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 December 31, 2008
  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 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 equity,
as of the latest practicable date:
  Class
              Outstanding
      as of February 13, 2009Common
      Stock, $.01 par value
              2,556,490
   
 ROYAL
FINANCIAL, INC. AND SUBSIDIARY
  FORM
10-Q
  For
the quarterly period ended December 31, 2008
  TABLE OF CONTENTS
  
 PagePART I. – FINANCIAL
      INFORMATIONItem 1. Financial Statements
                    1Consolidated Statements of Financial
      Condition December 31, 2008 and June 2008
                    1Consolidated Statements of Operations
      Three months and six months ended December 31, 2008 and
      2007
                    2Consolidated Statements of
      Stockholders’ Equity Six months ended December 31, 2008 and
      2007
                    3Consolidated Statements of Cash Flows Six
      months ended December 31, 2008 and 2007
                    5Notes to Unaudited Financial Statements
                    6Item 2. Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
                    10Item 3. Quantitative and Qualitative Disclosure About Market
      Risk
                    20Item 4T. Controls and Procedures
                    20PART II. – OTHER INFORMATIONItem 1. Legal Proceedings
                    20Item 1A. Risk Factors
                    21Item 2. Unregistered Sales of Equity Securities
      and Use of Proceeds
                    22Item 3. Defaults Upon Senior
      Securities
                    22Item 4. Submission of Matters to a Vote of
      Security Holders
                    23Item 5. Other
Information
                    23Item 6. Exhibits
                    23SIGNATURES
                    24EXHIBIT INDEX
  
 
  PART I. – FINANCIAL INFORMATION
  Item1.   Financial
Statements.
  ROYAL
FINANCIAL, INC. AND SUBSIDIARY
 ConsolidatedStatements of Financial
Condition
 December
31, 2008 and June 2008
  December
      31, 2008
                
                
                June
      30, 2008(Unaudited)ASSETSCash
      and non-interest-bearing balances in financial
Institutions
                
                $
                3,606,532
                
                
                $
                3,692,777Interest-bearing
      balances in financial institutions
                
                
                25,383
                
                
                
                68,126Federal
      funds sold
                
                
                44,694
                
                
                
                2,163,946Total
      cash and cash equivalents
                
                
                3,676,609
                
                
                
                5,924,849Securities
      available-for-sale
                
                
                4,238,026
                
                
                
                7,747,047Loans
      receivable, net of allowance for loan losses of $2,420,000 at December 31,
      2008 and $2,060,000 at June 30, 2008
                
                
                91,513,796
                
                
                
                90,775,183Federal
      Home Loan Bank stock, at cost
                
                
                460,000
                
                
                
                381,300Cash
      surrender value of life insurance
                
                
                5,031,905
                
                
                
                4,933,722Premises
      and equipment, net
                
                
                5,374,820
                
                
                
                5,534,815Accrued
      interest receivable
                
                
                395,082
                
                
                
                454,922Other
      real estate owned
                
                
                110,250
                
                
                
                —Other
      assets
                
                
                356,029
                
                
                
                376,277Total
      assets
                
                $
                111,156,517
                
                
                $
                116,128,115LIABILITIES
      AND STOCKHOLDERS’ EQUITYLiabilitiesDeposits
                
                $
                71,020,936
                
                
                $
                83,875,204Advances
      from borrowers for taxes and insurance
                
                
                473,080
                
                
                
                545,518Federal
      Home Loan Bank advances
                
                
                9,200,000
                
                
                
                —Accrued
      interest payable and other liabilities
                
                
                539,429
                
                
                
                1,167,569Common
      stock in ESOP subject to contingent repurchase obligation
                
                
                487,526
                
                
                
                643,264Total
      Liabilities
                
                
                81,720,971
                
                
                
                86,231,555Stockholders’
      equityPreferred
      stock, $.01 par value per share, authorized 1,000,000 shares; no issues
      are outstanding
                
                
                —
                
                
                
                —Common
      stock, $.01 par value per share, authorized 5,000,000 shares, 2,645,000
      shares issued at December 31, 2008 and June 30, 2008
                
                
                26,450
                
                
                
                26,450Additional
      paid-in capital
                
                
                24,747,342
                
                
                
                24,672,588Retained
      earnings
                
                
                7,905,797
                
                
                
                8,759,470Treasury
      stock, 88,510 shares and 89,568 shares, at cost
                
                
                (1,310,575
                )
                
                
                (1,326,286
                )Accumulated
      other comprehensive loss, net of tax
                
                
                25,126
                
                
                
                12,376Unearned
      ESOP shares
                
                
                (1,471,068
                )
                
                
                (1,604,774
                )Reclassification
      of ESOP shares
                
                
                (487,526
                )
                
                
                (643,264
                )Total
      stockholders’ equity
                
                
                29,435,546
                
                
                
                29,896,560Total
      liabilities and stockholders’ equity
                
                $
                111,156,517
                
                
                $
                116,128,115
 
 See
accompanying notes to these unaudited consolidated financial
statements.
   Table of Contents
  ROYAL
FINANCIAL, INC. AND SUBSIDIARY
 ConsolidatedStatements of
Operations
 Three
months and six months ended December 31, 2008 and 2007
 (Unaudited)
  Three
      Months Ended
                    December
      31,
                
                
                Six
      Months Ended
                    December
      31,2008
                
                
                2007
                
                
                2008
                
                
                2007Interest
      incomeLoans
                
                $
                1,434,184
                
                
                $
                1,688,828
                
                
                $
                2,954,647
                
                
                $
                3,309,420Securities,
      taxable
                
                
                50,793
                
                
                
                147,645
                
                
                
                112,784
                
                
                
                308,854Federal
      funds sold and other
                
                
                467
                
                
                
                22,049
                
                
                
                9,234
                
                
                
                201,574Total
      interest income
                
                
                1,485,444
                
                
                
                1,858,522
                
                
                
                3,076,665
                
                
                
                3,819,848Interest
      expenseDeposits
                
                
                276,448
                
                
                
                605,955
                
                
                
                648,312
                
                
                
                1,374,051Federal
      Home Loan Bank advances and other borrowings
                
                
                20,442
                
                
                
                22,724
                
                
                
                29,090
                
                
                
                22,829Total
      interest expense
                
                
                296,890
                
                
                
                628,679
                
                
                
                677,402
                
                
                
                1,396,880Net
      interest income
                
                
                1,188,554
                
                
                
                1,229,843
                
                
                
                2,399,263
                
                
                
                2,422,968Provision
      for loan losses
                
                
                750,607
                
                
                
                119,944
                
                
                
                900,607
                
                
                
                143,721Net
      interest income after provision for loan losses
                
                
                437,947
                
                
                
                1,109,899
                
                
                
                1,498,656
                
                
                
                2,279,247Non-interest
      incomeService
      charges on deposit accounts
                
                
                70,344
                
                
                
                68,004
                
                
                
                154,767
                
                
                
                131,533Earnings
      on cash surrender value of life insurance
                
                
                49,208
                
                
                
                47,481
                
                
                
                98,184
                
                
                
                95,062Other
      income
                
                
                18,838
                
                
                
                14,199
                
                
                
                31,552
                
                
                
                26,746Total
      non-interest income
                
                
                138,390
                
                
                
                129,684
                
                
                
                284,503
                
                
                
                253,341Non-interest
      expenseSalaries
      and employee benefits
                
                
                606,961
                
                
                
                649,286
                
                
                
                1,237,250
                
                
                
                1,366,927Occupancy
      and equipment
                
                
                252,112
                
                
                
                263,499
                
                
                
                491,221
                
                
                
                579,173Data
      processing
                
                
                93,812
                
                
                
                109,581
                
                
                
                199,014
                
                
                
                215,863Professional
      services
                
                
                189,434
                
                
                
                175,444
                
                
                
                374,022
                
                
                
                370,332Investigation
      costs
                
                
                —
                
                
                
                113,677
                
                
                
                —
                
                
                
                414,857Director
      fees
                
                
                38,400
                
                
                
                35,300
                
                
                
                75,100
                
                
                
                66,100Supplies
                
                
                6,697
                
                
                
                12,667
                
                
                
                16,726
                
                
                
                27,203Advertising
                
                
                4,176
                
                
                
                17,618
                
                
                
                7,604
                
                
                
                52,022Insurance
      premiums
                
                
                28,778
                
                
                
                19,423
                
                
                
                48,217
                
                
                
                41,458Other
                
                
                89,423
                
                
                
                80,682
                
                
                
                187,678
                
                
                
                183,033Total
      non-interest expense
                
                
                1,309,793
                
                
                
                1,477,177
                
                
                
                2,636,832
                
                
                
                3,316,968Loss
      before income tax expense
                
                
                (733,456
                )
                
                
                (237,594
                )
                
                
                (853,673
                )
                
                
                (784,380
                )Income
      tax benefit
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Net
      (loss)
                
                $
                (733,456
                )
                
                $
                (237,594
                )
                
                $
                (853,673
                )
                
                $
                (784,380
                )Basic
      and diluted (loss) per share
                
                $
                (0.31
                )
                
                $
                (0.10
                )
                
                $
                (0.36
                )
                
                $
                (0.33
                )Comprehensive
      (loss)
                
                $
                (723,513
                )
                
                $
                (194,620
                )
                
                $
                (840,923
                )
                
                $
                (657,621
                )
 
 See
accompanying notes to these unaudited consolidated financial
statements.
   2
 Table of Contents
 ROYAL
FINANCIAL, INC. AND SUBSIDIARY
 Consolidated Statements of Stockholders’
Equity
 Six
months ended December 31, 2007
  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
      income (loss)Net
      loss
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (784,380
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (784,380
                  )Change
      in fair value of securities available-for-sale, net
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  126,759
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  126,759Total
      comprehensive income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (657,621
                  )Reclassification
      due to change in fair value of common stock in ESOP subject to contingent
      repurchase obligation
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (31,740
                  )
                  
                  
                  —
                  
                  
                  
                  (31,740
                  )Release
      of 10,578 of unearned ESOP shares
                  
                  
                  —
                  
                  
                  
                  17,206
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  133,706
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  150,912Issuance
      of 5,290 shares to RRP plan
                  
                  
                  —
                  
                  
                  
                  (78,556
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  78,556
                  
                  
                  
                  —Forfeiture
      of 21,160 shares from the RRP plan
                  
                  
                  —
                  
                  
                  
                  309,994
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (309,994
                  )
                  
                  
                  —Tax
      benefit on RRP shares vested
                  
                  
                  —
                  
                  
                  
                  5,223
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  5,223Stock-based
      Compensation
                  
                  
                  —
                  
                  
                  
                  126,567
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  126,567Balance
      at December 31, 2007
                  
                  $
                  26,450
                  
                  
                  $
                  24,549,716
                  
                  
                  $
                  10,725,919
                  
                  
                  $
                  (16,613
                  )
                  
                  $
                  (1,741,153
                  )
                  
                  $
                  (999,810
                  )
                  
                  $
                  (1,289,136
                  )
                  
                  $
                  31,255,373
 See
accompanying notes to these unaudited consolidated financial
statements.
   3
 Table of Contents
 ROYAL
FINANCIAL, INC. AND SUBSIDIARY
 ConsolidatedStatements of Stockholders’
Equity
 Six
months ended December 31, 2008
  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
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (853,673
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (853,763
                  )Change
      in fair value of securities available-for-sale, net
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  12,750
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  12,750Total
      comprehensive income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (840,923
                  )Reclassification
      due to change in fair value of common stock in ESOP subject to contingent
      repurchase obligation
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  155,738
                  
                  
                  
                  —
                  
                  
                  
                  155,738Release
      of 10,578 of unearned ESOP shares
                  
                  
                  —
                  
                  
                  
                  (60,591
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  133,706
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  73,115Issuance
      of 5,290 shares to RRP plan
                  
                  
                  —
                  
                  
                  
                  (15,711
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  15,711
                  
                  
                  
                  —Stock-based
      Compensation
                  
                  
                  —
                  
                  
                  
                  151,056
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  151,056Balance
      at December 31, 2008
                  
                  $
                  26,450
                  
                  
                  $
                  24,747,342
                  
                  
                  $
                  7,905,797
                  
                  
                  $
                  25,126
                  
                  
                  $
                  (1,471,068
                  )
                  
                  $
                  (487,526
                  )
                  
                  $
                  (1,310,575
                  )
                  
                  $
                  29,435,546
 See
accompanying notes to these unaudited consolidated financial
statements.
   4
 Table of Contents
 ROYAL
FINANCIAL, INC. AND SUBSIDIARY
 ConsolidatedStatements of Cash Flows
 Six
months ended December 31, 2008 and 2007
 (Unaudited)
  Six
      Months Ended
                    December
      31,2008
                
                
                2007Cash
      flows from operating activitiesNet
      (loss)
                
                $
                (853,673
                )
                
                $
                (784,380
                )Adjustments
      to reconcile net (loss) to net cash from operating
      activities:Depreciation
                
                
                185,875
                
                
                
                240,259Provision
      for loan losses
                
                
                900,607
                
                
                
                143,721Earnings
      on bank-owned life insurance
                
                
                (98,183
                )
                
                
                (95,062
                )ESOP
      expense
                
                
                73,115
                
                
                
                150,912Stock-based
      compensation
                
                
                151,056
                
                
                
                126,567Change
      in accrued interest receivable and other assets
                
                
                73,522
                
                
                
                207,808Change
      in other accrued interest payable and liabilities
                
                
                (628,140
                )
                
                
                77,510Net
      cash from operating activities
                
                
                (195,821
                )
                
                
                67,335Cash
      flows from investing activitiesProceeds
      from sales, maturities, calls, and pay downs of available for sale
      securities
                
                
                3,528,337
                
                
                
                2,159,636Change
      in loans receivable
                
                
                (1,749,470
                )
                
                
                (8,349,882
                )Purchase
      of loan participations
                
                
                —
                
                
                
                (3,000,000
                )Purchase
      of Federal Home Loan Bank stock
                
                
                (78,700
                )
                
                
                —Purchase
      of premises and equipment
                
                
                (25,880
                )
                
                
                (94,380
                )Net
      cash from investing activities
                
                
                1,674,287
                
                
                
                (9,284,626
                )Cash
      flows from financing activitiesNet
      increase (decrease) in deposits
                
                
                (12,854,268
                )
                
                
                (12,510,171
                )Federal
      Home Loan Bank advances
                
                
                9,200,000
                
                
                
                5,000,000Change
      in advances from borrowers for taxes and insurance
                
                
                (72,438
                )
                
                
                (143,262
                )Tax
      benefit on RRP shares
                
                
                —
                
                
                
                5,223Net
      cash from financing activities
                
                
                (3,726,706
                )
                
                
                (7,648,210
                )Net
      change in cash and cash equivalents
                
                
                (2,248,240
                )
                
                
                (16,865,501
                )Cash
      and cash equivalentsBeginning
      of the year
                
                
                5,924,849
                
                
                
                21,395,954End
      of period
                
                $
                3,676,609
                
                
                $
                4,530,453Supplemental
      cash flow information:Interest
      paid
                
                $
                1,239,058
                
                
                $
                1,046,739Supplemental
      non cash disclosures:Transfer
      from  loan portfolio to real estate owned
                
                $
                110,250
                
                
                $
                —
 
 See
accompanying notes to these unaudited consolidated financial
statements.
   5
 Table of Contents
 ROYAL
FINANCIAL, INC. AND SUBSIDIARY
 NOTES TO UNAUDITED FINANCIAL STATEMENTS
  Note
1 – Nature of Business
  Royal
Financial, Inc. was incorporated under the laws of Delaware on
September 15, 2004, for the purpose of serving as the holding company of
Royal Savings Bank (the “Bank”) as part of the Bank’s conversion from a mutual
to stock form of organization.
  Note
2 – Basis of Presentation
  The
accompanying unaudited consolidated financial statements include the accounts of
Royal Financial, Inc. (the “Company”) and its wholly owned subsidiary, the Bank,
as of and for the three and six month periods ended December 31, 2008 and
2007.  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.
  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.
  Note
5 – Loans
  At
December 31, 2008 and June 30, 2008, loans receivable consisted of the
following:
  December
      31,
                    2008
                
                
                June
      30,
                    2008Real
      estate loansOne-to-four
      family
                
                $
                34,589,298
                
                
                $
                36,362,454Commercial
                
                
                44,337,654
                
                
                
                43,337,424Multi-family
                
                
                3,633,826
                
                
                
                3,688,999Total
      real estate loans
                
                
                82,560,778
                
                
                
                83,388,877Commercial
      loans
                
                
                10,715,156
                
                
                
                8,738,738Consumer
      loansHome
      equity loans
                
                
                561,949
                
                
                
                591,347Other
                
                
                82,010
                
                
                
                119,067Total
      consumer loans
                
                
                643,959
                
                
                
                710,414Net
      deferred loan fees
                
                
                13,903
                
                
                
                (2,846
                )Total
      Loans
                
                
                93,933,796
                
                
                
                92,835,183Less:Allowance
      for loan losses
                
                
                2,420,000
                
                
                
                2,060,000Loans,
      net
                
                $
                91,513,796
                
                
                $
                90,775,183
 
 A summary
of changes in the allowance for loan losses for the six months ended December
31, 2008 and 2007 is as follows:
  2008
                
                
                2007Balance
      at beginning of period
                
                $
                2,060,000
                
                
                $
                667,105Provision
      for loan loss
                
                
                900,607
                
                
                
                143,721Charge
      offs
                
                
                (540,607
                )
                
                
                (8,902
                )Balance
      at end of period
                
                $
                2,420,000
                
                
                $
                801,924
   7
 Table of Contents
 The
following is a summary of information pertaining to impaired and nonperforming
loans at:
  December
      31,
                    2008
                
                
                June
      30,
                    2008Loans
      with allocated allowance for loan loss at period end
                
                $
                9,090,239
                
                
                $
                3,745,680Loans
      with no allocated allowance for loan loss at period
    end
                
                
                2,831,396
                
                
                
                1,519,334Total
      impaired and non-performing loans
                
                $
                11,921,635
                
                
                $
                5,265,014Amount
      of the allowance for loan losses allocated to impaired loans at period
      end
                
                $
                1,504,000
                
                
                $
                1,285,000Interest
      income recognized during impairment
                
                
                —
                
                
                
                —
 
 Non-performing
loans were as follows at December 31, 2008 and June 30,
2008:
  December
      31,
                    2008
                
                
                June
      30,
                    2008Loans
      past due over 90 days still on accrual
                
                $
                87,096
                
                
                
                —Nonaccrual
      loans
                
                $
                11,921,635
                
                
                $
                5,265,014
 
 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 six month periods
ended December 31, 2008 and 2007.  Weighted average common shares
outstanding exclude unallocated ESOP shares.
  Three
      Months
                    Ended
                    December
      31, 2008
                
                
                Three
      Months
                    Ended
                    December
      31, 2007
                
                
                Six
      Months
                    Ended
                    December
      31, 2008
                
                
                Six
      Months
                    Ended
                    December
      31, 2007Basic
      and diluted loss per shareNet
      loss as reported
                
                $
                (733,456
                )
                
                $
                (237,594
                )
                
                $
                (853,673
                )
                
                $
                (784,380
                )Weighted
      average common shares outstanding
                
                
                2,397,930
                
                
                
                2,370,390
                
                
                
                2,394,462
                
                
                
                2,367,170Basic
      and diluted loss per share
                
                
                (0.31
                )
                
                
                (0.10
                )
                
                
                (0.36
                )
                
                
                (0.33
                )
 
 The
effect of stock option 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.
   8
 Table of Contents
 Level
2:  Significant other observable inputs other than Level 1 prices such
as quoted prices for similar assets or liabilities, quoted prices in markets
that are not active, or other inputs that are observable or can be corroborated
by observable market data.
  Level
3:  Significant unobservable inputs that reflect a reporting entity’s
own assumptions about the assumptions that market participants would use in
pricing an asset or liability.
  Assets
and Liabilities Measured on a Recurring Basis
  The fair
values of securities available-for-sale are determined by matrix pricing, which
is a mathematical technique widely used in the industry to value debt securities
without relying exclusively on quoted prices for the specific securities but
rather by relying on the securities’ relationship to other benchmark quoted
securities (Level 2 inputs).
  Assets
and liabilities measured at fair value on a recurring basis are summarized
below:
  Fair
      Value Measurements at December 31, 2008 Using: December 31, 2008
      Using:December
      31, 2008
                            
                            
                            Quoted
      Prices in Active Markets for Identical Assets
                                (Level
      1)
                            
                            
                            Significant
      Other Observable Inputs
                                (Level
      2)Asset:Securities
      available-for-sale
                            
                            $
                            4,238,026
                            
                            
                            $
                            —
                            
                            
                            $
                            4,238,026
  Assets
and liabilities measured at fair value on a non-recurring basis are summarized
below:
 Fair
      Value Measurements at December 31, 2008 UsingDecember
      31, 2008
                
                
                Quoted
      Prices in Active Markets for Identical Assets(Level
    1)
                
                
                Significant
      Other Observable Inputs(Level 2)
                
                
                Significant
      Unobservable Inputs(Level 3)Assets:Impaired
      loans
                
                $
                9,090,239
                
                
                
                —
                
                
                
                —
                
                
                $
                9,090,239
 
 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 $9,090,239, with a
valuation allowance of $1,504,000 resulting in an additional provision for loan
losses of $872,000 for the six month period.
   9
 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 December 31, 2008  and June 30,
2008
  The
Company’s total assets decreased $5.0 million, or 4.3%, to $111.2 million at
December 31, 2008, from $116.1 million at June 30, 2008.
  Cash and
cash equivalents decreased $2.2 million to $3.7 million at December 31,
2008 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 $3.5 million, or 45.3%, to $4.2 million at
December 31, 2008 from $7.7 million at June 30, 2008.  The
decrease is the result of securities maturing or being repaid during the six
months ended December 31, 2008.  The proceeds received as a
result of these maturities or repayments were used to fund minimal loan growth
and to fund maturing certificates of deposit rather than to purchase additional
investment securities.
  Loans
increased $739,000, or 0.81%, to $91.5 million at December 31, 2008, from
$90.8 million at June 30, 2008.
  Total
deposits decreased $12.9 million, or 15.3%, to $71.0 million at
December 31, 2008 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.
   10
 Table of Contents
 Deposits
are detailed as below:
  December
      31,
                          2008
                      
                      
                      June
      30,
                          2008Savings
                      
                      $
                      24,790,475
                      
                      
                      $
                      25,944,633NOW
      accounts
                      
                      
                      4,191,395
                      
                      
                      
                      4,804,409Non-interest
      bearing checking
                      
                      
                      5,460,749
                      
                      
                      
                      5,157,209Money
      market
                      
                      
                      3,143,875
                      
                      
                      
                      3,364,53837,586,494
                      
                      
                      
                      39,270,789Certificates
      of deposit
                      
                      
                      26,836,333
                      
                      
                      
                      38,010,315IRAs
                      
                      
                      6,598,109
                      
                      
                      
                      6,594,10033,434,442
                      
                      
                      
                      44,604,415Total
      Deposits
                      
                      $
                      71,020,936
                      
                      
                      $
                      83,875,204
 
 Federal
Home Loan Bank advances increased to $9.2 million at December 31, 2008 from
$0 at June 30, 2008, as a result of the need to fund loan demand and
replace the maturing certificates of deposit as a source of
liquidity.
  Total
stockholders’ equity decreased $461,000, or 1.54%, to $29.4 million at
December 31, 2008, compared to $29.9 million at June 30,
2008.  This decrease was primarily the result of a net loss for the
year-to-date of $854,000 offset by the reclassification of ESOP shares with a
value of $156,000 and the release of 10,580 unearned ESOP shares with a value of
$73,000 during the period.
  Comparison
of Results of Operation for the Three Months and Six Month Ended December 31,
2008 and 2007
  General.  The net
loss for the three months ended December 31, 2008 was $733,000, an increase
in net loss of $496,000, from the same period in 2007.  The net loss
for the six months ended December 31, 2008 was $854,000, an increase in net
loss of $69,000, from the same period in 2007.  The increase in the
net loss for the three months ended December 31, 2008 resulted primarily
from an increase in the provision for loan losses of $631,000.  The
increase in net loss for the six months ended December 31, 2008 resulted
primarily from an increase in the provision for loan losses of $757,000 offset
by a decrease in non interest expense of $680,000.
  Net Interest
Income.  Net interest income remained steady with a slight
decrease of $41,000 for the three months ended December 31, 2008, compared
to the same period in 2007.  Net interest income decreased slightly by
$24,000 for the six months ended December 31, 2008 compared to the same
period in 2007.  The net interest rate spread increased to 4.40% and
4.31% for the three and six months ended December 31, 2008, respectively,
from 3.78% and 3.54% for the same periods in 2007.  The net interest
margin increased to 4.81% and 4.78% for the three and six months ended
December 31, 2008, respectively, from 4.48% and 4.27% for the same periods
in 2007.  The reduction in deposits, slightly offset by a decline in
the loan yield, was the primary reason for the increase in spread and
margin.
  Interest
Income.  Total interest income was $1.5 million for the three
months ended December 31, 2008, a decrease of $373,000 from the same period
in 2007.  Total interest income was $3.1 million for the six months
ended December 31, 2008, a decrease of $743,000 from the same period in
2007.  For the three and six months ended December 31, 2008,
average interest-earning assets decreased to $98.8 million and $100.5 million,
respectively, from $109.7 million and $113.4 million for the same periods in
2007.  The decrease in interest income was primarily the result of
decreases in the average balances of the securities portfolio and federal funds
sold for the respective periods and a decrease in the loan
yield.  Loan yields decreased due to interest rate declines and an
increase in non accrual loans.  Average non accrual loans during the
six month period ended December 31, 2008 and 2007 was $9.4 million
and
   11
 Table of Contents
 $536,000
with an average rate of 8.14% and 10.65%.  Non accrual loans resulted
in foregone interest of $248,000 and $49,000 during the six month periods ended
December 31, 2008, and 2007.  The yield on interest-earning
assets was 6.01% and 6.13% for the three and six months ended December 31,
2008, respectively, compared to 6.78% and 6.74% for the same periods in
2007.
  Interest
Expense.  Total interest expense decreased $332,000 to $297,000
for the three months ended December 31, 2008 as compared to $629,000 for
the three months ended December 31, 2007.  Interest expense
decreased $719,000 to $677,000 for the six months ended December 31, 2008
as compared to $1.4 million for the six months ended December 31,
2007.  The average cost of funds decreased to 1.61% and 1.80% for the
three and six months ended December 31, 2008, respectively, compared to
3.00% and 3.20% for the same periods in 2007.  The reduction in
interest expense is a direct result of the decreasing rate environment and the
reduction in certificates of deposits.
  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
six months ending December 31, 2008 and 2007.  Average balances
are derived from daily balances, and nonaccrual loans are included as
interest-bearing loans for purposes of these tables.
  Three
      months ended December 31,2008
                
                
                2007Average
      Balance
                
                
                Interest
                
                
                Average
      Yield/Rate(1)
                
                
                Average
      Balance
                
                
                Interest
                
                
                Average
      Yield/Rate(1)Interest-earning
      assets:Loans
      receivable, net(2)
                
                $
                93,572,506
                
                
                $
                1,434,184
                
                
                
                6.13
                %
                
                $
                93,522,239
                
                
                $
                1,688,828
                
                
                
                7.22
                %Securities
      available-for-sale(3)
                
                
                4,558,501
                
                
                
                50,793
                
                
                
                4.46
                
                
                
                13,914,639
                
                
                
                147,645
                
                
                
                4.24Interest-bearing
      balances in financial institutions(4)
                
                
                38,555
                
                
                
                54
                
                
                
                0.56
                
                
                
                141,072
                
                
                
                1,608
                
                
                
                4.56Federal
      funds sold and other
                
                
                648,353
                
                
                
                413
                
                
                
                0.25
                
                
                
                2,139,507
                
                
                
                20,441
                
                
                
                3.82Total
      interest earning assets
                
                
                98,817,915
                
                
                
                1,485,444
                
                
                
                6.01
                %
                
                
                109,717,457
                
                
                
                1,858,522
                
                
                
                6.78
                %Non-interest-earning
      assets
                
                
                12,912,951
                
                
                
                
                
                
                
                
                
                
                
                13,953,108Total
      assets
                
                $
                111,730,866
                
                
                
                
                
                
                
                
                
                
                $
                123,670,565Interest-bearing
      liabilities:Interest-bearing
      deposits
                
                $
                66,711,955
                
                
                
                276,448
                
                
                
                1.66
                %
                
                $
                81,885,057
                
                
                
                605,955
                
                
                
                2.96
                %FHLB
      advances
                
                
                7,142,391
                
                
                
                20,007
                
                
                
                1.12
                
                
                
                1,793,478
                
                
                
                20,910
                
                
                
                4.66Federal
      funds purchased
                
                
                116,300
                
                
                
                435
                
                
                
                1.49
                
                
                
                143,857
                
                
                
                1,814
                
                
                
                5.04Total
      interest-bearing liabilities
                
                
                73,970,646
                
                
                
                296,890
                
                
                
                1.61
                %
                
                
                83,822,392
                
                
                
                628,679
                
                
                
                3.00
                %Non-interest-bearing
      liabilities
                
                
                7,654,326
                
                
                
                
                
                
                
                
                
                
                
                8,418,051Total equity capital(5)
                
                
                30,105,894
                
                
                
                
                
                
                
                
                
                
                
                31,430,122Total
      liabilities and equity capital
                
                $
                111,730,866
                
                
                
                
                
                
                
                
                
                
                $
                123,670,565Net
      average interest-earning assets
                
                $
                24,847,269
                
                
                
                
                
                
                
                
                
                
                $
                25,895,065Net
      interest income; interest rate spread(6)
                
                
                
                
                
                $
                1,188,554
                
                
                
                4.40
                %
                
                
                
                
                
                $
                1,229,843
                
                
                
                3.78
                %Net
      interest margin(7)
                
                
                
                
                
                
                
                
                
                
                4.81
                %
                
                
                
                
                
                
                
                
                
                
                4.48
                %
 
 12
 Table of Contents
 Six months
      ended December 31,2008
                
                
                2007Average
      Balance
                
                
                Interest
                
                
                Average
      Yield/Rate(1)
                
                
                Average
      Balance
                
                
                Interest
                
                
                Average
      Yield/Rate(1)Interest-earning
      assets:Loans
      receivable, net(2)
                
                $
                93,942,058
                
                
                $
                2,954,647
                
                
                
                6.29
                %
                
                $
                90,544,706
                
                
                $
                3,309,420
                
                
                
                7.312
                %Securities
      available-for-sale(3)
                
                
                5,107,986
                
                
                
                112,785
                
                
                
                4.42
                
                
                
                14,660,952
                
                
                
                308,854
                
                
                
                4.21Interest-bearing
      balances in financial institutions(4)
                
                
                53,329
                
                
                
                385
                
                
                
                1.44
                
                
                
                1,763,047
                
                
                
                45,950
                
                
                
                5.21Federal
      funds sold and other
                
                
                1,349,496
                
                
                
                8,848
                
                
                
                1.31
                
                
                
                6,393,362
                
                
                
                155,624
                
                
                
                4.87Total
      interest earning assets
                
                
                100,452,869
                
                
                
                3,076,665
                
                
                
                6.13
                %
                
                
                113,362,067
                
                
                
                3,819,848
                
                
                
                6.74
                %Non-interest-earning
      assets
                
                
                12,763,742
                
                
                
                
                
                
                
                
                
                
                
                13,939,055Total
      assets
                
                $
                113,216,611
                
                
                
                
                
                
                
                
                
                
                $
                127,301,122Interest-bearing
      liabilities:Interest-bearing
      deposits
                
                $
                70,758,764
                
                
                
                648,313
                
                
                
                1.86
                %
                
                $
                86,265,137
                
                
                
                1,374,051
                
                
                
                3.19
                %FHLB
      advances
                
                
                4,280,435
                
                
                
                28,080
                
                
                
                1.31
                
                
                
                900,543
                
                
                
                21,015
                
                
                
                4.67Federal
      funds purchased
                
                
                104,195
                
                
                
                1,009
                
                
                
                1.94
                
                
                
                71,928
                
                
                
                1,814
                
                
                
                5.04Total
      interest-bearing liabilities
                
                
                75,143,394
                
                
                
                677,405
                
                
                
                1.80
                %
                
                
                87,237,608
                
                
                
                1,396,880
                
                
                
                3.20
                %Non-interest-bearing
      liabilities
                
                
                7,996,144
                
                
                
                
                
                
                
                
                
                
                
                8,514,736Total equity
      capital(5)
                
                
                30,077,073
                
                
                
                
                
                
                
                
                
                
                
                31,548,778Total
      liabilities and equity capital
                
                $
                113,216,611
                
                
                
                
                
                
                
                
                
                
                $
                127,301,122Net
      average interest-earning assets
                
                $
                25,309,475
                
                
                
                
                
                
                
                
                
                
                $
                26,124,459Net
      interest income; interest rate spread(6)
                
                
                
                
                
                $
                2,399,263
                
                
                
                4.31
                %
                
                
                
                
                
                $
                2,422,968
                
                
                
                3.54
                %Net
      interest margin(7)
                
                
                
                
                
                
                
                
                
                
                4.78
                %
                
                
                
                
                
                
                
                
                
                
                4.27
                %
 _______________
 (1)
              Yields
      and rates have been annualized where
  appropriate.
 (2)
              Includes
      nonaccruing loans.
 (3)
              Tax
      effective yield, assuming a 34%
rate.
 (4)
              Includes
      interest-bearing demand deposits, repurchase agreements, and federal funds
      sold.
 (5)
              Includes
      retained earnings.
 (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 collectibility
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.  Large,
more complex loans, such as multi-family and larger commercial real estate
loans, are evaluated individually for impairment.
  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.
  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 gross loans outstanding increased to 2.58% at December 31,
2008, from 2.22% at June 30, 2008.
   13
 Table of Contents
 The Bank
recorded a provision of $751,000 and $901,000 during the three and six months
ended December 31, 2008, respectively, based on management’s estimate of
probable incurred losses in the portfolio, which was reflective of a continued
increase in classified credits 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
December 31, 2008, all loans considered impaired are on nonaccrual
status.
  Non-accrual
loans at December 31, 2008 were $11.9 million, compared to $5.3 million at
June 30, 2008.  Foregone interest on non-accrual loans was
approximately $248,000 for the three months ended December 31, 2008
compared to $49,000 for the three months ended December 31,
2007.
  During
the quarter ending December 31, 2008 two additional loan relationships were
identified as impaired.  One of these relationships was previously
disclosed at June 30, 2008 as a credit with heightened
concerns.  This loan participation involves a hotel and complex in the
state of Michigan with an aggregate balance of $20 million of which the Bank’s
share is approximately $3.0 million.  The borrower is experiencing
negative operating results directly attributed to the weak economy and downturn
in discretionary consumer spending.  Current potential workout options
are being considered with the lead bank, which may include forbearance
arrangements intended to provide short term cash flow
relief.  Management has established a specific reserve allowance of
$166,000 for this credit based on information available to us at this
time.
  The
second involves a commercial real estate loan on property near downtown
Chicago.  The loan has an approximate balance of $2.6 million as of
December 31, 2008.  This credit had not been previously disclosed
as a potential problem credit.  The bank was in the process of
reviewing short term renewal options when one of the borrower’s affiliated
companies filed for bankruptcy protection.  The actual borrower has
not filed for protection; however, the guarantors on the loan are named in the
bankruptcy proceedings of the affiliated companies mentioned
above.  We continue to seek viable workout and exit strategies based
on the availability of cash flows generated from the collateral securing the
loan.  The Company has established a $197,000 specific reserve based
on continuing declining market values of that collateral.
  As
previously disclosed, another existing impaired loan, a commercial and
industrial loan secured by receivables, has continued to perform in a
satisfactory manner.  The balance of the loan at June 30, 2008
was approximately $590,000.  At December 31, 2008, the loan
balance has been reduced to approximately $454,000.  The specific
reserve on this loan has been reduced from $442,000 as of June 30, 2008 to
$382,000 at December 31, 2008.  Currently, the loan repayment
schedule is in the process of being restructured which we expect will result in
a decreased monthly principal payment obligation.  We continue to
closely monitor this credit.
  Management
recommended and the board approved the charge off of two previously disclosed
impaired loans involving one single borrower secured by three residential
properties in Chicago.  As a result of the Company foreclosing on the
properties and taking them into Real Estate Owned, approximately $67,000 was
charged-off during the quarter.
  On
January 19, 2009, the bank agreed to accept a discounted principal payment
of $622,000 as full settlement to sell our entire 33% interest in a previously
disclosed impaired Florida loan participation.  The balance on this
loan was approximately $797,000 at December 31, 2008.  This
discounted sale of our interest in this impaired credit was deemed prudent by
management based on prevailing economic and housing conditions in that
market.  A $175,000 specific reserve had been established at
December 31, 2008 for this loan based on continuing declining market values
in Florida.
   14
 Table of Contents
 The
following table represents information concerning total loans and impaired loans
by geographical area and the percentage of impaired loans by geographical area
to total impaired loans:
  (Dollar
      amounts in thousands)December
      31, 2008
                
                
                June
      30, 2008
                
                
                December
      31, 2007Geographical
      Location
                
                Total Loans
                
                
                Impaired
      Loans
                
                
                %
                
                
                Total
      Loans
                
                
                Impaired
      Loans
                
                
                %
                
                
                Total Loans
                
                
                Impaired
      Loans
                
                
                %Illinois
                
                $
                68,247
                
                
                $
                6,765
                
                
                
                56.74
                %
                
                $
                65,872
                
                
                $
                2,735
                
                
                
                51.95
                %
                
                $
                70,258
                
                
                
                360
                
                
                
                33.61
                %Florida
                
                
                2,613
                
                
                
                2,171
                
                
                
                18.21
                
                
                
                2,989
                
                
                
                2,530
                
                
                
                48.05
                
                
                
                2,846
                
                
                
                467
                
                
                
                43.61Michigan
                
                
                3,425
                
                
                
                2,986
                
                
                
                25.05
                
                
                
                3,441
                
                
                
                —
                
                
                
                —
                
                
                
                3,444
                
                
                
                —
                
                
                
                —Indiana
                
                
                14,670
                
                
                
                —
                
                
                
                —
                
                
                
                14,645
                
                
                
                —
                
                
                
                —
                
                
                
                12,854
                
                
                
                —
                
                
                
                —Wisconsin
                
                
                1,700
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Other
      States Combined
                
                
                3,279
                
                
                
                —
                
                
                
                —
                
                
                
                5,888
                
                
                
                —
                
                
                
                —
                
                
                
                6,105
                
                
                
                244
                
                
                
                22.78Total
      loans
                
                $
                93,934
                
                
                $
                11,922
                
                
                
                100.00
                %
                
                $
                92,835
                
                
                $
                5,265
                
                
                
                100.00
                %
                
                $
                95,507
                
                
                $
                1,071
                
                
                
                100.00
                %
 
 The
following table represents information concerning impaired loans by category and
the percentage of impaired loans by category to total impaired
loans:
  (Dollar
      amounts in thousands)December
      31, 2008
                
                
                June
      30, 2008
                
                
                December
      31, 2007Loan
      Category
                
                Impaired
      Amount
                
                
                %
      of Total Impaired
                
                
                Impaired
      Amount
                
                
                %
      of Total Impaired
                
                
                Impaired
      Amount
                
                
                %
      of Total ImpairedOne-to-four family
      loans
                
                $
                2,476
                
                
                
                22.06
                %
                
                $
                1,358
                
                
                
                25.79
                %
                
                $
                171
                
                
                
                15.97
                %Commercial
      real estate loans
                
                
                8,845
                
                
                
                72.98
                
                
                
                2,873
                
                
                
                54.57
                
                
                
                467
                
                
                
                43.60Multi-family
      loans
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Commercial
      loans
                
                
                601
                
                
                
                4.96
                
                
                
                1,034
                
                
                
                19.64
                
                
                
                433
                
                
                
                40.43Home
      Equity loans
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Other
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Total
                
                $
                11,922
                
                
                
                100.00
                %
                
                $
                5,265
                
                
                
                100.00
                %
                
                $
                1,071
                
                
                
                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 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 steadily risen over the 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.
  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.
    15
 Table of Contents
 June 30,
2008 and December 31, 2007, 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.  At
December 31, 2008, there is one loan, approximately $87,000, past due
ninety days which is well secured and in the process of collection.
  (Dollar
      amounts in thousands)December
      31, 2008
                  
                  
                  June
      30, 2008
                  
                  
                  December
      31, 200730-59
      Days
                  
                  
                  60-89
      Days
                  
                  
                  +90
      Days
                  
                  
                  30-59
      Days
                  
                  
                  60-89
      Days
                  
                  
                  30-59
      Days
                  
                  
                  60-89
      DaysOne-to-four
      family loans
                  
                  $
                  1,592
                  
                  
                  $
                  804
                  
                  
                  $
                  87
                  
                  
                  $
                  136
                  
                  
                  $
                  56
                  
                  
                  $
                  485
                  
                  
                  $
                  —Commercial
      real estate loans
                  
                  
                  —
                  
                  
                  
                  254
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  
                  
                  
                  
                  —Multi-family
      loans
                  
                  
                  333
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Commercial  loans
                  
                  
                  53
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  50
                  
                  
                  
                  —Home
      equity loans
                  
                  
                  27
                  
                  
                  
                  38
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Share
      loans
                  
                  
                  2
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Total
      loan delinquencies
                  
                  $
                  2,008
                  
                  
                  $
                  1,096
                  
                  
                  $
                  87
                  
                  
                  $
                  136
                  
                  
                  $
                  56
                  
                  
                  $
                  535
                  
                  
                  $
                  —
  Allowance for Loan
Losses.  At December 31, 2008, the allowance for loan
losses was $2,420,000, or 2.58% of the total loan portfolio.  The loan
loss allowance is maintained by management at a level considered adequate to
cover probable incurred losses inherent in the existing portfolio based on prior
loan loss experience, known and probable risks in the portfolio, adverse
situations that may affect the borrower’s ability to repay, the estimated value
of any underlying collateral, general economic conditions, and other factors and
estimates that are subject to change over time.
  The Bank
relies, among other things, on its experienced senior management in determining
the appropriate allowance for loan losses on the commercial and commercial real
estate loan portfolio, as the Bank does not have a seasoned portfolio of
commercial and commercial real estate loans.  Management reviews the
composition of the commercial and commercial real estate loan portfolio on a
quarterly basis.  This includes reviewing delinquency trends, impaired
loans, loan-to-value ratios, and types of collateral.  Management then
compares this ratio to peer group data and the FDIC state profile for Illinois
banks as a means of additional analysis. Based on these factors, we believe that
the allocation of the allowance for loan losses for these types of loans was
appropriate at December 31, 2008.
  While
management believes that it determines the amount of the allowance based on the
best information available at the time, the allowance will need to be adjusted
as circumstances change and assumptions are updated. Future adjustments to the
allowance could significantly affect net income.
  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 December 31, 2008, the specific
reserve component of the allowance for loan losses was $1,504,000, an increase
of $219,000 from $1,285,000 at June 30, 2008.  The increase was
primarily due to an increase in the provision for loan losses of
$872,000 for impaired loans offset by charge-offs of $542,000 and reductions of
specific reserves on impaired loans of $111,000 due to the receipt of principal
payments.
   16
 Table of Contents
  The
following table shows our allocation for the specific reserve component of the
allowance for loan losses as of December 31, 2008:
  (Dollar
      amounts in thousands)Number
      of loans
                  
                  
                  Specific
      Reserve
                      Allocation
      (in thousands)Illinois
                  
                  
                  9
                  
                  
                  $
                  796Florida
                  
                  
                  4
                  
                  
                  
                  542Michigan
                  
                  
                  1
                  
                  
                  
                  166Total
                  
                  
                  14
                  
                  
                  $
                  1,504
 
 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 two credits 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.
  A credit,
not previously disclosed, involving a commercial multi-family property located
in the state of Wisconsin with a balance of $1.7 million matured on
January 26, 2009.  Previous discussions with the borrower
indicated with a certain degree of confidence that the loan would be paid in
full upon maturity.  We have initiated workout strategies to determine
a viable course of action.
  Another
credit, also not previously disclosed, involves a retail development loan
located in Northwest Indiana with a balance of $2.1 million and total
availability up to $4.1 million subject to development progress.  The
loan matures in March of 2009.  This loan possesses heightened credit
risks due to the overall national and local retail economy which continues to
show contraction.  The bank is closely monitoring this
credit.
  Non-interest
Income.  Non-interest income increased $9,000 to $138,000 for
the three-month period ended December 31, 2008 from the same period in
2007.  Non-interest income increased $31,000 to $284,000 for the
six-month period ended December 31, 2008 from the same period in
2007.  The increase in the three and six 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 $167,000 to $1.3
million for the three months ended December 31, 2008 from $1.5 million for
the same period in 2007.  Non-interest expense decreased $680,000 to
$2.6 million for the six months ended December 31, 2008 from $3.3 million
for the same period in 2007.
  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.
  Provision for Income
Taxes.  The Company recognized no income tax benefit for the
three and six month periods ended December 31, 2008 and
2007.  The Company ceased recording an income tax benefit until net
income is recorded to offset these benefits.
  17
 Table of Contents
 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
December 31, 2008, there were $9.2 million of FHLB advances
outstanding.  As of December 31, 2008, the Bank had $12.0 million
in additional available credit with the FHLB based on parameters set by the
FHLB.  We have concerns regarding the viability of the FHLB as a
future source of liquidity.  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.  We are identifying and developing alternative
sources of liquidity.
  During
the six month period ended December 31, 2008 management strategically did
not renew certain certificates of deposit issued during a promotional period at
above market rates.  Approximately $11.0 million of the $13.0 million
decrease in deposits was related to these certificates of deposit.
  The
Company’s cash flows are comprised of three primary
classifications:  cash flows from operating activities, investing
activities, and financing activities.  Net cash (used in) from
operating activities were $(196,000) and $67,000 for December 31, 2008 and
2007, respectively.  Net cash from (used in) investing activities
consisted primarily of disbursements for loan originations, maturing agency
securities and paydowns on mortgage backed securities.  Net cash from
(used in) investing activities were $1.7 million and $(9.3) million for
December 31, 2008 and 2007, respectively.  Net cash used in
financing activities consisted primarily of the activity in deposit accounts,
FHLB advances, and advances from borrowers for taxes and
insurance.  The net cash used in financing activities was $(3.7)
million and $(7.6) million at December 31, 2008 and 2007.
  From
June 30, 2008 through December 31, 2008, the Company received proceeds
of $3.5 million from sales, maturities, calls, and paydowns of
available-for-sale securities.  These proceeds were primarily used to
fund new loans and fund maturing high-yielding promotional certificates of
deposit.
  At
December 31, 2008, the Company had $8.4 million in unfunded lines, and
letters of credit outstanding of $513,000.  In addition, as of
December 31, 2008, the total amount of certificates of deposit that were
scheduled to mature in the next 12 months equaled $27.1 million.  The
Company believes that it has adequate resources to fund all of its commitments
and that it can adjust the rates paid on certificates of deposit to retain
deposits in changing interest rate environments.  If the Company
requires funds beyond its internal funding capabilities, advances from the FHLB
are available as an additional source of funds.
  Capital.  The Bank
is required to maintain regulatory capital sufficient to meet Tier 1
leverage, Tier 1 risk-based and total risk-based capital ratios of at least
4.0%, 4.0%, and 8.0%, respectively.  At December 31, 2008, the
Bank exceeded each of its capital requirements with ratios of 19.85% 23.85%, and
25.12%, respectively.
   18
 Table of Contents
 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 submitted its application timely
and is awaiting the Treasury’s decision.
  The CPP
provides for a minimum investment of 1% of Total Risk-Weighted Assets and a
maximum investment equal to the lesser of 3% of Total Risk-Weighted Assets or
$25 billion.  The approximate range of possible investment in Royal
would be from $0.9 million to $2.8 million.  Participating financial
institutions will be required to pay cumulative dividends on the preferred
perpetual stock at the rates of 5% during the first five years, then 9%
thereafter.  The program requires an institution to comply with a
number of provisions and restrictions, including:  issuance to the
Treasury of warrants to purchase shares of common stock equal to 15% of the
capital invested by the Treasury; contractual consent that allows the Treasury
to alter the terms of its investment unilaterally, without negotiation and
without compensation; and limits on the payment of executive compensation, stock
repurchase, and the declaration of dividends.  The Company continues
to monitor developments and evaluate whether it will participate in the program
if its application is approved.
  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.
  A loan is
considered impaired when it is probable that not all principal and interest
amounts will be collected according to the loan contract.  Residential
mortgage, installment and other consumer loans are collectively evaluated for
impairment.  Individual commercial loans are evaluated for
impairment.  Impaired loans are recorded at the loan’s fair value by
the establishment of a specific allowance where necessary.  The fair
value of collateral-dependent loans is determined by the fair value of the
underlying collateral.  The fair value of noncollateral-dependent
loans is determined by discounting expected future interest and principal
payments at the loan’s effective interest rate.
     19
 Table of Contents
  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 December 31, 2008, that have materially affected
or are reasonably likely to materially affect, the Company’s internal control
over financial reporting.
   PART II. – OTHER INFORMATION
  Item 1.   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.
   20
 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 may have a negative impact
on our business.  If the strength of the U.S. economy in general and
the strength of the economy in areas where we lend (or previously provided real
estate financing) continue to decline, this could result in, among other things,
a further deterioration in credit quality or loans.  Negative
conditions in the real estate markets where we operate 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 may adversely impact our
borrowers’ ability to make required payments, which in turn, may negatively
impact our financial results.
  Current
and further deterioration in the housing market could cause further increases in
delinquencies and non-performing assets, including loan charge-offs, and depress
our income and growth.
  The
volume and credit quality of our one-to-four family residential mortgages and
home equity loans may decrease during economic downturns as a result of, among
other things, a decrease in real estate values, an increase in unemployment, a
slowdown in housing price appreciation or increases in interest
rates.  These factors could reduce our earnings and consequently our
financial condition because:
  ·
              The
      borrowers may not be able to repay their
loans
  ·
              The
      value of the collateral securing our loans to borrowers may decline
      further
  ·
              The
      quality of our loan portfolio may decline
  further
  ·
              Customers
      may not want or need our products and
services
  Any of
these scenarios could 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, which would reduce income.
  Liquidity.
  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
   21
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 We test
and evaluate our liquidity sources regularly, and we are developing alternative
sources.  We have applied to the Federal Reserve Bank for access to
its discount window as an alternative lower-cost source of funding in order to
attempt to mitigate some of our liquidity risk and manage our liquidity
costs.
  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 for 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.
  Item2.   Unregistered Sales of Equity
Securities and Use of Proceeds.
  None
  Item3.    Defaults Upon Senior
Securities.
  None
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  Item4.   Submission of Matters to a
Vote of Security Holders.
  At the
Company’s Annual Meeting of Stockholders held on October 22, 2008, the
following matters were submitted to and approved by a vote of
stockholders:
  (1)           The
election of two Class I directors for a three-year term ending at the
Annual Meeting of Stockholders to be held in 2011:
  Directors
                            
                            Votes
      For
                            
                            Votes
      WithheldC.
      Michael McLaren
                            
                            
                            2,103,293
                            
                            107,007Rodolfo
      Serna
                            
                            
                            2,069,955
                            
                            143,345
 The
following directors continue to serve after the Annual Meeting:
  Continuing
      Director
                            
                            Term
      ExpiresAlan
      W. Bird
                            
                            2009James
      A. Fitch, Jr.
                            
                            2009Barbara
      K. Minster
                            
                            2009John
      T. Dempsey
                            
                            2010Leonard
      Szwajkowski
                            
                            2010
 
 (2)           Ratification
of the appointment of Crowe Horwath LLP as the Company’s independent accountants
for the fiscal year ending June 30, 2009.
  Total
      votes for
                      
                      
                      2,114,477Total
      votes against
                      
                      
                      94,219Total
      votes abstaining
                      
                      
                      1,604
 
 Item5.   Other
Information.
  None
  Item 6.    Exhibits.
  (a)           The
exhibits filed as part of this Form 10-Q are listed in the Exhibit Index, which
is incorporated herein by reference.
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 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: 
      February 17, 2009
                ROYAL FINANCIAL,
      INC.By:
                /s/Leonard
      SzwajkowskiLeonard
      SzwajkowskiChief
      Executive Officer and President
 Date: 
      February 17, 2009
                    By:
                    /s/Jodi
      A. OjedaJodi
      A. OjedaSenior
      Vice President and Chief
      Financial Officer
   24
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 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.
   25