successfully transferred to our other
locations.  The Bank’s operating expenses have decreased approximately
$35,000 per month as a result of the branch closing.  As a result of
management’s cost-cutting efforts, salary and benefits and advertising expenses
have been significantly reduced resulting in a decrease in expense of
approximately $175,000 in the period.  Additionally, the investigation
originating in fiscal year 2007 was concluded in January 2008.
  As
previously disclosed in our press release dated March 25, 2009 the Company
announced plans to close the Bank branches located at 19802 S. Harlem Avenue in
Frankfort, Illinois and 713 U.S. Highway 41 in Schererville, Indiana, effective
June 30, 2009. The decision is part of the company’s strategic plan to improve
earnings by focusing on community banking services in the Bank’s primary markets
areas. It is expected that the reduction of operating expenses will have a
positive impact on the Bank’s and Company’s financial performance in fiscal
2010. The Company expects to record a one-time charge to earnings of
approximately $1.0 million in its fiscal year ending June 30, 2009 as a result.
The Company estimates that the branch closures will reduce annual operating
expenses by approximately $490,000 beginning in fiscal 2010.
  Deposit
Insurance.  As an FDIC-insured institution, the Bank is
required to pay deposit insurance premiums to the FDIC.  Because the
FDIC’s deposit insurance fund fell below prescribed levels in 2008, the FDIC has
announced increased premiums for all insured depository institutions, including
the Bank, in order to begin recapitalizing the fund.  Insurance
assessments range from 0.12% to 0.50% of total deposits for the first calendar
quarter 2009 assessment.  Effective April 1, 2009, insurance
assessments will range from 0.07% to 0.78%, depending on an institution's risk
classification and other factors.
 
 In
addition, under a proposed rule, the FDIC indicated its plans to impose a 20
basis point emergency assessment on insured depository institutions to be paid
on September 30, 2009, based on deposits at June 30, 2009.  FDIC
representatives subsequently indicated the amount of this special assessment
could decrease if certain events transpire.  The proposed rule would
also authorize the FDIC to impose an additional emergency
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 Table of Contents
  assessment
of up to 10 basis points after June 30, 2009, if necessary to maintain public
confidence in federal deposit insurance.
 
 These
changes would result in increased deposit insurance expense for the Bank in
2009.  These increases will be reflected in other expenses in the
Bank’s
income statement in the period of enactment.
  Provision for Income
Taxes.  The Company recognized no income tax benefit for the
three and nine month periods ended March 31, 2009 and 2008.  The
Company ceased recording an income tax benefit until net income is recorded to
offset these benefits.
  Liquidity
and Capital Resources
  Liquidity.  Management
actively manages 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 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 March
31, 2009, there were $1.6 million of FHLB advances outstanding.  As of
March 31, 2009, the Bank had $19.0 million in additional available credit
with the FHLB based on parameters set by the FHLB.  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.  Then funding
limitations are calculated based on the value of the collateral pledged for
borrowing. To date, no collateral has been pledged. This relationship will
assist in maintaining adequate liquidity and provide an additional source for
short-term funding needs.
  During
the nine month period ended March 31, 2009 management strategically did not
renew above market rate certificates of deposit which were primarily offered
during promotional periods.
  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 $(327,000) and $168,000 for March 31, 2009 and
2008, respectively. Net cash from (used in) investing activities consist
primarily of disbursements for loan originations, maturing agency securities and
pay downs or sales of mortgage backed securities portfolio. In addition net cash
from investing activities include proceeds from the surrender of the bank-owned
life insurance (BOLI) plan. Net cash from (used in) investing activities were
$9.2 million and $(4.8) million for March 31, 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 $(11.6)
million and $(12.4) million at March 31, 2009 and 2008.
  From
June 30, 2008 through March 31, 2009, the Company received proceeds of $7.8
million from sales, maturities, calls, and paydowns of available-for-sale
securities. Proceeds resulting from scheduled payments or calls were primarily
to fund maturing high-yielding promotional certificates of
   21
 Table of Contents
  deposit.
In addition, during the third quarter 2009, management restructured the
investment portfolio in order to provide the Company with quality assets which
may be pledged as collateral for liquidity purposes; $3.7 million mortgage
backed securities were sold and $4.0 million agency securities were
purchased.
  At
March 31, 2009, the Company had $8.6 million in unfunded lines, and letters
of credit outstanding of $138,000.  In addition, as of March 31,
2009, the total amount of certificates of deposit that were scheduled to mature
in the next 12 months equaled $26.5 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 March 31, 2009, the Bank
exceeded each of its capital requirements with ratios of 22.97%, 29.14%, and
30.43%, respectively.
  In order
to strengthen the capital structure of the Bank, Royal Financial, Inc., the
Bank’s holding company, invested an additional $4.0 million into its sole
subsidiary Royal Savings Bank. As of March 31, 2009, Royal Financial, Inc.
maintained an investment of $24.1 million in Royal Savings Bank.
  Capital Purchase
Program.  On October 3, 2008, Congress passed the
Emergency Economic Stabilization Act of 2008 (the “Act”), which provides the
U.S. Secretary of the Treasury with broad authority to implement certain actions
to help restore stability and liquidity to U.S. markets.  Under
authority provided by the Act, the Treasury Department established the Capital
Purchase Program (“CPP”), which provides direct equity investment of perpetual
preferred stock by the Treasury in qualified financial
institutions.  The program is voluntary.  Financial
institutions interested in participating were required to apply not later than
November 14, 2008.  The Company originally submitted its
application prior to the deadline, but has since withdrawn its application.
Given the increasing level of uncertainty associated with the government
program, management has determined that it is in the best interest of the
Company and its stockholders not to seek to participate in the CPP, especially
given that the Company’s regulatory capital levels far exceed the minimums
required to be considered “ well-capitalized”.
  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 collectibility of the loan is
unlikely.  Recoveries of amounts previously charged off are credited
to the allowance.  Allowances established to provide for losses under
commitments to extend credit, or recourse
provisions under loan sales agreements or servicing agreements are classified
with other liabilities.
   22
 Table of Contents
   A loan is
considered impaired when it is probable that not all principal and interest
amounts will be collected according to the loan contract. Impaired loans are
recorded at the loan’s fair value by the establishment of a specific allowance
where necessary.  The fair value of collateral-dependent loans is
determined by the fair value of the underlying collateral.  The fair
value of noncollateral-dependent loans is determined by discounting expected
future interest and principal payments at the loan’s effective interest
rate.
  The
Company maintains the allowance for loan losses at a level adequate to absorb
management’s estimate of probable incurred losses in the loan
portfolio.  Management believes that it uses the best information
available to determine the adequacy of the allowance for loan
losses.  However, future adjustments to the allowance may be necessary
and the results of operations could be significantly and adversely affected if
circumstances differ substantially from the assumptions used in making the
determinations.
  Income
Taxes.  Accounting for income taxes is a critical accounting
policy due to the subjective nature of certain estimates that are involved in
the calculation.  The Company uses an asset/liability method of
accounting for income taxes in which deferred tax assets and liabilities are
established for temporary differences between the financial reporting basis and
the tax basis of the Company’s assets and liabilities.  The Company
must assess the realization of the deferred tax asset quarterly, and to the
extent that management believes that recovery is not likely, a valuation
allowance is established.  This assessment is impacted by various
factors, including taxable income and the composition of the investment
securities portfolio.  Material changes to these items can cause an
adjustment to the valuation allowance.  An adjustment to increase or
decrease the valuation allowance is charged or credited, respectively, to income
tax expense.
  Item3.                      Quantitative and Qualitative
Disclosure About Market Risk.
  Not
applicable
  Item4T.                      Controls and
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 March 31, 2009, that have materially affected or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
   PARTII. – OTHER
INFORMATION
  Item1.                      Legal
Proceedings.
  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.
  
 23
 Table of Contents
 
 Item1A.                      Risk
Factors.
  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, prolonged economic stagnation in our markets or adverse changes in
laws and regulations that impact the banking industry could continue to 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 have and could continue to 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 have and are likely to continue to adversely
impact our borrowers’ ability to make required payments, which in turn, will
continue to 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 and credit quality of our one-to-four family residential mortgages and
home equity loans has recently decreased and continue to decrease as a result
of, among other things, a continuing decrease in real estate values, a further
increase in unemployment, a continued slowdown in housing price appreciation, or
increases in interest rates.  These factors could continue to
negatively affect 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 continue to 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, each of which would reduce income.
  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, Federal Home Loan Bank advances and proceeds from pay downs on our
investment portfolio.
  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
   24
 Table of Contents
  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.
  We test
and evaluate our liquidity sources regularly, and we are developing alternative
sources.  In the third quarter 2009, the Bank has 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. Funding limitations are calculated based on the value of the collateral
pledged against any borrowing. To date, no collateral has been pledged. 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 source of funding will be or remain available in the
future.
  Recent
developments affecting the financial markets presently have an unknown effect on
our business.
  In
response to recent crises affecting the financial markets, the federal
government has taken unprecedented steps in an attempt to stabilize and provide
liquidity to the U.S. financial markets.
  Under the
Emergency Economic Stabilization Act of 2008 (“EESA”) and the  Capital
Purchase Program (“CPP”), the U.S. Treasury will make $250 billion of capital
available to U.S. financial institutions by purchasing preferred stock in these
institutions.  In conjunction with the purchase of preferred stock,
the U.S. Treasury will receive warrants to purchase common stock having an
aggregate market price equal to 15% of the preferred stock
purchased.  Participating financial institutions will be required to
adopt the Treasury’s standards for executive compensation and corporate
governance for the period during which the Treasury holds the securities issued
under the CPP.
  In
addition, the Federal Deposit Insurance Corporation will temporarily provide a
100% guarantee of the senior unsecured debt of all FDIC-insured institutions and
their holding companies, as well as deposits in non-interest bearing transaction
deposit accounts under the Temporary Liquidity Guarantee
Program.  Coverage under the Temporary Liquidity Guarantee Program
(TLGP) is available for 30 days without a charge and thereafter at a cost of 75
basis points per annum for senior unsecured debt and 10 basis points per annum
for non-interest bearing transactions deposits.  On November 24,
2008, we elected to participate in the Transaction Account Guarantee Program
component in order to provide additional insurance coverage to our
depositors.  We opted out of the Debt Guarantee Program which
guarantees senior unsecured debt.  The Company did not have any
eligible unsecured senior debt outstanding and does not intend to issue any new
eligible debt.
  Item
2.                      Unregistered Sales of Equity
Securities and Use of Proceeds.
  None
  Item3.                      Defaults Upon Senior
Securities.
  None
  Item4.                      Submission of Matters to a Vote of Security
Holders.
  None
 
 Item5.                      Other
Information.
  None
   25
 Table of Contents
  Item6.                      Exhibits.
  (a)           The
exhibits filed as part of this Form 10-Q are listed in the Exhibit Index, which
is incorporated herein by reference.
  
 26
 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:  May
      15, 2009
                      ROYAL FINANCIAL,
      INC.By:
                      /s/Leonard
      SzwajkowskiLeonard
      SzwajkowskiChief
      Executive Officer and President
 Date:  May
      15, 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