SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
  FORM
10-QSB
  (mark
one)
  ý  QUARTERLY
REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
 EXCHANGE
ACT OF 1934
 For
the quarterly period ended March 31, 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 small business issuer specified in its charter)
  Delaware
                (State
      or other jurisdiction of incorporation or organization)
              20-1636029
                (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
      changed 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 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 May 9, 2008Common
      Stock, $0.01 par value
              2,555,432
 
 Transitional
Small Business Disclosure Format (check one):  Yes  ̈ No ý
   
  ROYAL
FINANCIAL, INC. AND SUBSIDIARY
  FORM
10-QSB
  For
the quarterly period ended March 31, 2008
  TABLE OF CONTENTS
  
 PagePART I – FINANCIAL INFORMATIONItem 1.  Financial
      StatementsConsolidated Statements of Financial Condition as
      of March 31, 2008 and June 30, 2007
              1Consolidated Statements of Income (Loss) and
      Comprehensive Income (Loss) for the three months and nine months ended
      March 31, 2008 and 2007
              2Consolidated Statements of Stockholders’
      Equity for the nine months ended March 31, 2008 and
    2007
              3Consolidated Statements of Cash Flows for
      the nine months ended March 31, 2008 and 2007
              5Notes to Unaudited Financial
      Statements
              6Item 2.  Management’s Discussion and
      Analysis of Financial Condition and Results of
    Operations
              12Item 3.  Controls and
      Procedures
              18PART II – OTHER INFORMATIONItem 1.  Legal
Proceedings
              19Item 2.  Unregistered Sales of Equity
      Securities and Use of Proceeds
              19Item 3.  Defaults Upon Senior
      Securities
              19Item 4.  Submission of Matters to a
      Vote of Security Holders
              19Item 5.  Other
Information
              19Item 6.  Exhibits
              19SIGNATURESEXHIBIT INDEX
 
  i
 Table of Contents
  PART I. – FINANCIAL INFORMATION
  Item 1.   Financial Statements.
  ROYAL
FINANCIAL, INC. AND SUBSIDIARY
 CONSOLIDATEDSTATEMENTS OF FINANCIAL
CONDITION
 March 31,
2008 and June 30, 2007 (Unaudited)
  March
      31, 2008
              
              
              June
      30, 2007ASSETSCash
      and non-interest-bearing balances in
      financial institutions
              
              $
              3,470,044
              
              
              $
              3,629,356Interest-bearing
      balances in financial institutions
              
              
              121,359
              
              
              
              5,140,346Federal
      funds sold
              
              
              750,529
              
              
              
              12,626,252Total
      cash and cash equivalents
              
              
              4,341,932
              
              
              
              21,395,954Securities
      available-for-sale
              
              
              9,219,437
              
              
              
              15,595,283Loans
      receivable, net of allowance for loan losses of $1,903,000 at March 31,
      2008, and $667,105
                at  June 30, 2007
              
              
              93,692,421
              
              
              
              83,498,883Federal
      Home Loan Bank stock, at cost
              
              
              340,500
              
              
              
              340,500Cash
      surrender value of life insurance
              
              
              4,885,051
              
              
              
              4,741,698Premises
      and equipment, net
              
              
              5,622,333
              
              
              
              5,933,862Accrued
      interest receivable
              
              
              446,270
              
              
              
              508,835Other
      assets
              
              
              378,167
              
              
              
              616,696Total
      assets
              
              $
              118,926,111
              
              
              $
              132,631,711LIABILITIES
      AND STOCKHOLDERS’ EQUITYLiabilitiesDeposits
              
              $
              85,057,679
              
              
              $
              98,675,891Advances
      from borrowers for taxes and insurance
              
              
              322,929
              
              
              
              571,730Federal
      Home Loan Bank advances
              
              
              1,500,000
              
              
              
              —Accrued
      interest payable and other liabilities
              
              
              981,669
              
              
              
              753,988Common
      stock in ESOP subject to contingent repurchase obligation
              
              
              1,011,713
              
              
              
              968,070Stockholders’
      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 March 31, 2008 and June 30,
      2007
              
              
              26,450
              
              
              
              26,450Additional
      paid-in capital
              
              
              24,612,086
              
              
              
              24,169,282Retained
      earnings
              
              
              9,370,265
              
              
              
              11,510,299Treasury
      stock, 89,568 shares and 69,498 shares, at cost
              
              
              (1,326,286
              )
              
              
              (1,057,698
              )Accumulated
      other comprehensive income (loss), net of tax
              
              
              55,619
              
              
              
              (143,372
              )Unearned
      ESOP shares
              
              
              (1,674,300
              )
              
              
              (1,874,859
              )Reclassification
      of ESOP shares
              
              
              (1,011,713
              )
              
              
              (968,070
              )Total
      stockholders’ equity
              
              
              30,052,121
              
              
              
              31,662,032Total
      liabilities and stockholders’ equity
              
              $
              118,926,111
              
              
              $
              132,631,711
 
 See
accompanying notes to these unaudited consolidated financial
statements.
   1
 Table of Contents
  ROYAL
FINANCIAL, INC. AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF INCOME
(LOSS)
 AND
COMPREHENSIVE INCOME (LOSS)
 Three
months and nine months ended March 31, 2008 and 2007
 (Unaudited)
  Three
      Months Ended
                  March
      31,
              
              
              Nine
      Months Ended
                  March
      31,2008
              
              
              2007
              
              
              2008
              
              
              2007Interest
      incomeLoans
              
              $
              1,593,024
              
              
              $
              1,326,649
              
              
              $
              4,902,444
              
              
              $
              4,065,186Securities,
      taxable
              
              
              136,669
              
              
              
              171,719
              
              
              
              445,523
              
              
              
              553,141Federal
      funds sold and other
              
              
              6,164
              
              
              
              320,299
              
              
              
              207,738
              
              
              
              783,532Total
      interest income
              
              
              1,735,857
              
              
              
              1,818,667
              
              
              
              5,555,705
              
              
              
              5,401,859Interest
      expenseDeposits
              
              
              541,800
              
              
              
              740,800
              
              
              
              1,915,851
              
              
              
              2,058,618Federal
      Home Loan Bank advances and other borrowings
              
              
              40,104
              
              
              
              —
              
              
              
              62,933
              
              
              
              2,151Total
      interest expense
              
              
              581,904
              
              
              
              740,800
              
              
              
              1,978,784
              
              
              
              2,060,769Net
      interest income
              
              
              1,153,953
              
              
              
              1,077,867
              
              
              
              3,576,921
              
              
              
              3,341,090Provision
      for loan losses
              
              
              1,101,076
              
              
              
              35,667
              
              
              
              1,244,797
              
              
              
              95,667Net
      interest income after provision for loan losses
              
              
              52,877
              
              
              
              1,042,200
              
              
              
              2,332,124
              
              
              
              3,245,423Non-interest
      incomeService
      charges on deposit accounts
              
              
              79,551
              
              
              
              65,144
              
              
              
              211,084
              
              
              
              197,941Earnings
      on cash surrender value of life insurance
              
              
              48,291
              
              
              
              47,425
              
              
              
              143,353
              
              
              
              139,485Other
      income
              
              
              19,421
              
              
              
              35,839
              
              
              
              46,167
              
              
              
              132,301Total
      non-interest income
              
              
              147,263
              
              
              
              148,408
              
              
              
              400,604
              
              
              
              469,727Non-interest
      expenseSalaries
      and employee benefits
              
              
              689,746
              
              
              
              711,105
              
              
              
              2,056,673
              
              
              
              2,137,143Occupancy
      and equipment
              
              
              355,145
              
              
              
              336,972
              
              
              
              934,318
              
              
              
              936,189Data
      processing
              
              
              102,601
              
              
              
              106,024
              
              
              
              318,464
              
              
              
              272,575Professional
      services
              
              
              162,394
              
              
              
              126,966
              
              
              
              532,726
              
              
              
              483,813Investigation
      costs
              
              
              59,958
              
              
              
              —
              
              
              
              474,815
              
              
              
              -Director
      fees
              
              
              33,300
              
              
              
              34,200
              
              
              
              99,400
              
              
              
              102,600Supplies
              
              
              14,816
              
              
              
              19,018
              
              
              
              42,019
              
              
              
              87,319Advertising
              
              
              29,595
              
              
              
              33,902
              
              
              
              81,617
              
              
              
              187,422Insurance
      premiums
              
              
              18,581
              
              
              
              15,610
              
              
              
              60,039
              
              
              
              50,841Other
              
              
              89,658
              
              
              
              122,076
              
              
              
              272,691
              
              
              
              395,254Total
      non-interest expense
              
              
              1,555,794
              
              
              
              1,505,873
              
              
              
              4,872,762
              
              
              
              4,653,156Loss
      before income tax expense
              
              
              (1,355,654
              )
              
              
              (315,265
              )
              
              
              (2,140,034
              )
              
              
              (938,006
              )Income
      tax benefit
              
              
              —
              
              
              
              (93,500
              )
              
              
              —
              
              
              
              (326,500
              )Net
      (loss)
              
              $
              (1,355,654
              )
              
              $
              (221,765
              )
              
              $
              (2,140,034
              )
              
              $
              (611,506
              )Basic
      and diluted (loss) per share
              
              $
              (.57
              )
              
              $
              (.09
              )
              
              $
              (.90
              )
              
              $
              (.26
              )Comprehensive
      (loss)
              
              $
              (1,283,422
              )
              
              $
              (184,809
              )
              
              $
              (1,941,043
              )
              
              $
              (373,908
              )
 
 See
accompanying notes to these unaudited consolidated financial
statements.
   2
 Table of Contents
  ROYAL
FINANCIAL, INC. AND SUBSIDIARY
 CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’
EQUITY
 Nine
months ended March 31, 2008 and 2007
 (Unaudited)
  2006
                
                Common
      Stock
                
                
                Additional
      Paid-In Capital
                
                
                Retained
      Earnings
                
                
                Accumulated
      Other Comprehensive Income (Loss)
                
                
                Unearned
      ESOP Shares
                
                
                Amount
      Reclassified on ESOP Shares
                
                
                Treasury
      Stock
                
                
                Unearned
      RRP Shares
                
                
                TotalBalance
      at July 1, 2006
                
                $
                26,450
                
                
                $
                24,739,005
                
                
                $
                12,822,013
                
                
                $
                (393,231
                )
                
                $
                (2,140,299
                )
                
                $
                (617,872
                )
                
                $
                (783,611
                )
                
                $
                (897,072
                )
                
                $
                32,755,383Comprehensive
      income (loss)Net
      loss
                
                
                —
                
                
                
                —
                
                
                
                (611,506
                )
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (611,506
                )Change in fair value of securities available-for-sale, net
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                237,598
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                237,598Total comprehensive loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (373,908
                )Reclassification
      due to change in fair value of common stock in ESOP subject to contingent
      repurchase obligation
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (330,625
                )
                
                
                —
                
                
                
                —
                
                
                
                (330,625
                )Reclassification
      of RRPS in conjunction with adoption of SFAS 123(R)
                
                
                —
                
                
                
                (897,072
                )
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                897,072
                
                
                
                —Release
      of 15,800 of unearned ESOP shares
                
                
                —
                
                
                
                50,733
                
                
                
                —
                
                
                
                —
                
                
                
                199,080
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                249,813Issuance
      of 5,000 shares to RRP plan
                
                
                —
                
                
                
                (74,250
                )
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                74,250
                
                
                
                —
                
                
                
                —Tax
      benefit on RRP shares vested
                
                
                —
                
                
                
                7,482
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                7,482Purchase
      of 22,243 treasury shares at cost
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (357,115
                )
                
                
                —
                
                
                
                (357,115
                )Stock-based
      compensation
                
                
                —
                
                
                
                307,002
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                307,002Balance
      at March 31, 2007
                
                $
                26,450
                
                
                $
                24,132,900
                
                
                $
                12,210,507
                
                
                $
                (155,633
                )
                
                $
                (1,941,219
                )
                
                $
                (948,497
                )
                
                $
                (1,066,476
                )
                
                $
                —
                
                
                $
                32,258,032
 
  3
 Table of Contents
  ROYAL
FINANCIAL, INC. AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
 Nine
months ended March 31, 2008 and 2007
 (Unaudited)
  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
              
              
              —
              
              
              
              —
              
              
              
              (2,140,034
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (2,140,034
              )Change
      in fair value of securities available-for-sale, net
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              198,991
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              198,991Total
      comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,941,043
              )Reclassification
      due to change in fair value of common stock in ESOP subject to contingent
      repurchase obligation
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (43,643
              )
              
              
              —
              
              
              
              (43,643
              )Release
      of 15,867 of unearned ESOP shares
              
              
              —
              
              
              
              19,640
              
              
              
              —
              
              
              
              —
              
              
              
              200,559
              
              
              
              —
              
              
              
              —
              
              
              
              220,199Issuance
      of 6,290 shares to RRP plan
              
              
              —
              
              
              
              (93,406
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              93,406
              
              
              
              —Forfeiture
      of 21,160 shares from the RRP plan
              
              
              —
              
              
              
              309,994
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (309,994
              )
              
              
              —Tax
      benefit on RRP shares vested
              
              
              —
              
              
              
              4,865
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              4,865Purchase
      of 5,200 Treasury shares at cost
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (52,000
              )
              
              
              (52,000
              )Stock-based
      compensation
              
              
              —
              
              
              
              201,711
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              201,711Balance
      at March 31, 2008
              
              $
              26,450
              
              
              $
              24,612,086
              
              
              $
              9,370,265
              
              
              $
              55,619
              
              
              $
              (1,674,300
              )
              
              $
              (1,011,713
              )
              
              $
              (1,326,286
              )
              
              $
              30,052,121
 
 See
accompanying notes to these unaudited consolidated financial
statements.
   4
 Table of Contents
  ROYAL
FINANCIAL, INC. AND SUBSIDIARY
 CONSOLIDATEDSTATEMENTS OF CASH
FLOWS
 Nine
months ended March 31, 2008 and 2007
 (Unaudited)
  2008
              
              
              2007Cash
      flows from operating activitiesNet
      (loss)
              
              $
              (2,140,034
              )
              
              $
              (611,506
              )Adjustments
      to reconcile net (loss)  to net cash from operating
      activities:Depreciation
              
              
              353,469
              
              
              
              327,412Provision
      for loan losses
              
              
              1,244,797
              
              
              
              95,667Earnings
      on bank-owned life insurance
              
              
              (143,353
              )
              
              
              (139,485
              )ESOP
      expense
              
              
              220,199
              
              
              
              249,813Stock-based
      compensation
              
              
              201,711
              
              
              
              307,002Change
      in accrued interest receivable and other assets
              
              
              198,582
              
              
              
              (266,954
              )Change
      in other accrued interest payable and liabilities
              
              
              227,681
              
              
              
              131,066Net
      cash from operating activities
              
              
              163,052
              
              
              
              93,015Cash
      flows from investing activitiesInvestment
      in interest-bearing term deposits at other financial
      institutions
              
              
              —
              
              
              
              (5,000,000
              )Proceeds
      from sales, maturities, calls, and paydowns of available for sale
      securities
              
              
              6,677,349
              
              
              
              7,394,741Purchases
      of securities available for sale
              
              
              —
              
              
              
              (2,003,129
              )Change
      in loans receivable
              
              
              (8,438,335
              )
              
              
              130,811Purchase
      of loan participations
              
              
              (3,000,000
              )
              
              
              (1,846,563
              )Redemption
      of Federal Home Loan Bank stock
              
              
              —
              
              
              
              22,921Purchase
      of premises and equipment
              
              
              (41,940
              )
              
              
              (965,107
              )Net
      cash from investing activities
              
              
              (4,802,926
              )
              
              
              (2,266,326
              )Cash
      flows from financing activitiesNet
      (decrease) increase  in deposits
              
              
              (13,618,212
              )
              
              
              19,736,723Net
      increase (decrease) in Federal funds purchased
              
              
              —
              
              
              
              (1,225,404
              )Net
      change in Federal Home Loan Bank advances
              
              
              1,500,000
              
              
              
              —Change
      in advances from borrowers for taxes and insurance
              
              
              (248,801
              )
              
              
              (108,524
              )Purchase
      of treasury stock
              
              
              (52,000
              )
              
              
              (357,115
              )Tax
      benefit on RRP shares
              
              
              4,865
              
              
              
              7,482Net
      cash from financing activities
              
              
              (12,414,148
              )
              
              
              18,053,162Net
      change in cash and cash equivalents
              
              
              (17,054,022
              )
              
              
              15,879,851Cash
      and cash equivalentsBeginning
      of the period
              
              
              21,395,954
              
              
              
              4,348,220End
      of period
              
              $
              4,341,932
              
              
              $
              20,228,071
 
 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 nine-month periods ended March 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-QSB.  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, 2007 and 2006.  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,
2008.  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.
  6
 Table of Contents
  Note
4 - Loans
  At March
31, 2008 and June 30, 2007, loans receivable consisted of the
following:
  March
      31,
                  2008
              
              
              June
      30,
                  2007Real
      estate loansOne-to-four
      family
              
              $
              33,095,034
              
              
              $
              36,756,599Commercial
              
              
              49,831,737
              
              
              
              32,880,378Multi-family
              
              
              3,588,258
              
              
              
              4,768,442Total
      real estate loans
              
              
              86,515,029
              
              
              
              74,405,419Commercial
      loans
              
              
              8,419,313
              
              
              
              9,237,266Consumer
      loansHome
      equity loans
              
              
              512,518
              
              
              
              342,492Other
              
              
              176,714
              
              
              
              187,195Total
      consumer loans
              
              
              689,232
              
              
              
              529,687Less:Net
      deferred loan fees (cost)
              
              
              28,153
              
              
              
              6,384Allowance
      for loan losses
              
              
              1,903,000
              
              
              
              667,105Loans,
      net
              
              $
              93,692,421
              
              
              $
              83,498,883
 
 A summary
of changes in the allowance for loan losses for the nine months ended March 31,
2008 and 2007 is as follows:
  2008
              
              
              2007Balance
      at beginning of period
              
              $
              667,105
              
              
              $
              400,000Provision
      for loan loss
              
              
              1,244,797
              
              
              
              95,667Charge
      offs
              
              
              (8,902
              )
              
              
              -Balance
      at end of period
              
              $
              1,903,000
              
              
              $
              495,667
 
 A portion
of the allowance for loan losses has been allocated to each impaired loan at the
periods ended March 31, 2008 and June 30, 2007.  Impaired loans were
as follows:
  March
      31,
                  2008
              
              
              June
      30,
                  2007Total
      impaired loans at period  end
              
              $
              5,066,850
              
              
              $
              709,000Amount
      of the allowance for loan losses allocated
              
              
              1,217,000
              
              
              
              120,000Interest
      income recognized during impairment
              
              
              —
              
              
              
              6,718Cash-basis
      interest income recognized
              
              
              —
              
              
              
              3,682
 
 Non-performing
loans were as follows at March 31, 2008 and June 30, 2007:
  March
      31,
                  2008
              
              
              June
      30,
                  2007Loans
      past due over 90 days still on accrual
              
              $
              —
              
              
              $
              225,733Nonaccrual
      loans
              
              
              5,066,850
              
              
              
              —
 
  7
 Table of Contents
  Note
5 - Loss Per Share
  The
following table presents a reconciliation of the components used to compute
basic and diluted earnings (loss) per share for the three and nine month periods
ended March 31, 2008 and 2007.  Weighted average common shares
outstanding excludes unallocated ESOP shares.
  Three
      Months Ended
                March
      31, 2008
              
              
              Three
      Months Ended
                March
      31, 2007
              
              
              Nine
      Months Ended
                March
      31, 2008
              
              
              Nine
      Months Ended
                March
      31, 2007Basic
      and diluted loss per share:Net
      loss as reported
              
              $
              (1,355,654
              )
              
              $
              (221,765
              )
              
              $
              (2,140,034
              )
              
              $
              (611,506
              )Weighted
      average common shares outstanding
              
              
              2,395,311
              
              
              
              2,351,023
              
              
              
              2,381,781
              
              
              
              2,355,674Basic
      and diluted loss per share
              
              $
              (.57
              )
              
              $
              (.09
              )
              
              $
              (.90
              )
              
              $
              (.26
              )
 
 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
6 - Stock-Based Compensation
  The
Company has two share-based compensation plans as described below.
  Stock
Option Plan:
  The
Company’s 2005 Stock Option Plan (“SOP”), which is shareholder approved, permits
the grant of share options to its employees for up to 264,500 shares of common
stock.  At March 31, 2008, there are 122,250 shares available for
future grants under this plan.  The Company believes that such awards
better align the interests of its employees with those of its shareholders.
Option awards are generally granted with an exercise price equal to the market
price of the Company’s common stock at the date of grant; those option awards
have vesting periods of 5 years and have exercise periods of 10
years.  The Company has a policy of using shares held as treasury
stock to satisfy share option exercises.
  The fair
value of each option award is estimated on the date of grant using a closed form
option valuation (Black-Scholes) model that uses the assumptions noted in the
table below. Expected volatilities are based on historical volatilities of the
Company’s common stock.  The risk-free interest rate for the expected
term of the option is based on the U.S. Treasury yield curve in effect at the
time of the grant.
  The fair
value of options granted was determined using the following weighted-average
assumptions as of the grant date for the nine months ended March
31:
 2008
              
              
              2007Risk-free
      interest rate
              
              
              4.65
              %
              
              
              5.10
              %Expected
      term
              
              
              7
              
              
              
              7Expected
      stock volatility
              
              
              13
              %
              
              
              20
              %Dividend
      yield
              
              
              0
              %
              
              
              0
              %
 
  8
 Table of Contents
  Note
6 - Stock-Based Compensation (continued)
  A summary
of the activity in the stock option plan for the nine months ended March 31,
2008, follows:
  Shares
              
              
              Weighted
      Average Exercise Price
              
              
              Weighted
      Average Remaining Contractual Term in Years
              
              
              Aggregate
      Intrinsic ValueOutstanding
      at July 1, 2007
              
              
              163,410
              
              
              $
              13.99Granted
              
              
              13,225
              
              
              
              13.15Exercised
              
              
              —
              
              
              
              —Forfeited
      or expired
              
              
              (37,030
              )
              
              
              13.90Outstanding
      at March 31, 2008
              
              
              139,605
              
              
              $
              13.93
              
              
              
              7.81
              
              
              $
              —Exercisable
      at March 31, 2008
              
              
              46,965
              
              
              $
              13.98
              
              
              
              7.63
              
              
              $
              —Vested
      or expect to vest at March 31, 2008
              
              
              139,605
              
              
              $
              13.93
              
              
              
              7.81
              
              
              $
              —
 
 As of
March 31, 2008, there was $384,000 of total unrecognized compensation cost
related to nonvested stock options granted under the Plan.  The cost
is expected to be recognized over a weighted average period of 2.9
years.
  Forfeitures
for options granted prior to fiscal 2006 were recognized as they occurred.
Beginning July 1, 2006, the Company began estimating the impact of future
forfeitures consistent with the requirements of FAS 123(R).
 Share
Award Plan:
  The
Company’s Recognition and Retention Plan (“RRP”), which is shareholder approved,
provides for the issuance of shares of restricted stock to directors, officers,
and employees.  Compensation expense is recognized over the vesting
period of the shares based on the market value of the Company’s common stock at
the issue date.  Pursuant to the RRP, the Company can award up to
105,800 shares of restricted stock.  These shares vest over a
five-year period.  Prior to July 1, 2006, the unamortized cost of
shares not yet earned (vested) was reported as a reduction of shareholders’
equity.  Upon adoption of FAS 123(R), the unamortized cost of shares
not yet awarded was reclassified to additional paid-in capital.  As of
March 31, 2008, 36,320 shares could still be granted under the
plan.
  A summary
of the activity in the RRP for the nine months ended March 31, 2008, is as
follows:
 Nonvested
      Shares
              
              Shares
              
              
              Weighted
      Average Grant-Date Fair ValueNonvested
      at July 1, 2007
              
              
              47,320
              
              
              $
              14.03Granted
              
              
              6,290
              
              
              
              13.21Vested
              
              
              (10,522
              )
              
              
              14.02Forfeited
              
              
              (4,232
              )
              
              
              13.90Nonvested
      at March 31, 2008
              
              
              38,856
              
              
              $
              13.91
 
 As of
March 31, 2008, there was $468,000 of total unrecognized compensation cost
related to nonvested shares granted under the RRP. The cost is expected to be
recognized over a weighted average period of 3.0 years.
   9
 Table of Contents
  Note
7 - Income Taxes - Adoption of FIN 48
  The
Company adopted FASB Interpretation 48, Accounting for Uncertainty in Income
Taxes (“FIN 48”), as of July 1, 2007.  A tax position is recognized as
a benefit only if it is “more likely than not” that the tax position would be
sustained in a tax examination, with a tax examination being presumed to
occur.  The amount recognized is the largest amount of tax benefit
that is greater than 50% likely of being realized on examination. For tax
positions not meeting the “more likely than not” test, no tax benefit is
recorded.  The adoption had no effect on the Company’s financial
statements.
  The
Company and its subsidiaries are subject to U.S. federal income tax as well as
income tax of the state of Illinois and Indiana. The Company is no longer
subject to examination by taxing authorities for years before 2003. The Company
does not expect the total amount of unrecognized tax benefits to significantly
increase in the next 12 months.
  The
Company recognizes interest and/or penalties related to income tax matters in
income tax expense. The Company did not have any amounts accrued for interest
and penalties at July 1, 2007.
 Note
8 – Effect of Newly Issued But Not Yet Effective  Accounting
Standards:
 
 In
September 2006, the FASB issued Statement No. 157, Fair Value
Measurements.  This Statement defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements.  This Statement establishes a fair value hierarchy about
the assumptions used to measure fair value and clarifies assumptions about risk
and the effect of a restriction on the sale or use of an asset.  The
standard is effective for fiscal years beginning after November 15, 2007.
 In February 2008, the FASB issued Staff Position (“FSP”) 157-2,Effective Date of FASB Statement
No. 157.This FSP delays the effective date of FAS 157 for all
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value on a recurring basis (at least annually)
to fiscal years beginning after November 15, 2008, and interim periods within
those fiscal years.  The impact of adoption on July 1, 2008, is not
expected to  have a material impact on the Company’s consolidated
financial position or results of operations.
 
 In
February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities.  The standard provides
companies with an option to report selected financial assets and liabilities at
fair value and establishes presentation and disclosure requirements designed to
facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities.  The new
standard is effective for the Company on July 1, 2008.  The impact of
adoption on July 1, 2008, is not expected to  have a material impact
on the Company’s consolidated financial position or results of
operations.
 
 In March
2008, the FASB issued Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities an Amendment of FASB Statement No. 133
(“SFAS 161”).  SFAS 161 amends Statement 133 by requiring expanded
disclosures about an entity’s derivative instruments and hedging activities, but
does not change Statement 133’s scope or accounting.  This statement
requires increased qualitative, quantitative, and credit-risk
disclosures.  SFAS 161 also amends Statement No. 107 to clarify that
derivative instruments are subject to Statement 107’s
concentration-of-credit-risk disclosures.  SFAS 161 is effective for
fiscal years beginning on or after November 15, 2008.  The Company
does not expect the adoption to have a material impact on the Company’s
consolidated financial position or results of
operations.
   10
 Table of Contents
  Note
8 - Pending Investigation
  As
previously disclosed in the Company’s Annual Report on Form 10-KSB for its
fiscal year ended June 30, 2007, filed with the SEC on September 28, 2007,
during the course of a special investigation being conducted by the Audit
Committee of the Board, which included engaging a team of outside specialists
and advisers to assist in the investigation, evidence of irregularities in
connection with the Company’s stock conversion and initial public offering in
2005, including the alleged unauthorized receipt by certain investors of shares
of stock in the offering, was uncovered. On January 31, 2008, the Company
announced that its Board of Directors concluded the
investigation.   The Company has not uncovered credible evidence
of fraud or illegal acts in the connection of the conversion and
offering.  The investigation identified two instances in which certain
investors who purchased shares in the conversion were later determined to not be
eligible to do so.  As a result, 5,200 shares of stock were
repurchased from these certain investors at the initial public offering price of
$10 in January, 2008.  Year-to-date, the Company has incurred costs of
$474,815 related to this investigation.
  11
 Table of Contents
  Item 2.    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; credit
deterioration in our loan portfolio that would cause us to further increase our
allowance for loan losses; legislative/regulatory changes; monetary and fiscal
policies of the U.S. Government, including policies of the U.S. Treasury and the
Federal Reserve Board; the quality or composition of the loan and securities
portfolios; demand for loan products in our market areas; deposit flows;
competition; demand for financial services in the Company’s market area; and
changes in accounting principles, policies, and guidelines.  These
risks and uncertainties should be considered in evaluating forward-looking
statements, and undue reliance should not be placed on such
statements.
  Comparison
of Financial Condition at March 31, 2008 and June 30, 2007
  The
Company’s total assets decreased $13.7 million, or 10.33%, to $118.9 million at
March 31, 2008, from $132.6 million at June 30, 2007.
  Cash and
cash equivalents consisting primarily of Federal Funds Sold decreased $17.1
million to $4.3 million at March 31, 2008, from $21.4 million at June 30, 2007,
as a result of the Company using the excess liquidity to fund loan demand and
the funding of certain maturing certificate of deposits.
  Securities
available for sale decreased $6.4 million, or 40.88%, to $9.2 million at March
31, 2008, from $15.6 million at June 30, 2007.  The decrease is the
result of securities maturing or being repaid during the nine months ended March
31, 2008.  We used the proceeds received as a result of these
maturities or repayments to fund our loan growth rather than to purchase
additional investment securities.
  Loans
increased $10.2 million, or 12.21%, to $93.7 million at March 31, 2008, from
$83.5 million at June 30, 2007.  The increase in loans was the result
of increased loan demand, and occurred primarily in real estate and home equity
loans.
  Total
deposits decreased $13.6 million, or 13.80%, to $85.1 million at March 31, 2008,
from $98.7 million at June 30, 2007, 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 issued during the promotion of the Bank’s opening of its
Frankfort, Illinois and Schererville, Indiana branch locations during fiscal
2007.
  12
 Table of Contents
 Deposits
are detailed as below:
  March
      31,
                  2008
              
              
              June
      30,
                  2007DepositsDemand
              
              $
              9,944,438
              
              
              $
              12,017,560Money
      Market
              
              
              3,031,698
              
              
              
              4,191,974Savings
              
              
              25,956,959
              
              
              
              27,618,061Certificates
      of Deposit
              
              
              39,432,000
              
              
              
              47,114,018IRAs
              
              
              6,692,584
              
              
              
              7,734,278Total
      Deposits
              
              $
              85,057,679
              
              
              $
              98,675,891
 
  Federal
Home Loan Bank advances increased to $1.5 million at March 31, 2008, from no
advances at June 30, 2007, as a result of the need to fund loan demand and
replace the maturing of certain certificates of deposit.
  Total
stockholders’ equity was $30.1 million at March 31, 2008, compared to $31.7
million at June 30, 2007, a decrease of $1.6 million.  This decrease
was primarily the result of a net loss for the year-to-date of $2.1 million
offset by a decrease in unrealized losses on securities available-for-sale of
$199,000 and the release of unearned ESOP shares during the period with a value
of $220,000.
  Comparison
of Results of Operation for the Three Months and Nine Months Ended March 31,
2008 and 2007
  General.  The net
loss for the three months ended March 31, 2008, was $1.4 million, an increase in
net loss of $1.1 million, from the same period in 2007.  For the nine
months ended March 31, 2008, the net loss was $2.1 million, an increase in net
loss of $1.5 million, from the same period last year.  The increase in
the net loss for the three months ended March 31, 2008, resulted primarily from
an increase in the provision for loan losses of $1.1 million, an increase in
non-interest expense of $50,000, and a decrease in income tax benefit of
$94,000, partially offset by an increase in net interest income of
$76,000.  The increase in net loss for the nine months ended March 31,
2008, resulted primarily from an increase in the provision for loan losses of
$1.2 million, an increase in non-interest expense of $220,000, a decrease in
income tax benefit of $327,000, and a decrease in non-interest income of $69,000
partially offset by an increase in net interest income of $236,000.
  Net Interest
Income.  Net interest income increased $76,000 to $1.2 million
for the three months ended March 31, 2008, from $1.1 million for the same period
in 2007.  Net interest income increased $236,000 to $3.6 million for
the nine months ended March 31, 2008, from the same period in 2007. The net
interest rate spread increased to 3.77% and 3.76% for the three- and nine-months
ended March 31, 2007, from 3.16% and 3.37% for the same period in 2007. The net
interest margin increased to 4.35% and 4.30% for the three- and nine-month
periods ended March 31, 2008, from 3.71% and 3.90% for the same periods in 2007.
The increase in the loan portfolio with the reduction in deposits related to the
promotional certificates of deposit offered with the opening of two branch
locations were the primary cause for the increase in spread and
margin.
  Interest
Income.  Total interest income was $1.7 million for the three
months ended March 31, 2008, a decrease of $83,000 from the same period in
2007.  Total interest income increased $154,000 to $5.6 million for
the nine months ended March 31, 2008, from $5.4 million for the same period in
2007.  For the three and nine months ended March 31, 2008, average
interest-earning assets decreased to $108.5 million and $111.7 million from
$116.3 million and $114.1 million for the same period in
2007.  The
   13
 Table of Contents
   decrease
in interest income was the result of decreases in the securities portfolio and
Federal Funds Sold for the respective periods partially offset by an increase in
the loan portfolio. The yield on interest-earning assets was 6.40% and 6.63% for
the three and nine months ended March 31, 2008, compared to 6.25% and 6.31% for
the comparable periods in 2007. While the decrease in yield for the three month
period ended March 31, 2008, was reflective of the current general interest rate
environment, the increase in yield for the nine month period ended March 31,
2008, was the result of an increase in the loan portfolio with its higher yields
compared to the yields on the securities and Federal Funds Sold
portfolios.  Because of the increase of non-performing loans,
approximately $26,000 less interest income was recorded during the
quarter.
  Interest
Expense.  Total interest expense decreased $159,000 to $582,000
for the three months ended March 31, 2008, as compared to $741,000 for the three
months ended March 31, 2007, while interest expense decreased $82,000 to $2.0
million for the nine months ended March 31, 2008, from $2.1 million for the same
period in 2007.  The average cost of funds decreased to 2.62% for the
three months ended March 31, 2008, from 3.09% for the same period in 2007 as a
result of the decreasing rate environment.  The cost of funds for the
nine months ended March 31, 2008, decreased to 2.88% from 2.94% for the same
period in 2007.
  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.  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 1.99% at March 31, 2008, from
..79% at June 30, 2007.
  The Bank
recorded a provision of $1.1 million and $1.2 million, during the three and nine
months ended March 31, 2008, respectively, based on management’s estimate of
probable incurred losses in the portfolio, which was reflective of an increase
in classified credits, impaired credits, changing economic conditions in the
Bank’s market areas and the growth and continued change in the composition of
the loan portfolio as management continues to emphasize growth in commercial and
commercial real estate loans.
  The Bank
had ten loan relationships that it considers to be impaired as of March 31,
2008, and two loans as of June 30, 2007.  The balance of the impaired
loans at March 31, 2008, and June 30, 2007, is $5.1 million and $709,000,
respectively.  The valuation allowance on impaired loans as of March
31, 2008, and June 30, 2007, is $1,217,000 and $120,000,
respectively.  The increase in impaired loans resulted
in
 14
 Table of Contents
 
 an
additional provision for loan losses of $1.0 million and $1.1 million for the
three and nine months ended March 31, 2008, respectively.  Four of
these credits, totaling $1.8 million with valuation allowances of $151,000, are
separate commercial real estate loan participations in Florida that have been
impacted by current economic and housing conditions in that
market.  The remaining six impaired relationships involve a 1-4 family
residential loan relationship, a non-owner occupied commercial real estate loan,
a construction and development loan, a commercial lease, and two commercial and
industrial loans.  During the third quarter, the two largest of these
loans, one to a residential builder and one commercial and industrial loan, were
classified as impaired and resulted in specific reserves
of  $910,000.
 
 The Bank
had identified the first of these two largest impaired loans as a potential
problem loan as of December 31, 2007.  During the quarter ended
March 31, 2008, the Bank released a portion of the residential real estate
collateral in exchange for a $576,000 principal reduction to reduce the overall
exposure to this credit given the weakening housing
market.  Additionally, the Bank received a second lien position on
other property.  The Bank established a specific reserve of $440,000
for the remaining loan balance of approximately $975,000.
  In
addition, the second loan management identified was a commercial and industrial
loan secured by receivables.   The balance of the loan at March
31, 2008, was approximately $650,000.  During the quarter ended March
31, 2008, the loan matured.  During the due diligence process for the
loan renewal the Bank developed a concern over the collectibility of the
receivables securing the loan.  As a result, the Bank has established
a specific reserve of approximately $470,000 for this loan as of March 31,
2008.
  As of March 31, 2008, all loans considered impaired were on
nonaccrual status.
  In
addition to its periodic and systematic loan review pursuant to the Bank’s loan
policy, management performed a detailed review during January 2008, to determine
whether the Bank has exposure to any “sub-prime” credit risk and, if so, the
amount of that exposure.  Based on that review, management did not
identify any such “sub-prime” loans.  In addition, all of the Bank’s
mortgage loans secured by 1-4 family properties are traditional, fixed-rate
loans.  The Bank’s exposure to the credit risk of adjustable-rate
repricing actions is also minimal.
  However,
while the Bank’s exposure to “sub-prime” credit risk is negligible, the Bank’s
concentration of credit secured by real estate, the general decline in real
estate values over the last year, and the continued deterioration of general
economic conditions in the Bank’s lending markets has resulted in a more
conservative approach in our impairment analysis and decisions, which is
reflected in part by the significant increase in the loan loss provision this
quarter.  If and as real estate values continue to decline, general
economic conditions continue to deteriorate,  and/or the financial
condition of certain of our borrowers continue to deteriorate, additional
impairment may be recognized, which, accordingly, would result in further
increases to our allowance for loan losses.  Management continues to
manage the Bank’s loan portfolio, specifically our non-performing loans, in an
attempt to mitigate this risk.
  Non-interest
Income.  Non-interest income decreased $1,000 to $147,000 for
the three-month period ended March 31, 2008, from the same period in
2007.  The decrease in the three-month period was primarily the result
of a $16,000 decrease in loan fee income, offset by increases of $14,000 in
service charges on deposit accounts and $1,000 in earnings on the cash surrender
value of life insurance.  Non-interest income was $401,000 and
$470,000 for the nine-month periods ended March 31, 2008 and 2007,
respectively.
  Non-interest
Expense.  Non-interest expense increased $50,000 to $1.6
million for the three months ended March 31, 2008, from $1.5 million for the
same period in 2007. Non-interest expense was $4.9 million and $4.7 million for
the nine-month periods ended March 31, 2008, and March 31,
2007,
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  respectively,
an increase of $220,000. These increases were primarily due to professional fees
of $60,000 and $475,000 associated with the previously disclosed internal
investigation conducted by the Company and an increase in professional fees of
$35,000 and $49,000 incurred due to additional costs related to third party loan
reviews, offset by decreases of $4,000 and $45,000 in supplies, $4,000 and
$106,000 in advertising and $32,000 and $123,000 in other expenses for the three
and nine months ended March 31, 2008, respectively, as compared to the same
periods in 2007.  These decreases were attributable to the new branch
openings in August 2006 with no similar activities occurring in the three- and
nine-month periods ended March 31, 2008.  Salaries and employee
benefits decreased $21,000 and $80,000 for the three- and nine-months ended
March 31, 2008, as compared to the same period in 2007.  The
decrease in salaries and employee benefits is primarily the result of a
reduction in employees and decrease in stock-based compensation expense as a
result of forfeited stock awards.
  As
previously disclosed in our press release dated April 1, 2008, the Company is
closing its branch located at 17130 Torrence Avenue, in Lansing, Illinois
effective Monday, June 30, 2008.  The decision to close the branch was
due primarily to a shrinking customer base in that location given our customers’
clear preference to bank at our other, recently established locations in
Frankfort, Illinois and Schererville, Indiana.  The Company estimates
that the Bank will recognize a cost savings of approximately $35,000 per month
as a result of the branch closing.  A one-time charge to earnings of
approximately $125,000 is expected in fiscal year 2008, as a result of the
closure.  In addition, the Bank will incur approximately $97,000 in
expenses in fiscal year 2009 until the lease expires in February
2009.
  Provision for Income
Taxes.  The income tax benefit decreased $94,000 and $327,000
for the three- and nine-months ended March 31, 2008, from the comparable period
in 2007.  Beginning April 1, 2007, the Company ceased recording tax
benefits until net income is recognized to offset these benefits.
  Liquidity
and Capital Resources
  Liquidity.  Liquidity
management is measured and monitored on both a short- and long-term basis,
allowing management to better understand and react to emerging balance sheet
trends.  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 and calls of securities and 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.  We utilize FHLB advances as needed.  At March
31, 2008, there were $1.5 million of FHLB advances outstanding.
  The
Company’s cash flows are comprised of three primary
classifications:  cash flows from operating activities, investing
activities, and financing activities.  Net cash from operating
activities were $163,000 and $93,000 for March 31, 2008 and 2007,
respectively.  Net cash (used in) from investing activities consisted
primarily of disbursements for loan originations and participation interest and
the purchase of securities, offset by principal collections on loans, proceeds
from maturing securities and paydowns on mortgage backed
securities.  Net cash used from investing activities were $(4.8)
million and $(2.3) million for March 31, 2008 and 2007,
respectively.  Net cash (used) from financing activities consisted
primarily of the activity in deposit accounts, FHLB advances, and treasury stock
purchases.  The net cash used from financing activities was $(12.4)
million and $18.1 million at March 31, 2008 and 2007.
  From June
30, 2007, through March 31, 2008, the Company received proceeds of $6.7 million
from sales, maturities, calls, and paydowns of available-for-sale
securities.  These proceeds were primarily reinvested in the loan
portfolio.
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  At March
31, 2008, the Company had outstanding commitments to originate $8.7 million in
loan originations, $8.3 million in unfunded lines, and letters of credit
outstanding of $515,000.  In addition, as of March 31, 2008, the total
amount of certificates of deposit that were scheduled to mature in the next 12
months equaled $40.9 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.  As of March 31, 2008, the Bank had $5.3 million of
available credit from the FHLB.
  Capital.  The Bank
is required to maintain regulatory capital sufficient to meet Tier 1 leverage,
Tier 1 risk-based and total risk-based capital ratios of at least 4.0%, 4.0% and
8.0%, respectively.  At March 31, 2008, the Bank exceeded each of its
capital requirements with ratios of 18.21%, 21.67% and 22.84%,
respectively.
  Critical
Accounting Policies and Estimates
  The
accounting and reporting policies of the Company are in accordance with U.S.
generally accepted accounting principles and conform to general practices within
the banking industry.  Accounting and reporting policies for the
allowance for loan losses and income tax are deemed critical because they
involve the use of estimates and require significant management
judgments.
  Allowance for Loan
Losses.  The allowance for loan losses is an amount that
management believes will be adequate to absorb probable incurred losses in
existing loans, taking into consideration such factors as past loss experience,
changes in the nature and volume of the portfolio, overall portfolio quality,
loan concentrations, specific problem loans, and current economic conditions
that affect the borrower’s ability to pay.  Determination of the
allowance is inherently subjective due to the above mentioned
reasons.  Loan losses are charged off against the allowance when
management believes that the full collectability of the loan is
unlikely.  Recoveries of amounts previously charged off are credited
to the allowance.  Allowances established to provide for losses under
commitments to extend credit, or recourse provisions under loan sales agreements
or servicing agreements are classified with other liabilities.
  A loan is
considered impaired when it is probable that not all principal and interest
amounts will be collected according to the loan contract.  Residential
mortgage, installment and other consumer loans are collectively evaluated for
impairment.  Individual commercial loans are evaluated for
impairment.  Impaired loans are recorded at the loan’s fair value by
the establishment of a specific allowance where necessary.  The fair
value of collateral-dependent loans is determined by the fair value of the
underlying collateral.  The fair value of noncollateral-dependent
loans is determined by discounting expected future interest and principal
payments at the loan’s effective interest rate.
  The
Company maintains the allowance for loan losses at a level adequate to absorb
management’s estimate of probable losses inherent in the loan
portfolio.  Management believes that it uses the best information
available to determine the adequacy of the allowance for loan
losses.  However, future adjustments to the allowance may be necessary
and the results of operations could be significantly and adversely affected if
circumstances differ substantially from the assumptions used in making the
determinations.
  Income
Taxes.  Accounting for income taxes is a critical accounting
policy due to the subjective nature of certain estimates that are involved in
the calculation.  The Company uses an asset/liability method of
accounting for income taxes in which deferred tax assets and liabilities are
established for temporary differences between the financial reporting basis and
the tax basis of the Company’s assets and liabilities.  The Company
must assess the realization of the deferred tax asset quarterly, and to the
extent
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 Table of Contents
  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.
  Item
3.  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.
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  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.
 Item 2.    Unregistered Sales of Equity
Securities and Use of Proceeds.
  None
  Item 3.    Defaults Upon Senior
Securities.
  None
  Item 4.    Submission of Matters to a
Vote of Security Holders.
  None
  Item 5.    Other
Information.
  None
  Item 6.    Exhibits.
  (a)           The
exhibits filed as part of this Form 10-QSB 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.
  ROYAL FINANCIAL,
      INC.Date: 
      May 15, 2008
                By:
                /s/Leonard
      SzwajkowskiLeonard
      SzwajkowskiChief
      Executive Officer and President
 Date:  May
      15, 2008
                  By:
                  /s/Jodi
      A. OjedaJodi
      A. OjedaSenior
      Vice President andChief
      Financial Officer
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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.
 
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