UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q




(mark
one)




ý  QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)


OF
THE SECURITIES EXCHANGE ACT OF 1934




For
the quarterly period ended December 31, 2009




or




 ̈TRANSITION REPORT UNDER
SECTION 13 OR 15(d)


OF
THE EXCHANGE ACT




For the
transition period from _______to_______




Commission
File Number 000-51123




ROYAL
FINANCIAL, INC.


(Exact name of registrant specified in
its charter)




Delaware
              (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
      changes since last report)





Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.  Yes ý No  ̈




Indicate
by check mark whether the registrant is a large accelerated filed, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “larger accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.




Large accelerated filer  ̈                                                                         Accelerated
filer  ̈


Non-accelerated filer  ̈                                                                          Smaller
reporting company ý




Indicate
by a check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes  ̈ No ý




State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date:




Class
            Outstanding
      as of February 12, 2010Common
      Stock, $0.01 par value
            2,560,606














ROYAL
FINANCIAL, INC. AND SUBSIDIARY




FORM
10-Q




For
the quarterly period ended December 31, 2009




TABLE OF CONTENTS




PagePART
      I – FINANCIAL INFORMATIONItem
      1.     Financial StatementsConsolidated Statements of Financial Condition as
      of December 31, 2009 and June 30, 2009
            1Consolidated Statements of Operations for the
      three and six months ended December 31, 2009 and 2008
            2Consolidated Statements of Stockholders’
      Equity for the six months ended December 31, 2009 and
    2008
            3Consolidated Statements of Cash Flows for the
      six months ended December 31, 2009 and 2008
            5Notes to Unaudited Financial
      Statements
            6Item 2.     Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            12Item
      3.     Quantitative and Qualitative Disclosures
      About Market Risk
            23Item 4T.   Controls and
      Procedures
            23PART
      II – OTHER INFORMATIONItem 1.     Legal
      Proceedings
            24Item 1A.  Risk
    Factors
            24Item
      2.     Unregistered Sales of Equity Securities
      and Use of Proceeds
            27Item 3.     Defaults Upon
      Senior Securities
            27Item 4.     Submission of
      Matters to a Vote of Security Holders
            27Item 5.     Other
      Information
            28Item
      6.     Exhibits
            28SIGNATURES
            29EXHIBIT INDEX
            30








i
 Table of Contents





PART
I. – FINANCIAL INFORMATION




Item
1.  Financial
Statements.




ROYAL
FINANCIAL, INC. AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF FINANCIAL
CONDITION


December
31, 2009 and June 30, 2009




December
      31, 2009
            
            
            June
      30, 2009(Unaudited)ASSETSCash
      and non-interest-bearing balances in financial
institutions
            
            $
            2,362,747
            
            
            $
            2,764,827Interest-bearing
      balances in financial institutions
            
            
            548,859
            
            
            
            401,098Federal
      funds sold
            
            
            62,810
            
            
            
            6,329Total
      cash and cash equivalents
            
            
            2,974,416
            
            
            
            3,172,254Securities
      available-for-sale
            
            
            9,404,420
            
            
            
            3,996,370Loans
      receivable, net of allowance for loan losses of $4,443,000 at December 31,
      2009 and $5,225,000 at June 30, 2009
            
            
            72,568,090
            
            
            
            82,222,237Federal
      Home Loan Bank stock, at cost
            
            
            381,300
            
            
            
            381,300Premises
      and equipment, net
            
            
            3,817,757
            
            
            
            3,887,347Land
      available for sale
            
            
            689,705
            
            
            
            686,556Accrued
      interest receivable
            
            
            349,189
            
            
            
            346,716Other
      real estate owned
            
            
            152,225
            
            
            
            44,000Other
      assets
            
            
            427,083
            
            
            
            111,650Total
      assets
            
            $
            90,764,185
            
            
            $
            94,848,430LIABILITIES
      AND STOCKHOLDERS’ EQUITYLiabilitiesDeposits
            
            $
            65,312,500
            
            
            $
            70,486,574Advances
      from borrowers for taxes and insurance
            
            
            477,375
            
            
            
            591,046Federal
      Home Loan Bank advances
            
            
            6,600,000
            
            
            
            3,900,000Accrued
      interest payable and other liabilities
            
            
            930,179
            
            
            
            1,108,203Common
      stock in ESOP subject to contingent repurchase obligation
            
            
            290,950
            
            
            
            312,110Total
      liabilities
            
            
            73,611,004
            
            
            
            76,397,933Stockholders’
      equityPreferred
      stock, $.01 par value per share, authorized 1,000,000 shares; no issues
      are outstanding
            
            
            —
            
            
            
            —Common
      stock, $.01 par value per share, authorized 5,000,000 shares, 2,645,000
      shares issued at December 31, 2009 and June 30,
    2009
            
            
            26,450
            
            
            
            26,450Additional
      paid-in capital
            
            
            24,826,300
            
            
            
            24,783,189Retained
      deficit
            
            
            (4,859,944
            )
            
            
            (3,426,399
            )Treasury
      stock, 84,394 shares and 86,510 shares, at cost
            
            
            (1,249,452
            )
            
            
            (1,280,875
            )Accumulated
      other comprehensive income (loss), net of tax
            
            
            (95,580
            )
            
            
            (2,396
            )Unearned
      ESOP shares
            
            
            (1,203,643
            )
            
            
            (1,337,362
            )Reclassification
      of ESOP shares
            
            
            (290,950
            )
            
            
            (312,110
            )Total
      stockholders’ equity
            
            
            17,153,181
            
            
            
            18,450,497Total
      liabilities and stockholders’ equity
            
            $
            90,764,185
            
            
            $
            94,848,430





See
accompanying notes to these unaudited consolidated financial
statements.







1
 Table of Contents





ROYAL
FINANCIAL, INC. AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF OPERATIONS


Three and
Six months ended December 31, 2009 and 2008


(Unaudited)




Three
      Months Ended
                December
      31,
            
            
            Six
      Months Ended
                December
      31,2009
            
            
            2008
            
            
            2009
            
            
            2008Interest
      incomeLoans
            
            $
            1,114,508
            
            
            $
            1,434,184
            
            
            $
            2,375,090
            
            
            $
            2,954,647Securities,
      taxable
            
            
            35,897
            
            
            
            50,793
            
            
            
            66,397
            
            
            
            112,784Federal
      funds sold and other
            
            
            554
            
            
            
            467
            
            
            
            778
            
            
            
            9,234Total
      interest income
            
            
            1,150,959
            
            
            
            1,485,444
            
            
            
            2,442,265
            
            
            
            3,076,665Interest
      expenseDeposits
            
            
            179,004
            
            
            
            276,448
            
            
            
            389,195
            
            
            
            648,312Federal
      Home Loan Bank advances and other borrowings
            
            
            1,017
            
            
            
            20,442
            
            
            
            4,661
            
            
            
            29,090Total
      interest expense
            
            
            180,021
            
            
            
            296,890
            
            
            
            393,856
            
            
            
            677,402Net
      interest income
            
            
            970,938
            
            
            
            1,188,554
            
            
            
            2,048,409
            
            
            
            2,399,263Provision
      for loan losses
            
            
            1,385,269
            
            
            
            750,607
            
            
            
            1,385,269
            
            
            
            900,607Net
      interest income after provision for loan losses
            
            
            (414,331
            )
            
            
            437,947
            
            
            
            663,140
            
            
            
            1,498,656Non-interest
      incomeService
      charges on deposit accounts
            
            
            60,225
            
            
            
            70,344
            
            
            
            122,025
            
            
            
            154,767Earnings
      on cash surrender value of life insurance
            
            
            —
            
            
            
            49,208
            
            
            
            —
            
            
            
            98,184Other
      income
            
            
            9,030
            
            
            
            18,838
            
            
            
            18,052
            
            
            
            31,552Total
      non-interest income
            
            
            69,255
            
            
            
            138,390
            
            
            
            140,077
            
            
            
            284,503Non-interest
      expenseSalaries
      and employee benefits
            
            
            532,531
            
            
            
            606,961
            
            
            
            1,066,003
            
            
            
            1,237,250Occupancy
      and equipment
            
            
            140,876
            
            
            
            252,112
            
            
            
            288,238
            
            
            
            491,221Data
      processing
            
            
            67,819
            
            
            
            93,812
            
            
            
            138,051
            
            
            
            199,014Professional
      services
            
            
            154,970
            
            
            
            189,434
            
            
            
            340,082
            
            
            
            374,022Director
      fees
            
            
            35,600
            
            
            
            38,400
            
            
            
            74,000
            
            
            
            75,100Supplies
            
            
            4,750
            
            
            
            6,697
            
            
            
            16,152
            
            
            
            16,726Marketing
            
            
            10,509
            
            
            
            4,176
            
            
            
            21,749
            
            
            
            7,604FDIC
      insurance expense
            
            
            22,103
            
            
            
            12,778
            
            
            
            45,820
            
            
            
            16,876Insurance
      premiums
            
            
            16,113
            
            
            
            16,000
            
            
            
            31,892
            
            
            
            31,341Foreclosed
      asset expense
            
            
            72,510
            
            
            
            10,103
            
            
            
            78,880
            
            
            
            21,750Other
            
            
            74,981
            
            
            
            79,320
            
            
            
            135,895
            
            
            
            165,928Total
      non-interest expense
            
            
            1,132,762
            
            
            
            1,309,793
            
            
            
            2,236,762
            
            
            
            2,636,832Net
      loss
            
            $
            (1,477,838
            )
            
            $
            (733,456
            )
            
            $
            (1,433,545
            )
            
            $
            (853,673
            )Basic
      and diluted loss per share
            
            $
            (0.60
            )
            
            $
            (0.31
            )
            
            $
            (0.58
            )
            
            $
            (0.36
            )Comprehensive
      loss
            
            $
            (1,598,763
            )
            
            $
            (723,513
            )
            
            $
            (1,526,729
            )
            
            $
            (840,923
            )





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, 2008


(Unaudited)




2008
              
              Common
      Stock
              
              
              Additional
                Paid-In
      Capital
              
              
              Retained
                Earnings
              
              
              Accumulated
                Other
                Comprehensive
                Income
              
              
              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
      loss:Net
      income gain (loss)
              
              
              —
              
              
              
              —
              
              
              
              (853,673
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (853,673
              )Change
      in fair value of securities available-for-sale, net
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              12,750
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              12,750Total
      comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (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












3
 Table of Contents





ROYAL
FINANCIAL, INC. AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY


Six
months ended December 31, 2009


(Unaudited)




2009
            
            Common
      Stock
            
            
            Additional
                Paid-In
                Capital
            
            
            Retained
                Deficit
            
            
            Accumulated
                Other
                Comprehensive
                Loss
            
            
            Unearned
                ESOP
                Shares
            
            
            Amount
                Reclassified
      on
                ESOP
      Shares
            
            
            Treasury
                Stock
            
            
            TotalBalance
      at July 1, 2009
            
            $
            26,450
            
            
            $
            24,783,189
            
            
            $
            (3,426,399
            )
            
            $
            (2,396
            )
            
            $
            (1,337,362
            )
            
            $
            (312,110
            )
            
            $
            (1,280,875
            )
            
            $
            18,450,497Comprehensive
      lossNet
      loss
            
            
            —
            
            
            
            —
            
            
            
            (1,433,545
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (1,433,545
            )Change
      in fair value of securities available-for-sale, net
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (93,184
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (93,184
            )Total
      comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,526,729
            )Reclassification
      due to change in fair value of common stock in ESOP subject to contingent
      repurchase obligation
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            21,160
            
            
            
            —
            
            
            
            21,160Release
      of 10,580 of unearned ESOP shares
            
            
            —
            
            
            
            (105,259
            )
            
            
            —
            
            
            
            —
            
            
            
            133,719
            
            
            
            —
            
            
            
            —
            
            
            
            28,460Issuance
      of 2,116 shares to RRP plan
            
            
            —
            
            
            
            (31,423
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            31,423
            
            
            
            —Stock-based
      compensation
            
            
            —
            
            
            
            179,793
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            179,793Balance
      at December 31, 2009
            
            $
            26,450
            
            
            $
            24,826,300
            
            
            $
            (4,859,944
            )
            
            $
            (95,580
            )
            
            $
            (1,203,643
            )
            
            $
            (290,950
            )
            
            $
            (1,249,452
            )
            
            $
            17,153,181







See
accompanying notes to these unaudited consolidated financial
statements.







4
 Table of Contents





ROYAL
FINANCIAL, INC. AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF CASH FLOWS


Six
months ended December 31, 2009 and 2008


(Unaudited)




2009
            
            
            2008Cash
      flows from operating activitiesNet
      loss
            
            $
            (1,433,545
            )
            
            $
            (853,673
            )Adjustments
      to reconcile net loss
              to
      net cash from operating activities:Depreciation
            
            
            104,629
            
            
            
            185,875Provision
      for loan losses
            
            
            1,385,269
            
            
            
            900,607Bank-owned
      life insurance income
            
            
            —
            
            
            
            (98,183
            )ESOP
      expense
            
            
            28,460
            
            
            
            73,115Stock-based
      compensation
            
            
            179,793
            
            
            
            151,056Loss
      on sale of real estate owned
            
            
            32,614
            
            
            
            —Change
      in accrued interest receivable and other assets
            
            
            (319,141
            )
            
            
            73,522Change
      in other accrued interest payable and liabilities
            
            
            (178,023
            )
            
            
            (628,140
            )Net
      cash used
      inoperating activities
            
            
            (199,944
            )
            
            
            (195,821
            )Cash
      flows from investing activitiesProceeds
      from sales, maturities, calls, and pay downs
              of
      available for sale securities
            
            
            —
            
            
            
            3,528,337Purchase
      of securities available for sale
            
            
            (5,500,000
            )
            
            
            —Change
      in loans receivable
            
            
            8,123,039
            
            
            
            (1,749,470
            )Purchase
      of Federal Home Loan Bank stock
            
            
            —
            
            
            
            (78,700
            )Purchase
      of premises and equipment
            
            
            (38,188
            )
            
            
            (25,880
            )Proceeds
      from sale of other real estate owned
            
            
            5,000
            
            
            
            —Net
      cash from investing activities
            
            
            2,589,851
            
            
            
            1,674,287Cash
      flows from financing activitiesNet
      decrease in deposits
            
            
            (5,174,074
            )
            
            
            (12,854,268
            )Proceeds
      from Federal Home Loan Bank advances
            
            
            12,650,000
            
            
            
            45,050,000Repayments  of
      Federal Home Loan Bank advances
            
            
            (9,950,000
            )
            
            
            (35,850,000
            )Change
      in advances from borrowers for taxes and insurance
            
            
            (113,671
            )
            
            
            (72,438
            )Net
      cash used in financing activities
            
            
            (2,587,745
            )
            
            
            (3,726,706
            )Net
      change in cash and cash equivalents
            
            
            (197,838
            )
            
            
            (2,248,240
            )Cash
      and cash equivalentsBeginning
      of the period
            
            
            3,172,254
            
            
            
            5,924,849End
      of period
            
            $
            2,974,416
            
            
            $
            3,676,609Supplemental
      cash flow information:Interest
      paid
            
            $
            397,116
            
            
            $
            1,239,058Supplemental
      noncash disclosures:Common
      stock in ESOP subject to contingent repurchase obligation
            
            $
            290,950
            
            
            $
            487,526Transfer
      from loan portfolio to real estate owned
            
            $
            145,839
            
            
            $
            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 six month periods ended December 31, 2009 and
2008.  Significant intercompany accounts and transactions have been
eliminated in consolidation.




The
accompanying unaudited interim consolidated financial statements have been
prepared pursuant to the rules and regulations for reporting on Form
10-Q.  Accordingly, certain disclosures required by U.S. generally
accepted accounting principles (GAAP) are not included herein.  These
interim financial statements should be read in conjunction with the audited
financial statements and accompanying notes of the Company for the fiscal years
ended June 30, 2009 and 2008.  The results of the Company’s operations
for any interim period are not necessarily indicative of the results of the
Company’s operations for any other interim period or for a full fiscal
year.




Interim
statements are subject to possible adjustment in connection with the annual
audit of the Company’s financial statements for the fiscal year ending June 30,
2010.  In the opinion of management of the Company, the accompanying
unaudited interim consolidated financial statements reflect all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation
of the consolidated financial position and consolidated results of operations
for the periods presented.  The Company has evaluated subsequent
events for potential recognition and/or disclosure through February 16,
2010, the date the financial statements included in this Quarterly Report on
Form 10-Q were issued.




Note
3 - Use of Estimates and Significant Accounting Policies




The
preparation of the consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect amounts
reported in the consolidated financial statements.  Changes in these
estimates and assumptions are considered reasonably possible and may have a
material impact on the consolidated financial statements and thus actual results
could differ from the amounts reported and disclosed herein.  The
Company considers the allowance for loan losses and valuation allowance on
deferred tax assets to be critical accounting estimates.




Significant
accounting policies followed are presented in Note 1 to the consolidated
financial statements included in our Annual Report on Form 10-K for the fiscal
year ended June 30, 2009.




Note
4 - Regulatory Actions




During
the quarter ended December 31, 2009, the Illinois Department of Financial and
Professional Regulation (the “IDFPR”) conducted a regularly scheduled
examination of the Bank.  As a result of certain issues identified by
the IDFPR during the exam, the Bank expects to enter into an informal
supervisory agreement with the IDFPR and the FDIC.  Management expects
the agreement to require the Bank to continue to work to reduce the Bank’s
problem credits and to further develop and implement its procedures relating to
the collection of delinquent loans, as well as to adopt a written
plan







6
 Table of Contents





to return
the Bank to profitability.  Also, the Bank expects to be required to
obtain the consent of the IDFPR and the FDIC prior to paying any dividends to
the Company.  Management believes that it has already made substantial
progress towards compliance with the expected terms of the agreement and that
compliance with the agreement will not materially affect the Company’s business
or its operations.




Note
5 - New Accounting Pronouncements




ASC Topic
825, Financial
Instruments.  New authoritative guidance under ASC Topic 825
requires an entity to provide disclosures about fair value of financial
instruments in interim financial information and amends prior guidance to
require those disclosures in summarized financial information at interim
reporting periods.  The new guidance requires a publicly traded
company to include disclosures about the fair value of its financial instruments
whenever it issues summarized financial information for interim reporting
periods.  In addition, entities must disclose, in the body or in the
accompanying notes of its summarized financial information for interim reporting
periods and in its financial statements for annual reporting periods, the fair
value of all financial instruments for which it is practicable to estimate that
value, whether recognized or not recognized in the balance sheet, as required
ASC Topic 825.  The adoption of this new guidance at July 1, 2009 did
not impact the results of operations or financial position of the Bank, as it
only requires additional disclosures to the financial statements and related
financial information.




ASC Topic
260, Earnings per
share.  New authoritative guidance under ASC Topic 260 provides
that unvested share-based payment awards that contain non-forfeitable rights to
dividends or dividend equivalents (whether paid or unpaid) are participating
securities and shall be included in the computation of earnings per share
pursuant to the two-class method. The new guidance is effective for the Company
beginning on July 1, 2009. The adoption of this standard did not have any impact
on the Company’s financial statements.




In August
2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05, Measuring Liabilities at Fair
Value, which is codified as ASC 820, Fair Value Measurements and
Disclosures.  This Update provides amendments to Topic 820-10,
Fair Value Measurements and
Disclosures – Overall, for the fair value measurement of
liabilities.  This Update provides clarification that in circumstances
in which a quoted price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value using a
valuation technique that uses the quoted price of the
identical liability when traded as an asset, quoted prices for similar
liabilities or similar liabilities when traded as assets, or that is consistent
with the principles of Topic 820.  The amendments in this Update also
clarify that when estimating the fair value of a liability, a reporting entity
is not required to include a separate input or adjustment to other inputs
relating to the existence of a restriction that prevents transfer of the
liability.  The amendments in this Update also clarify that both a
quoted price in an active market for the identical liability at the measurement
date and the quoted price for the identical liability when traded as an asset in
an active market when no adjustments to the quoted price of the asset are
required are Level 1 fair value measurements.  The guidance provided
in this Update is effective for the first reporting period (including interim
periods) beginning after issuance.  The adoption of this Update did
not have a significant impact to the Company’s financial
statements.




Note
6 - Newly Issued But Not Yet Effective Accounting Standards




In June
2009, the FASB issued new authoritative guidance under ASC Topic 860, Transfers and Servicing, to
enhance reporting about transfers of financial assets, including
securitizations, and where companies have continuing exposure to the risks
related to transferred financial assets. ASC Topic 860 eliminates the concept of
a “qualifying special-purpose entity” and changes the requirements for
derecognizing financial assets. ASC Topic 860 also requires additional
disclosures about all continuing involvements with transferred financial assets
including information about gains and losses resulting from








7
 Table of Contents





transfers
during the period. The new authoritative guidance under ASC Topic 860 is
effective at the start of the fiscal year beginning after November 15, 2009.
Early application is not permitted. The adoption of this guidance is not
expected to have a material impact upon the Company.




Note
7 - Securities




The fair
value of securities available-for-sale and the related gross unrealized gains
and losses recognized in accumulated other comprehensive income (loss) were as
follows at:




Gross
            
            
            GrossAmortized
            
            
            Fair
            
            
            Unrealized
            
            
            UnrealizedCost
            
            
            Value
            
            
            Gains
            
            
            LossesDecember
      31, 2009U.S.
      government-sponsored entities
            
            $
            9,500,000
            
            
            $
            9,404,420
            
            
            $
            16,920
            
            
            $
            (112,500
            )June
      30, 2009U.S.
      government-sponsored entities
            
            $
            4,000,000
            
            
            $
            3,996,370
            
            
            $
            9,130
            
            
            $
            (12,760
            )





Debt
securities issued by U.S. government-sponsored entities consist of Federal Home
Loan Mortgage Corporation (FHLMC), Federal Home Loan Bank (FHLB), and Federal
National Mortgage Association (FNMA) debt securities.




The fair
value of securities available-for-sale at December 31, 2009 by contractual
maturity follows.  Expected maturities may differ from contractual
maturities because borrowers have the right to call or prepay obligations with
or without call or prepayment penalties. Securities not due at a single maturity
date, primarily mortgage-backed securities, are shown separately.




Due
      in one year or less
            
            $
            —Due
      from one to five years
            
            
            3,013,790Due
      from five to ten years
            
            
            3,890,630Due
      after ten years
            
            
            2,500,000Total
            
            $
            9,404,420





The Bank
had one security with an unrealized loss at December 31, 2009.  This
security was in an unrealized loss position for less than 12
months.  At June 30, 2009, there were two securities with an
unrealized loss. Both of these securities were in an unrealized loss position
for less than 12 months.




Note
8 - Loans




At
December 31, 2009 and June 30, 2009, loans receivable consisted of the
following:




December
      31,
                2009
            
            
            June
      30,
                2009Real
      estate loans:One-to-four
      family
            
            $
            30,249,138
            
            
            $
            31,592,926Commercial
            
            
            34,576,053
            
            
            
            41,291,320Multi-family
            
            
            4,115,812
            
            
            
            4,418,550Total
      real estate loans
            
            
            68,941,003
            
            
            
            77,302,796Commercial
      loans
            
            
            7,340,921
            
            
            
            9,512,007Consumer
      loans:Home
      equity loans
            
            
            635,152
            
            
            
            514,923Other
            
            
            66,438
            
            
            
            95,013Total
      consumer loans
            
            
            701,590
            
            
            
            609,936   8
 Table of Contents
  Loans,
      gross
            
            $
            76,983,514
            
            
            $
            87,424,739Net
      deferred loan fees
            
            
            27,576
            
            
            
            22,498Allowance
      for loan losses
            
            
            (4,443,000
            )
            
            
            (5,225,000
            )Loans,
      net
            
            $
            72,568,090
            
            
            $
            82,222,237




A summary
of changes in the allowance for loan losses for the six months ended December
31, 2009 and 2008 is as follows:




2009
            
            
            2008Balance
      at beginning of period
            
            $
            5,225,000
            
            
            $
            2,060,000Provision
      for loan loss
            
            
            1,385,269
            
            
            
            900,607Charge
      offs
            
            
            (2,168,320
            )
            
            
            (540,607
            )Recoveries
            
            
            1,051
            
            
            
            —Balance
      at end of period
            
            $
            4,443,000
            
            
            $
            2,420,000





A summary
of impaired and non-performing loans at December 31, 2009 and June 30, 2009 is
as follows:




December
      31,
                2009
            
            
            June
      30,
                2009Loans
      with allocated allowance for loan loss at period end
            
            $
            168,771
            
            
            $
            948,689Loans
      with no allocated allowance for loan loss at period end
            
            
            10,989,270
            
            
            
            9,283,828Total impaired and
      non-performing loans
            
            $
            11,158,041
            
            
            $
            10,232,517Amount
      of the allowance for loan losses allocated to impaired loans at period
      end
            
            $
            52,000
            
            
            $
            274,000Interest
      income recognized during impairment
            
            
            —
            
            
            
            —Cash
      basis interest income recognized
            
            
            —
            
            
            
            —Average
      impaired loans for the period end
            
            $
            10,934,461
            
            
            $
            10,798,286





Non-performing
loans were as follows at December 31, 2009 and June 30, 2009:




December
      31,
                2009
            
            
            June
      30,
                2009Loans
      past due over 90 days still on accrual
            
            $
            204,583
            
            
            $
            48,000Nonaccrual
      loans
            
            $
            10,112,347
            
            
            $
            9,178,000





Note
9 - Income (Loss) Per Share




Basic
earnings (loss) per share of common stock is computed on the basis of the
weighted average number of common stock shares outstanding. Diluted earnings
(loss) per share of common stock is computed on the basis of the weighted
average number of common shares outstanding plus the effect of the assumed
conversion of outstanding stock options. The following table presents a
reconciliation of the components used to compute basic and diluted loss per
share for the three and six month periods ended December 31, 2009 and
2008.  ESOP shares and restricted stock are considered outstanding for
the calculations.






9
 Table of Contents




Three
      Months
                Ended
                December
      31, 2009
            
            
            Three
      Months
                Ended
                December
      31, 2008
            
            
            Six
      Months
                Ended
                December
      31, 2009
            
            
            Six
      Months
                Ended
                December
      31, 2008Basic
      and diluted loss per shareNet
      income (loss) as reported
            
            $
            (1,477,838
            )
            
            $
            (733,456
            )
            
            $
            (1,433,545
            )
            
            $
            (853,673
            )Weighted
      average common shares outstanding
            
            
            2,454,266
            
            
            
            2,397,930
            
            
            
            2,453,458
            
            
            
            2,394,462Basic
      and diluted earnings (loss) per share
            
            
            (0.60
            )
            
            
            (0.31
            )
            
            
            (0.58
            )
            
            
            (0.36
            )




The
effect of stock options was not included in the calculation of diluted loss per
share for the three and six months ended December 31, 2009 and 2008 because to
do so would have been anti-dilutive for all shares given the Company’s losses
for the period.




Note
10 - Fair Value




ASC
820-10 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.  This standard also
establishes a fair value hierarchy which requires an entity to maximize the use
of observable inputs and minimize the use of unobservable inputs when measuring
fair value.  The standard describes three levels of inputs that may be
used to measure fair value:




Level
1:  Quoted prices (unadjusted) for identical assets or liabilities in
active markets that the entity has the ability to access as of the measurement
date.





Level
2:  Significant other observable inputs other than Level 1 prices such
as quoted prices for similar assets or liabilities, quoted prices in markets
that are not active, or other inputs that are observable or can be corroborated
by observable market data.




Level
3:  Significant unobservable inputs that reflect a reporting entity’s
own assumptions about the assumptions that market participants would use in
pricing an asset or liability.




Assets and Liabilities
Measured on a Recurring Basis




The fair
values of securities available-for-sale are determined by matrix pricing, which
is a mathematical technique widely used in the industry to value debt securities
without relying exclusively on quoted prices for the specific securities but
rather by relying on the securities’ relationship to other benchmark quoted
securities (Level 2 inputs).




Assets
and liabilities measured at fair value on a recurring basis are summarized
below:




Fair Value
      Measurements:SignificantQuoted
      Prices in
            
            
            OtherActive
      Markets for
            
            
            ObservableTotal
      Fair
            
            
            Identical
      Assets
            
            
            InputsValue
            
            
            (Level 1)
            
            
            (Level 2)Assets
      at December 31, 2009:Securities
      available-for-saleU.S.
      government-sponsored entities
            
            $
            9,404,420
            
            
            $
            —
            
            
            $
            9,404,420Assets
      at June 30, 2009:Securities
      available-for-saleU.S.
      government-sponsored entities
            
            $
            3,996,370
            
            
            $
            —
            
            
            $
            3,996,370





10
 Table of Contents





Assets
and liabilities measured at fair value on a non-recurring basis are impaired
loans with specific allocations.




The fair
value of impaired loans with specific allocations of the allowance for loan
losses is generally based on recent real estate appraisals.  These
appraisals may utilize a single valuation approach or a combination of
approaches including comparable sales and the income
approach.  Adjustments are routinely made in the appraisal process by
the appraisers to adjust for differences between the comparable sales and income
data available. Such adjustments are typically significant and result in a
Level 3 classification of the inputs for determining fair
value.  Collateral may be real estate and/or business assets including
equipment, inventory and/or accounts receivable and is determined based on
appraisals by qualified licensed appraisers hired by the
Company.  Appraised and reported values may be discounted based on
management’s historical knowledge, changes in market conditions from the time of
valuation, and/or management’s expertise and knowledge of the client and
client’s business.  Impaired loans are reviewed and evaluated on at
least a quarterly basis for additional impairment and adjusted accordingly,
based on the same factors identified above.




One
impaired loan, which was collateral dependent, was measured for impairment using
the fair value of the collateral, had a carrying amount of $169,000 with a
valuation allowance of $52,000 at December 31, 2009.  There was a
$52,000 provision for loan loss for this loan during the three month period
ended December 31, 2009.  At June 30, 2009 impaired loans with
specific reserves approximated $949,000
with reserves of $274,000.  The dollar amount of these specific
reserves are based on management’s internal discounted cash flow
analyses.




Carrying
amount and estimated fair values of financial instruments were as follows (in
thousands):




December
      31, 2009
            
            
            June
      30, 2009Carrying
                Amount
            
            
            Fair
                Value
            
            
            Carrying
                Amount
            
            
            Fair
                ValueFinancial
      assetsCash
      and cash equivalents
            
            $
            2,974
            
            
            $
            2,974
            
            
            $
            3,172
            
            
            $
            3,172Securities
      available for sale
            
            
            9,404
            
            
            
            9,404
            
            
            
            3,996
            
            
            
            3,996Loans,
      net
            
            
            72,568
            
            
            
            73,016
            
            
            
            82,222
            
            
            
            81,989FHLB
      stock
            
            
            381
            
            
            
            n/a
            
            
            
            381
            
            
            
            n/aAccrued
      interest receivable
            
            
            349
            
            
            
            349
            
            
            
            347
            
            
            
            347Financial
      liabilitiesDeposits
            
            $
            (65,313
            )
            
            $
            (66,835
            )
            
            $
            (70,487
            )
            
            $
            (72,128
            )Federal
      Home Loan Bank advances
            
            
            (6,600
            )
            
            
            (6,600
            )
            
            
            (3,900
            )
            
            
            (3,900
            )Advances
      from borrowers for taxes and insurance
            
            
            (477
            )
            
            
            (477
            )
            
            
            (591
            )
            
            
            (591
            )Accrued
      interest payable
            
            
            (23
            )
            
            
            (23
            )
            
            
            (26
            )
            
            
            (26
            )




The
methods and assumptions used to estimate fair value are as follows:




Carrying
amount is the estimated fair value for cash and cash equivalents, accrued
interest receivable and payable, demand deposits, advances from borrowers for
taxes and insurance, and variable rate loans or deposits that reprice frequently
and fully.  As described in more detail above, security fair values
are based on market prices or dealer quotes and, if no such information is
available, on the rate and term of the security and information about the
issuer.  For fixed rate loans or deposits and for variable rate loans
or deposits with infrequent repricing or repricing limits, fair value is based
on discounted cash flows using current market rates applied to the estimated
life and credit risk without considering widening credit spreads due to market
illiquidity.  The allowance for loan losses is considered to be a
reasonable estimate








11
 Table of Contents





of
discount for credit risk on loans.  It was not practicable to
determine the fair value of FHLB stock due to restrictions placed on its
transferability.  The estimated fair value of FHLB advances is based
on estimates of the rate the Company would pay on such funds at December 31,
2009 and June 30, 2009, applied for the time period until maturity. The fair
value of off-balance-sheet items is not material.




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 December 31, 2009 and June 30, 2009




The
Company’s total assets decreased $4.1 million, or 4.31%, to $90.8 million at
December 31, 2009, from $94.8 million at June 30, 2009.




Cash and
cash equivalents decreased $198,000, or 6.24%, to $3.0 million at December 31,
2009 from $3.2 million at June 30, 2009.




Securities
available for sale increased $5.4 million, or 135.32%, to $9.4 million at
December 31, 2009 from $4.0 million at June 30, 2009.  The increase
resulted from the purchase of $5.5 million of securities issued by U.S.
government sponsored entities in the second quarter, offset by a decrease in the
market valuation of $93,000. Low cost FHLB advances were drawn to fund this
purchase.




Loans,
net of allowance, decreased $9.6 million, or 11.74%, to $72.6 million at
December 31, 2009, from $82.2 million at June 30, 2009.  The
decrease in loans was a result of loan pay offs of $6.8 million, partially
offset by loan originations of $900,000,  loan charge offs of $2.2
million, additional loan loss provision of $1.4 million and the transfer of
assets from the loan portfolio to other real estate owned of $146,000 during the
six month period.




Other
assets increased $315,000 or 282.52% to $427,000 at December 31, 2009 from
$112,000 at June 30, 2009.  The increase in other assets was primarily
due to the remittance on December 30, 2009 of the required FDIC Prepaid
Assessment calculated at $354,000 for the institution.








12
 Table of Contents




Total
deposits decreased $5.2 million, or 7.34%, to $65.3 million at December 31, 2009
from $70.5 million at June 30, 2009. The decrease in deposits resulted from a
decrease in transaction accounts of $2.4 million and a decrease in time deposits
of $2.8 million. The decrease in time deposits was partially due to the maturity
of a $1.0 million certificate of deposit held for a public entity which
management chose not to renew due to the need to pay an above market interest
rate in order to retain the funds.




Deposits
are detailed below:




December
      31,
                2009
            
            
            June
      30,
                2009Savings
            
            $
            24,451,241
            
            
            $
            25,684,002NOW
      accounts
            
            
            4,366,086
            
            
            
            4,088,079Non-interest
      bearing checking
            
            
            5,379,511
            
            
            
            5,760,935Money
      market
            
            
            2,377,397
            
            
            
            3,466,828Transaction
      Accounts
            
            
            36,574,235
            
            
            
            38,999,844Certificates
      of deposit
            
            
            22,288,293
            
            
            
            25,013,857IRAs
            
            
            6,449,972
            
            
            
            6,472,873Time Deposits
            
            
            28,738,265
            
            
            
            31,486,730Total Deposits
            
            $
            65,312,500
            
            
            $
            70,486,574





Federal
Home Loan Bank advances increased $2.7 million, or 69.23%, to $6.6 million at
December 31, 2009 from $3.9 million at June 30, 2009.  Lower cost FHLB
advances were drawn to fund the purchase of $5.5 million in higher yielding
securities in an effort to increase the net interest margin.




Total
stockholders’ equity decreased $1.3 million, or 7.03%, to $17.1 million at
December 31, 2009 from $18.5 million at June 30, 2009, primarily a result of the
net loss of $1.4 million for the period.




Comparison
of Results of Operation for the Three and Six Months Ended December 31, 2009 and
2008




General.  The net
loss for the three months ended December 31, 2009 was $1.5 million, an
increase in net loss of $744,000, from the same period in 2008.  The
net loss for the six months ended December 31, 2009 was $1.4 million, an
increase in net loss of $580,000, from the same period in 2008.  The
increase in the net loss for the three months ended December 31, 2009
resulted primarily from an increase in the provision for loan losses of
$635,000, a decrease in net interest income of $218,000, a decrease in non
interest income of $102,000, partially offset by a decrease in non-interest
expense of $210,000. The increase in net loss for the six months ended
December 31, 2009 resulted primarily from an increase in the provision for
loan losses of $485,000, a decrease in net interest income of $351,000
and  a decrease in non interest income of
$177,000,  partially offset by a decrease in non-interest expense of
$433,000.




Net Interest
Income.  Net interest income decreased $218,000 for the three
months ended December 31, 2009, compared to the same period in
2008.  Net interest income decreased $351,000 for the six months ended
December 31, 2009 compared to the same period in 2008.  The net
interest rate spread decreased to 4.17% and 4.28% for the three and six months
ended December 31, 2009, respectively, from 4.40% and 4.33% for the same
periods in 2008.  The net interest margin decreased to 4.50% and 4.62%
for the three and six months ended December 31, 2009, respectively, from
4.81% and 4.78% for the same periods in 2008.






13
 Table of Contents




Interest
Income.  Total interest income was $1.2 million for the three
months ended December 31, 2009, a decrease of $335,000 from the same period
in 2008.  Total interest income was $2.4 million for the six months
ended December 31, 2009, a decrease of $634,000 from the same period in
2008.  For the three and six months ended December 31, 2009,
average interest-earning assets decreased to $86.3 million and $88.7 million,
respectively, from $98.8 million and $100.5 million for the same periods in
2008.  The decrease in interest income was primarily the result of a
decrease in the average balance of the loan portfolio.  Loan yields
decreased due to interest rate declines and an increase in non accrual
loans.  Average non accrual loans during the three and six month
periods ended December 31, 2009 and 2008 was $11.3 million and $9.4
million, respectively, and $10.1 million and $8.2 million with average rates of
7.92% and 8.14%, respectively, and 8.02% and 8.65%, respectively.  Non
accrual loans resulted in foregone interest of $206,000 and $139,000,
respectively, during the three month periods and $425,000 and $248,000,
respectively, during the six month periods ended December 31, 2009 and
2008.  The yield on interest-earning assets was 5.33% and 5.50% for
the three and six months ended December 31, 2009, respectively, compared to
6.01% and 6.13% for the same periods in 2008.




Interest
Expense.  Total interest expense decreased $117,000 to $180,000
for the three months ended December 31, 2009 as compared to $297,000 for
the three months ended December 31, 2008.  Interest expense
decreased $283,000 to $394,000 for the six months ended December 31, 2009
as compared to $677,000 for the six months ended December 31,
2008.  The average cost of funds decreased to 1.16% and 1.22% for the
three and six months ended December 31, 2009, respectively, compared to
1.61% and 1.80% for the same periods in 2008.  The reduction in
interest expense is a direct result of the decreasing rate environment and the
reduction in certificates of deposits.




The
following table shows 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, 2009 and 2008. Average balances are derived from
daily balances, and nonaccrual loans are included as interest-bearing loans for
purposes of these tables.
 
 Three
      months ended December 31,2009
              
              
              2008Average
              
              
              
              
              
              Average
              
              
              Average
              
              
              
              
              
              AverageBalance
              
              
              Interest
              
              
              Yield/Rate(1)
              
              
              Balance
              
              
              Interest
              
              
              Yield/Rate(1)Interest-earning
      assets:Loans
      receivable, net(2)
              
              $
              80,284,985
              
              
              $
              1,114,508
              
              
              
              5.55
              %
              
              $
              93,572,506
              
              
              $
              1,434,184
              
              
              
              6.13
              %Securities
      available-for-sale(3)
              
              
              4,570,652
              
              
              
              35,897
              
              
              
              3.14
              %
              
              
              4,558,501
              
              
              
              50,793
              
              
              
              4.46
              %Interest-bearing
      balances in  financial institutions(4)
              
              
              645,363
              
              
              
              282
              
              
              
              0.17
              %
              
              
              38,555
              
              
              
              54
              
              
              
              0.56
              %Federal
      funds sold
              
              
              416,962
              
              
              
              272
              
              
              
              0.26
              %
              
              
              217,513
              
              
              
              413
              
              
              
              0.76
              %Federal
      Home Loan Bank stock(5)
              
              
              381,300
              
              
              
              —
              
              
              
              —
              %
              
              
              430,840
              
              
              
              —
              
              
              
              —
              %Total
      interest-earning assets
              
              
              86,299,262
              
              
              
              1,150,959
              
              
              
              5.33
              %
              
              
              98,817,915
              
              
              
              1,485,444
              
              
              
              6.01
              %Noninterest-earning
      assets
              
              
              2,494,301
              
              
              
              
              
              
              
              
              
              
              
              12,912,951Total
      assets
              
              $
              88,793,563
              
              
              
              
              
              
              
              
              
              
              $
              111,730,866Interest-bearing
      liabilities:Interest-bearing
      deposits
              
              
              61,059,869
              
              
              
              179,004
              
              
              
              1.17
              %
              
              
              66,711,955
              
              
              
              276,448
              
              
              
              1.66
              %FHLB
      advances
              
              
              957,609
              
              
              
              969
              
              
              
              0.40
              %
              
              
              7,142,391
              
              
              
              20,007
              
              
              
              1.12
              %Federal
      funds purchased
              
              
              27,243
              
              
              
              48
              
              
              
              0.70
              %
              
              
              116,300
              
              
              
              435
              
              
              
              1.49
              %Total
      interest-bearing liabilities
              
              
              62,044,721
              
              
              
              180,021
              
              
              
              1.16
              %
              
              
              73,970,646
              
              
              
              296,890
              
              
              
              1.61
              %Noninterest-bearing
      liabilities
              
              
              8,636,270
              
              
              
              
              
              
              
              
              
              
              
              7,654,326Total
      equity capital(6)
              
              
              18,112,572
              
              
              
              
              
              
              
              
              
              
              
              30,105,894Total
      liabilities and equity capital
              
              $
              88,793,563
              
              
              
              
              
              
              
              
              
              
              $
              111,730,866Net
      average interest-earning assets
              
              $
              24,254,541
              
              
              
              
              
              
              
              
              
              
              $
              24,847,269Net
      interest income; interest rate spread(7)
              
              
              
              
              
              $
              970,938
              
              
              
              4.17
              %
              
              
              
              
              
              $
              1,188,554
              
              
              
              4.40
              %Net
      interest margin(8)
              
              
              
              
              
              
              
              
              
              
              4.50
              %
              
              
              
              
              
              
              
              
              
              
              4.81
              %





14
 Table of Contents





Six
      months ended December 31,2009
            
            
            2008Average
            
            
            
            
            
            Average
            
            
            Average
            
            
            
            
            
            AverageBalance
            
            
            Interest
            
            
            Yield/Rate(1)
            
            
            Balance
            
            
            Interest
            
            
            Yield/Rate(1)Interest-earning
      assets:Loans
      receivable, net(2)
            
            $
            83,260,468
            
            
            $
            2,375,090
            
            
            
            5.71
            %
            
            $
            93,942,058
            
            
            $
            2,954,647
            
            
            
            6.29
            %Securities
      available-for-sale(3)
            
            
            4,285,326
            
            
            
            66,397
            
            
            
            3.10
            %
            
            
            5,107,986
            
            
            
            112,784
            
            
            
            4.42
            %Interest-bearing
      balances in  financial institutions(4)
            
            
            526,091
            
            
            
            447
            
            
            
            0.17
            %
            
            
            53,329
            
            
            
            385
            
            
            
            1.44
            %Federal
      funds sold
            
            
            284,525
            
            
            
            331
            
            
            
            0.23
            %
            
            
            943,426
            
            
            
            8,849
            
            
            
            1.88
            %Federal
      Home Loan Bank stock(5)
            
            
            381,300
            
            
            
            —
            
            
            
            —
            %
            
            
            406,070
            
            
            
            —
            
            
            
            —
            %Total
      interest-earning assets
            
            
            88,737,710
            
            
            
            2,442,265
            
            
            
            5.50
            %
            
            
            100,452,869
            
            
            
            3,076,665
            
            
            
            6.13
            %Noninterest-earning
      assets
            
            
            2,428,914
            
            
            
            
            
            
            
            
            
            
            
            12,763,742Total
      assets
            
            $
            91,166,624
            
            
            
            
            
            
            
            
            
            
            $
            113,216,611Interest-bearing
      liabilities:Interest-bearing
      deposits
            
            
            62,854,453
            
            
            
            389,195
            
            
            
            1.24
            %
            
            
            70,758,764
            
            
            
            648,312
            
            
            
            1.83
            %FHLB
      advances
            
            
            1,857,609
            
            
            
            4,590
            
            
            
            0.49
            %
            
            
            4,280,435
            
            
            
            28,081
            
            
            
            1.31
            %Federal
      funds purchased
            
            
            20,844
            
            
            
            71
            
            
            
            0.68
            %
            
            
            104,195
            
            
            
            1,009
            
            
            
            1.94
            %Total
      interest-bearing liabilities
            
            
            64,732,906
            
            
            
            393,856
            
            
            
            1.22
            %
            
            
            75,143,394
            
            
            
            677,402
            
            
            
            1.80
            %Noninterest-bearing
      liabilities
            
            
            8,113,441
            
            
            
            
            
            
            
            
            
            
            
            7,996,144Total
      equity capital(6)
            
            
            18,320,277
            
            
            
            
            
            
            
            
            
            
            
            30,077,073Total
      liabilities and equity capital
            
            $
            91,166,624
            
            
            
            
            
            
            
            
            
            
            $
            113,216,611Net
      average interest-earning assets
            
            $
            24,004,804
            
            
            
            
            
            
            
            
            
            
            $
            25,309,475Net
      interest income; interest rate spread(7)
            
            
            
            
            
            $
            2,048,409
            
            
            
            4.28
            %
            
            
            
            
            
            $
            2,399,263
            
            
            
            4.33
            %Net
      interest margin(8)
            
            
            
            
            
            
            
            
            
            
            4.62
            %
            
            
            
            
            
            
            
            
            
            
            4.78
            %





(1)
            Yields
      and rates have been annualized where
  appropriate.


(2)
            Includes
      non-accrual loans. Interest foregone on non-accrual loans was $206,000 and
      $139,000 for three months ended December 31, 2009 and 2008, respectively.
      Interest foregone on non-accrual loans was $425,000 and $248,000 for the
      six months ended December 31, 2009 and 2008,
  respectively.


(3)
            Tax
      effective yield, assuming a 34%
rate.


(4)
            Includes
      interest-bearing demand deposits and repurchase
  agreements.


(5)
            The
      FHLB Chicago discontinued the payment of dividends on its stock in the
      third quarter of 2007.


(6)
            Includes
      retained earnings (deficit) and accumulated other comprehensive
      income.


(7)
            Interest
      rate spread represents the differences between the weighted average yield
      on interest-earning assets and the weighted average rate on
      interest-bearing liabilities.


(8)
            Net
      interest margin is net interest income divided by average interest-earning
      assets.




Provision for Loan
Losses.  Provisions for loan losses are charged to earnings to
bring the total allowance for loan losses to a level considered adequate by
management to cover probable incurred credit losses in the loan
portfolio.  In evaluating the level of the allowance for loan losses,
management considers historical loss experience, the types of loans and the
amount of loans in the loan portfolio, overall portfolio mix, the level of
past-due or classified loans, the status of past-due principal and interest
payments, loan-to-value ratios, adverse situations that may affect the
borrower’s ability to repay, estimated value of any underlying collateral, and
prevailing economic conditions and other qualitative and environmental factors
related to the collectability of the loan portfolio.  Generally,
groups of smaller







15
 Table of Contents





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 as well as more current loss experience over the
last six quarters, which management feels is more indicative of the current
economic cycle, and peer group data adjusted for current economic
conditions.  Homogenous loans that are risk rated special mention,
substandard, or doubtful are evaluated in the same manner except for the
utilization of increased qualitative factors. Certain homogenous loans may be
specifically evaluated for impairment based on the loan’s individual facts and
circumstances. Large, more complex loans, such as multi-family and larger
commercial real estate loans, are evaluated individually for impairment and
specific reserves are allocated when necessary.




Management
assesses the allowance for loan losses quarterly.  Management uses
current available information to recognize losses on loans; therefore, future
loan loss provisions may be necessary given the volatility of economic
conditions, the effect of such conditions on the financial condition of the
borrower and the borrower’s ability to repay the loan.  In addition,
regulatory agencies, as an integral part of their examination process,
periodically review the allowance for loan losses and may require us to
recognize additional provisions based on their judgment of information available
to them at the time of their examination.




Management
continues to evaluate the manner in which the Bank estimates probable incurred
losses.  This evaluation is inherently subjective, as it requires
estimates that are susceptible to significant revision, as more information
becomes available or as projected events change.




The
allowance for loan losses was $4.4 million, or 5.77% of total loans, at December
31, 2009, as compared to $5.2 million, or 5.98% of total loans, at June 30,
2009.  Included in the allowance for loan loss balance were specific
allocations to impaired loans of $52,000 at December 31, 2009 and $274,000 at
June 30, 2009.  Management believes that, as of December 31, 2009, the
allowance for loan losses was adequate to cover probable incurred
losses.




We
recorded a $1.4 million provision for loan losses during the three and six
months ended December 31, 2009 and gross charge-offs of $2.1 million and $2.2
million, respectively. The following is a discussion of the $2.1 million of loan
charge offs for the quarter ended December 31, 2009:




·
            Approximately
      $250,000 of the total charge-off amount was related to one commercial
      lease involving a wholesale jeweler located in the state of New Jersey
      which had a $250,000 loan balance and an associated $250,000 specific
      reserve previously allocated.




·
            A
      $3.8 million commercial real estate loan involving a commercial retail
      development located in Northwest Indiana was identified as impaired during
      the quarter.  In connection with the scheduled maturity of this
      loan on March 6, 2010, the Bank obtained an updated appraisal during the
      quarter which indicated a significant decline in the collateral
      value.  Due to the lack of sales activity relating to similar
      commercial real estate properties and the decline in value as reflected in
      the updated appraisal, the Bank deemed the loan impaired and charged off
      $1.2 million.  The remaining balance of $2.6 million is supported by
      the recent appraisal and the Bank is currently in workout for this credit
      and may consider a deed in lieu to resolve the matter
      efficiently.




·
            During
      the quarter management restructured a commercial real estate loan, secured
      by a commercial office property located in the Chicago area, as a troubled
      debt restructured note. Restructure was necessary due to the borrower
      losing its primary tenant (a failed financial institution)
      which  had a negative impact on the cash flows that had
      previously supported the loan; in addition there was a steep decline in
      the collateral value based on an updated appraisal obtained during the
      quarter.  As a result, management charged off
      $463,000.







16
 Table of Contents





·
            A $176,000
      commercial loan involving a retail business in the south suburbs of
      Chicago that closed its operations due to weak operating results caused by
      the current recession was deemed impaired during the
      quarter.  Upon management’s receipt of updated appraisals
      obtained in January, 2010 on residences that primarily secure this credit,
      a significant deterioration in those residential values warranted a
      charge-off of $113,000.  Management is negotiating viable
      workout strategies, including liquidation of all existing collateral, with
      the borrower.




·
            The
      remaining charge-offs were attributed to residential 1-4 family
      loans.




Impaired Loans.  As of
December 31, 2009, the Bank’s total impaired loans were $11.2 million. Non
accrual impaired loans were $10.1 million while $1.1 million impaired loans were
still accruing interest, compared to $9.2 million impaired non accrual loans and
$1.1 million still accruing interest at June 30, 2009.  Non
accrual loans resulted in foregone interest of approximately $206,000 for the
three months ended December 31, 2009, compared to $139,000 for the same period
in 2008. Non accrual loans resulted in foregone interest of approximately
$425,000 for the six months ended December 31, 2009, compared to $248,000 for
the same period in 2008.




The bank
had 22 impaired credit relationships, totaling $11.2 million as of December 31,
2009, compared to 23 impaired credit relationships, totaling $10.2 million, as
of June 30, 2009.  During the three months ended December 31, 2009,
three additional loans totaling $2.9 million were identified as impaired and one
loan totaling $200,000 was paid off.  Of the $2.9 million newly
identified impaired loans during the quarter, approximately $2.6 million is
related to the commercial real estate loan newly identified as impaired
involving a commercial retail development located in Northwest
Indiana discussed above as a potential problem credit.




The
following is a discussion of select previously disclosed impaired
loans.





·
            Two
      relationships with an aggregate outstanding balance of $390,000 involving
      separate commercial real estate participations for properties located in
      Florida; both loans are secured by ocean front properties and remain in
      foreclosure.




·
            Two
      separate loan participations with different lead banks both involving
      hotel complex property continue to be negatively impacted by the current
      economy.  A forbearance agreement has been executed relating to
      the first loan and the borrower on the second loan has filed for
      bankruptcy.  The aggregate outstanding balance of these two
      loans is $1.4 million.




·
            The
      bank continues foreclosure procedures against a single family home builder
      in the Chicagoland area.  The loan balance is approximately $1.9
      million.  A second credit with this borrower involving a secured
      commercial real estate loan with a balance of $128,000 at December 31,
      2009 continues to be paid as
agreed.




·
            A
      commercial multi-family loan secured by a property located in Wisconsin is
      paying as agreed under a repayment arrangement.  The loan
      balance at December 31, 2009 was
$443,000.




·
            The
      Bank restructured a commercial real estate loan secured by a commercial
      office property located in the Chicago area where the primary tenant in
      this multi-level office building was a financial institution that recently
      failed.  This lease space remains vacant.  The loan
      balance at December 31, 2009 was
$986,000.







17
 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, 2009
            
            
            June
      30, 2009
            
            
            December
      31, 2008Geographical
      Location
            
            Total Loans
            
            
            Impaired
      Loans
            
            
            %
            
            
            Total
      Loans
            
            
            Impaired
      Loans
            
            
            %
            
            
            Total Loans
            
            
            Impaired
      Loans
            
            
            %Illinois
            
            $
            57,322
            
            
            $
            5,184
            
            
            
            46.46
            %
            
            $
            65,522
            
            
            $
            6,399
            
            
            
            62.54
            %
            
            $
            68,247
            
            
            $
            6,765
            
            
            
            56.74
            %Florida
            
            
            798
            
            
            
            390
            
            
            
            3.50
            
            
            
            905
            
            
            
            482
            
            
            
            4.71
            
            
            
            2,613
            
            
            
            2,171
            
            
            
            18.21Michigan
            
            
            1,391
            
            
            
            1,187
            
            
            
            10.64
            
            
            
            1,622
            
            
            
            1,187
            
            
            
            11.60
            
            
            
            3,425
            
            
            
            2,986
            
            
            
            25.05Indiana
            
            
            14,541
            
            
            
            3,331
            
            
            
            29.86
            
            
            
            15,754
            
            
            
            715
            
            
            
            6.99
            
            
            
            14,670
            
            
            
            —
            
            
            
            —Wisconsin
            
            
            443
            
            
            
            443
            
            
            
            3.97
            
            
            
            500
            
            
            
            500
            
            
            
            4.89
            
            
            
            1,700
            
            
            
            —
            
            
            
            —Other
      States Combined
            
            
            2,488
            
            
            
            623
            
            
            
            5.57
            
            
            
            3,122
            
            
            
            949
            
            
            
            9.27
            
            
            
            3,279
            
            
            
            —
            
            
            
            —Total
      loans
            
            $
            76,983
            
            
            $
            11,158
            
            
            
            100.00
            %
            
            $
            87,425
            
            
            $
            10,232
            
            
            
            100.00
            %
            
            $
            93,934
            
            
            $
            11,922
            
            
            
            100.00
            %










The
following table represents information concerning impaired loans by category and
the percentage of impaired loans by category to total impaired
loans:




Dollar
amounts in thousands




December
      31, 2009
            
            
            June
      30, 2009
            
            
            December
      31, 2008Loan
      Category
            
            Impaired
      Amount
            
            
            %
      of Total Impaired
            
            
            Impaired
      Amount
            
            
            %
      of Total Impaired
            
            
            Impaired
      Amount
            
            
            %
      of Total ImpairedOne-to-four family
      loans
            
            $
            821
            
            
            
            7.36
            %
            
            $
            1,219
            
            
            
            11.91
            %
            
            $
            2,476
            
            
            
            22.06
            %Commercial
      real estate loans
            
            
            9,061
            
            
            
            81.21
            
            
            
            7,297
            
            
            
            71.32
            
            
            
            8,845
            
            
            
            72.98Multi-family
      loans
            
            
            443
            
            
            
            3.97
            
            
            
            553
            
            
            
            5.41
            
            
            
            —
            
            
            
            —Commercial
      loans
            
            
            808
            
            
            
            7.24
            
            
            
            1,136
            
            
            
            11.10
            
            
            
            601
            
            
            
            4.96Home
      Equity loans
            
            
            25
            
            
            
            0.22
            
            
            
            27
            
            
            
            0.26
            
            
            
            —
            
            
            
            —Other
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Total
            
            $
            11,158
            
            
            
            100.00
            %
            
            $
            10,232
            
            
            
            100.00
            %
            
            $
            11,922
            
            
            
            100.00
            %





Management
recognizes that the current economic environment continues to present an
extremely difficult challenge to many of its borrowers.  With the
housing and credit markets dramatically impacted by the current state of the
economy, management remains committed to continuing to take 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.




As the
tables above indicate, the dollar amount of our nonperforming assets has
remained relatively consistent over the last three quarters. Like many community
banks, we rely on real estate secured lending as our primary type of
lending.  Management has responded to the difficult economic times
before us by imposing and adhering to loan policy geographic concentration and
construction lending restrictions as well as continuing to enforce stricter
underwriting and loan structuring covenants.




Management
identifies nonperforming loans proactively and
aggressively.   These loans include nonaccrual loans and accruing
loans that are 90 days or more delinquent and are well secured.  Loans
in this
category include those with risk characteristics such as past maturity more than
90 days, those that have payments past due more than 90 days, those where the
borrower has experienced recent adverse operating cash flow or balance sheet
trends, or loans that have general risk characteristics that management believes
might jeopardize the future timely collection of principal and interest
payments.  Management does not consider extension or renewals of
credits with these characteristics.







18
 Table of Contents




Delinquent
Loans.We continue to monitor the performance of our loan
portfolio through regular contact with our clients, continuous management
portfolio review and careful monitoring of delinquency reports and internal
watch list and risk rating reports.  As the delinquent status of a
loan may determine its risk rating, the allowance for loan losses may be
directly affected by loans that are performing despite past due
status.




The
following table summarizes our delinquent loans that are past due and still
accruing interest, including those that are 90 days or more past due and well
secured; all delinquent loans as of December 31, 2009 consist of Illinois and
Indiana market area loans.  Management has determined that the
increase in delinquencies at December 31, 2009, compared to June 30, 2009
and December 31, 2008, is 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. These strategies are
managed by a dedicated workout specialist.




Dollar
amounts in thousands







December 31, 2009
            
            
            June 30, 2009
            
            
            December 31, 200830-89 Days
            
            
            +90 Days
            
            
            30-89 Days
            
            
            +90 Days
            
            
            30-89 Days
            
            
            +90 DaysOne-to-four
      family loans
            
            $
            1,115
            
            
            $
            203
            
            
            $
            291
            
            
            $
            
            
            
            $
            2,396
            
            
            $
            87Commercial
      real estate loans
            
            
            69
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            254
            
            
            
            —Multi-family
      loans
            
            
            330
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            333
            
            
            
            —Commercial  loans
            
            
            1,754
            
            
            
            —
            
            
            
            —
            
            
            
            48
            
            
            
            53
            
            
            
            —Home
      equity loans
            
            
            47
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            65
            
            
            
            —Share
      loans
            
            
            13
            
            
            
            2
            
            
            
            —
            
            
            
            —
            
            
            
            2
            
            
            
            —Total
      loan delinquencies
            
            $
            3,328
            
            
            $
            205
            
            
            $
            291
            
            
            $
            48
            
            
            $
            3,104
            
            
            $
            87





Included
in the 30-89 days past due is a $1.7 million commercial loan that matured in
November of 2009.  The Bank is in the process of completing its due
diligence and expects to renew this credit.  In addition, a principal
reduction of $600,000 was received on this loan subsequent to December 31,
2009.




Allowance for Loan
Losses.At December 31, 2009, the allowance for loan losses
was $4,443,000 or 5.77% of the total loan portfolio.  The loss
allowance is maintained by management at a level considered adequate to cover
probableincurred
losses inherent in the existing portfolio based on prior loan loss experience,
known and probable risks in the portfolio, adverse situations that may affect
the borrower’s ability to repay, the estimated value of any underlying
collateral, general economic conditions, and other factors and estimates that
are subject to change over time.




The Bank
relies, among other things, on its experienced senior management in determining
the appropriate allowance for loan losses on the commercial and commercial real
estate loan portfolio, as the Bank does not have a seasoned portfolio of
commercial and commercial real estate loans. Management reviews the composition
of the commercial and commercial real estate loan portfolio on a quarterly
basis. This includes reviewing delinquency trends, impaired loans, loan-to-value
ratios, and types of collateral. Management then compares this ratio to peer
group data and the FDIC state profile for Illinois banks as a means of
additional analysis. Based on these factors, we determined that the allocation
of the allowance for loan losses for these types of loans was appropriate at
December 31, 2009.


While
management believes that it determines the amount of the allowance based on the
best information available at the time, the allowance will need to be adjusted
as circumstances change and assumptions are updated. Future adjustments to the
allowance could significantly affect net income.







19
 Table of Contents




Specific Component of the Allowance
for Loan Losses.As disclosed in the Company’s Annual
Report on Form 10-K for the fiscal year ended June 30, 2009, the Company changed
the timing of recording charge-offs of estimated loan impairments during the
fourth quarter of the 2009 fiscal year.  The Company continues to
charge-off the estimated loss for loans where management deems either the timing
or the repayment to be significantly impaired. The charge-off value is based on
a loan’s current value compared to the present value of its projected future
cash flows, collateral value or market value, as is relevant for the particular
loan pursuant to ASC 310.  The collateral value is based on a recent
appraisal, if the Bank has full control of the asset, or stressing of an
existing appraised value based upon current market
conditions.  Charge-off and non-accrual policies are essentially
treated similarly for all loans types.  Management will establish a
specific reserve through the allowance for loan losses when the loss is
attributed to a troubled debt restructuring or when the Company does not believe
the loss to be confirmed.  At December 31, 2009, the specific
component of the reserve was $52,000, a decrease of $222,000 from $274,000 at
June 30, 2009. The decrease was primarily due to the full charge off of $250,000
for an impaired lease in which the entire amount was held as a specific reserve
on June 30, 2009.




Potential Problem
Loans.In determining the adequacy of the allowance for loan
losses the Bank regularly evaluates potential problem loans as to the ability of
the borrower to comply with the present loan repayment terms.  The
Bank has identified two previously undisclosed credit relationships about which
it has concerns about the future ability of the borrower to comply with present
repayment terms.  However, management does not believe those concerns
necessitate considering the credits impaired at this time.  These two
residential mortgage loans with an aggregate balance of $194,000 possess
heightened credit risks due to the continuing high local unemployment
levels.  The bank is closely monitoring these two
credits.




At
September 30, 2009 the Bank disclosed a potential problem credit with a balance
of $3.8 million. This relationship involves a commercial retail development loan
located in Northwest Indiana with an approximate loan balance of $2.6 million,
net of the $1.2 million charge off, at December 31, 2009.  The loan
matures in March of 2010.  The Bank is considering a deed in lieu of
foreclosure as a viable collection strategy.  The Bank considers this
credit impaired and charged off $1.2 million as of December 31,
2009.




Non-interest
Income.  Non-interest income decreased $102,000 to $37,000 for
the three-month period ended December 31, 2009 compared to $138,000 for the same
period in 2008. Non-interest income decreased $77,000 to $107,000 for the
six-month period ended December 31, 2009 compared to $284,000 for the same
period in 2008.  The decrease was primarily related to the elimination
of earnings related to the bank owned life insurance policies of $49,000 and
$98,000 recognized in the prior periods. The policies were surrendered in
January 2009. In addition, service charges decreased $10,000 to $60,000 for the
three-month period and $33,000 to $122,000 for the six-month period ended
December 31, 2009 compared to $70,000 and $155,000, respectively, for the same
periods in 2008.  Additionally, the Bank recognized a loss of $33,000
on the sale of other real estate owned for the three and six month periods ended
December 31, 2009 as compared to no losses in the same periods in
2008.




Non-interest
Expense.  Non-interest expense decreased $210,000 to $1.1
million for the three-month period ended December 31, 2009 compared to $1.3
million for the same period in 2008. Non- interest
expense decreased $433,000 to $2.2 million for the six-month period ended
December 31, 2009 compared to $2.6 million for the same period in 2008. The
decrease was primarily due to cost savings in two areas: salaries expense and
occupancy expense. Salaries and employee benefits decreased $74,000 to $533,000
for the three-month period ended December 31, 2009 from $607,000 for the same
period in 2008. Salaries and employee benefits decreased $171,000 to $1,066,000
for the six-month period ended December 31, 2009 from $1,237,000 for the same
period in 2008. A decrease was recognized for the six-month period even though
additional employee benefits expense of $32,000 was recorded in September








20
 Table of Contents





relating
to the immediate vesting of restricted stock and stock options resulting from
the death of a previous director. Occupancy and equipment decreased $111,000 to
$141,000 for the three-month period ended December 31, 2009 from $252,000 for
the same period in 2008. Occupancy and equipment decreased $203,000 to $288,000
for the six-month period ended December 31, 2009 from $491,000 for the same
period in 2008. As previously disclosed, two branches, one located in Frankfort,
Illinois and one in Schererville, Indiana, were closed on June 30,
2009.  As a result, the Bank’s operating expenses have decreased
approximately $73,000 per month.




Provision for Income
Taxes.  At December 31, 2009 the Company has a valuation
allowance on 100% of the deferred tax asset as the Company believes it is more
likely than not that the deferred tax asset will not be recognized. The
valuation allowance for the deferred tax asset was recorded at June 30, 2009 and
resulted in additional expense of approximately $277,000 for the 2009 fiscal
year. The Company recognized no income tax benefit for the three and six months
ended December 31, 2009 as the Company believed it was more likely than not that
the deferred tax asset would not be recognized.




Liquidity
and Capital Resources




Liquidity.  Management
carefully gauges liquidity risk by measuring and monitoring our liquidity on
both a short- and long-term basis, assessing and anticipating changes in our
balance sheet and funding sources, and developing contingency funding
plans.  After assessing actual and projected cash flow needs,
management seeks to obtain funding at the most economical cost.  Our
primary sources of funds are deposits, principal and interest payments on loans,
proceeds from maturities, calls and the sale of securities held in the Bank’s
investment portfolio, Federal 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, 2009, there were $6.6 million of FHLB advances
outstanding.  As of December 31, 2009, the Bank had $11.4 million
in additional available credit with the FHLB based on parameters set by the
FHLB. Additional stock and collateral may be purchased or provided to increase
overall potential advance availability. Recently, the FHLB implemented a risk
rating process which could reduce the lines of credit extended to member
banks.  Following its most recent risk analysis of the Bank, FHLB
imposed no additional restrictions, terms or reporting requirements on our
borrowing capacity.




In an
effort to develop alternative sources of liquidity, the Bank has established a
relationship with the Federal Reserve Bank of Chicago and has been approved for
access to the Discount Window for borrowing funds.  The funding
capacity is calculated based on the value of the collateral pledged for
borrowing. To date, no loan collateral has been pledged, but a $500,000 agency
security was pledged temporarily to test the Bank’s ability to borrow and to
process the transaction. This relationship will assist in maintaining adequate
liquidity and provide an additional source for short-term funding
needs.




The
Company’s cash flows are comprised of three primary
classifications:  cash flows from operating activities, investing
activities, and financing activities.  Net cash used in operating
activities were
$199,994 and $195,821 for December 31, 2009 and 2008,
respectively.  Net cash from investing activities consisted primarily
of proceeds from loan payoffs, partially offset by activity in the securities
portfolio.  Net cash from investing activities were $2.6 million and
$1.7 million for December 31, 2009 and 2008, respectively.  Net cash
used in financing activities consisted primarily of the activity in deposit
accounts, FHLB advances, and advances from borrowers for taxes and
insurance.  The net cash used in financing activities was $2.7 million
and $3.7 million at December 31, 2009 and 2008.








21
 Table of Contents




At
December 31, 2009, the Company had $243,000 in outstanding loan origination
commitments, $3.7 million in unfunded lines, and letters of credit outstanding
of $138,000.  In addition, as of December 31, 2009, the total
amount of certificates of deposit that were scheduled to mature in the next 12
months equaled $22.4 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, 2009, the Bank exceeded each
of its capital requirements with ratios of 16.27%, 21.21%, and 22.53%,
respectively.





Regulatory
Matters




During
the quarter ended December 31, 2009, the Illinois Department of Financial and
Professional Regulation (the “IDFPR”) conducted a regularly scheduled
examination of the Bank.  As a result of certain issues identified by
the IDFPR during the exam, the Bank expects to enter into an informal
supervisory agreement with the IDFPR and the FDIC.  Management expects
the agreement to require the Bank to continue to work to reduce the Bank’s
problem credits and to further develop and implement its procedures relating to
the collection of delinquent loans, as well as to adopt a written plan to return
the Bank to profitability.  Also, the Bank expects to be required to
obtain the consent of the IDFPR and the FDIC prior to paying any dividends to
the Company.  Management believes that it has already made substantial
progress towards compliance with the expected terms of the agreement and that
compliance with the agreement will not materially affect the Company’s business
or its operations.




Critical
Accounting Policies and Estimates




The
accounting and reporting policies of the Company are in accordance with U.S.
generally accepted accounting principles and conform to general practices within
the banking industry.  Accounting and reporting policies for the
allowance for loan losses and income tax are deemed critical because they
involve the use of estimates and require significant management
judgments.




Allowance for Loan
Losses.  The allowance for loan losses is an amount that
management believes will be adequate to absorb probable incurred losses in
existing loans, taking into consideration such factors as past loss experience,
changes in the nature and volume of the portfolio, overall portfolio quality,
loan concentrations, specific problem loans, and current economic conditions
that affect the borrower’s ability to pay.  Determination of the
allowance is inherently subjective due to the above mentioned
reasons.  Loan losses are charged off against the allowance when
management believes that the full collectability of the loan is
unlikely.  Recoveries of amounts previously charged off are credited
to the allowance.  Allowances established to provide for losses under
commitments to extend credit, or recourse provisions under loan sales
agreements, or servicing agreements, are classified with other
liabilities.




A loan is
considered impaired when it is probable that not all principal and interest
amounts will be collected according to the loan contract.  Residential
mortgage, installment and other consumer loans are collectively evaluated for
impairment.  Individual commercial loans are evaluated for
impairment.  Impaired loans are recorded at the loan’s fair value by
the establishment of a specific allowance where necessary.  The
fair value of collateral-dependent loans is determined by the fair value of the
underlying collateral.  The fair value of non-collateral dependent
loans is determined by discounting expected future interest and principal
payments at the loan’s effective interest rate.





22
 Table of Contents




The
Company maintains the allowance for loan losses at a level adequate to absorb
management’s estimate of probable losses inherent in the loan
portfolio.  Management believes that it uses the best information
available to determine the adequacy of the allowance for loan
losses.  However, future adjustments to the allowance may be necessary
and the results of operations could be significantly and adversely affected if
circumstances differ substantially from the assumptions used in making the
determinations.




Income
Taxes.  Accounting for income taxes is a critical accounting
policy due to the subjective nature of certain estimates that are involved in
the calculation.  The Company uses an asset/liability method of
accounting for income taxes in which deferred tax assets and liabilities are
established for temporary differences between the financial reporting basis and
the tax basis of the Company’s assets and liabilities.  The Company
must assess the realization of the deferred tax asset quarterly, and to the
extent that management believes that recovery is not likely, a valuation
allowance is established.  This assessment is impacted by various
factors, including taxable income and the composition of the investment
securities portfolio.  Material changes to these items can cause an
adjustment to the valuation allowance.  An adjustment to increase or
decrease the valuation allowance is charged or credited, respectively, to income
tax expense.




Item 3.  Quantitative and Qualitative Disclosure About
Market Risk




Not
applicable




Item 4T.  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, 2009, that have materially affected, or
are reasonably likely to materially affect, the Company’s internal control over
financial reporting.







23
 Table of Contents





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
1A.                      Risk
Factors




The
following are certain material risks that management believes are specific to
the Company and its business. You should understand that it is not possible to
predict or identify all such potential risks and, as such, this list of risk
factors should not be viewed as all-inclusive or in any particular order. Before
deciding to make an investment decision regarding our common stock, you should
carefully consider the risks described below in conjunction with the other
information in our Annual Report on Form 10-K for our fiscal year ended June 30,
2009, and in this quarterly report on Form 10-Q for the quarter
ended December 31, 2009. Our business, financial condition and results of
operations could be adversely affected by any of the following risks or by other
risks that have not been identified or that the Company may believe are
immaterial or unlikely. The risks discussed below also include forward-looking
statements and our actual results may differ substantially from those discussed
in these forward-looking statements.




The
continuation of adverse market conditions in the U.S economy and the markets in
which we operate could adversely impact us.




A
continued deterioration of overall market conditions, a continued economic
downturn or prolonged economic stagnation in our markets or adverse changes in
laws and regulations that impact the banking industry may have a negative impact
on our business. If the strength of the U.S. economy in general and the strength
of the economy in areas where we lend (or previously provided real estate
financing) continue to decline, this could result in, among other things, a
further deterioration in credit quality or loans. Negative conditions in the
real estate markets where we operate could adversely affect our borrowers’
ability to repay their loans and the value of the underlying collateral. Real
estate values are affected by various factors, including general economic
conditions, governmental rules or policies and natural
disasters.  These factors may adversely impact our borrowers’ ability
to make required payments, which in turn, may negatively impact our financial
results.




Current
and further deterioration in the housing market could cause further increases in
delinquencies and non-performing assets, including loan charge-offs, and depress
our income and growth.




The
volume of our one-to-four family residential mortgages and home equity 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







24
 Table of Contents




Any
of these scenarios could cause an increase in delinquencies and non-performing
assets, require us to charge off a higher percentage of our loans, increase
substantially our provision for losses on loans, or make fewer loans, which
would reduce income.





As
a result of current economic conditions, our allowance for loan losses may prove
to be insufficient to absorb losses in our loan portfolio, which could adversely
affect our operating results.




At
December 31, 2009, our non-performing loans (which consist of impaired loans,
accruing and non-accruing loans, and loans still accruing but past due greater
than 90 days) totaled $11.4 million, or 14.75% of our loan
portfolio.  At December 31, 2009, our non-performing assets (which
include other real estate owned) were $11.5 million, or 12.69% of
assets.  In addition, we had $3.3 million in accruing loans that were
30 to 89 days delinquent at December 31, 2009.  At December 31, 2009,
we held $4.4 million of loan loss reserves, or 5.77% of total loans, and 39.10%
of non-performing loans.




Until
economic and market conditions improve, we may continue to incur additional
losses relating to an increase in nonperforming loans.  We do not
record interest income on non-accrual loans or other real estate owned, thereby
adversely affecting our income, and increasing our loan administration
costs.  When we take collateral in foreclosures and similar
proceedings, we are required to mark the related loan to the then fair market
value of the collateral, which may result in a loss.  These loans and
other real estate owned also increase our risk profile and the capital our
regulators believe is appropriate in light of such risks.  As a result
of current economic conditions, additional provisions for loan losses may be
necessary.




Determination
of the appropriate level of the allowance for loan losses involves a high degree
of subjectivity and requires significant estimates, and actual losses may vary
from current estimates.




We
maintain an allowance for loan losses to provide for loans in our portfolio that
may not be repaid in their entirety.  The determination of the
appropriate level of the allowance for loan losses involves a high degree of
subjectivity and requires us to make significant estimates of current credit
risks and future trends, all of which may undergo material changes.




In
evaluating the adequacy of the allowance for loan losses, we consider numerous
quantitative factors, including our historical charge-off experience, growth of
our loan portfolio, changes in the composition of our loan portfolio and the
volume of delinquent and classified loans.  In addition, we use
information about specific borrower situations, including their financial
position and estimated collateral values, to estimate the risk and amount of
loss for those borrowers.  Finally, we consider many qualitative
factors, including general and economic business conditions, duration of the
current business cycle, current general market collateral valuations, trends
apparent in any of the factors we take into account and other matters, which are
by nature subjective and fluid.  Our estimates of the risk of loss and
amount of loss on any loan are complicated by the significant uncertainties
surrounding the borrowers’ abilities to successfully execute their business
models through changing economic environments, competitive challenges and other
factors.  In considering information about specific borrower
situations, our analysis is subject to the risk that we are provided inaccurate
or incomplete information.  Because of the degree of uncertainty and
susceptibility of these factors to change, our actual losses may vary from our
current estimates.




Additionally,
bank regulators periodically review the allowance for loan losses and may
require an increase in the provision for loan losses or recognize loan
charge-offs based upon their judgments, which may be different from
ours.  Any increase in the allowance for loan losses or loan
charge-offs required by these regulatory authorities may adversely affect our
operating results.







25
 Table of Contents





We
may not be able to access sufficient and cost-effective sources of liquidity
necessary to fund our requirements.




We depend
on access to a variety of funding sources, including deposits, to provide
sufficient liquidity to meet our commitments and business needs and to
accommodate the transaction and cash management needs of our customers,
including funding current loan commitments.  Currently, our primary
sources of liquidity are our customers’ deposits, as well as federal funds
borrowings and Federal Home Loan Bank advances.




Across
the banking industry, access to liquidity has tightened in the form of reduced
borrowing lines and/or increased collateral requirements.  To the
extent our balance sheet (customer deposits and principal reductions on loans
and securities) is not sufficient to fund our liquidity needs, we rely on
alternative funding sources, which may be more expensive than organic
sources.  In the past, the Federal Home Loan Banks have provided
cost-effective and convenient liquidity to many community banks (like
us).  However, current economic conditions have created earnings and
capital challenges for some of the Federal Home Loan Banks, which may limit (or
preclude) their ability to provide adequate liquidity.




We test
and evaluate our liquidity sources regularly, and we continue to develop
alternative sources.  In the third quarter of fiscal 2009, the Bank
established a relationship with the Federal Reserve Bank of Chicago and has been
approved for access to the Fed’s Discount Window as an alternative source for
low cost funding.  We believe this relationship will assist us in
maintaining adequate liquidity and provide an additional source for short-term
funding. However, there is no assurance that this funding source will be or
remain available in the future.




There
can be no assurance that recently enacted legislation will help stabilize the
U.S. financial system.




Recent
legislative and regulatory initiatives to address difficult market and economic
conditions may not stabilize the U.S. banking system.  On October 3,
2008, the President signed into law the Emergency Economic Stabilization Act of
2008, or the Emergency Economic Stabilization Act, in response to the current
crisis in the financial sector.  The Treasury and various banking
regulators have implemented a number of programs under this legislation to
address capital and liquidity issues in the banking system.  On
February 17, 2009, the President signed into law the American Recovery and
Reinvestment Act of 2009, or the American Recovery and Reinvestment
Act.  There can be no assurance, however, as to the actual impact that
the Emergency Economic Stabilization Act or the American Recovery and
Reinvestment Act, and the various programs implemented in association with these
legislative efforts, will have on the financial markets, including the extreme
levels of volatility and limited credit availability currently being
experienced.  The failure of the Emergency Economic Stabilization Act
or American Recovery and Reinvestment Act and the associated programs to help
stabilize the financial markets and a continuation or worsening of current
financial market conditions could have a material adverse effect on our
business, financial condition, results of operations, access to credit or the
value of our securities.




We
are subject to extensive regulations that may limit or restrict our activities,
and the cost of compliance is high.




We
operate in a highly regulated industry and are subject to examination,
supervision and comprehensive regulation by various regulatory agencies,
including the IDFPR, the FDIC and the Federal Reserve.  Banking
regulations are primarily intended to protect the DIF and depositors, not
stockholders.  Our compliance with these regulations is costly and
restricts certain of our activities, including payment of dividends, mergers and
acquisitions, investments, loans and interest rates charged, interest rates paid
on deposits and locations of offices.  We are also subject to
regulatory capital requirements, which require us to maintain adequate capital
to support our growth.  If we fail to meet these capital and other
regulatory







26
 Table of Contents





requirements,
our ability to grow, our cost of funds and FDIC insurance and our ability to pay
dividends on our common stock could be materially and adversely
affected.




During
the quarter ended December 31, 2009, the Illinois Department of Financial and
Professional Regulation (the “IDFPR”) conducted a regularly scheduled
examination of the Bank.  As a result of certain issues identified by
the IDFPR during the exam, the Bank expects to enter into an informal
supervisory agreement with the IDFPR and the FDIC.  Management expects
the agreement to require the Bank to continue to work to reduce the Bank’s
problem credits and to further develop and implement its procedures relating to
the collection of delinquent loans, as well as to adopt a written plan to return
the Bank to profitability.  Also, the Bank expects to be required to
obtain the consent of the IDFPR and the FDIC prior to paying any dividends to
the Company.  Management believes that it has already made substantial
progress towards compliance with the expected terms of the agreement and that
compliance with the agreement will not materially affect the Company’s business
or its operations.




Federal
bank regulatory agencies, as well as the U.S. Congress and the President, are in
the process of evaluating the regulation of banks, other financial institutions
and the financial markets and such changes, if any, could require us to maintain
more capital, liquidity and risk management that could adversely affect our
growth, profitability and financial condition, as well as change our charter,
regulator and/or subject us to new or additional regulations and regulators.
Furthermore, various proposals to create a uniform financial institutions
charter have been introduced in past sessions of the U.S. Congress. We are
unable to predict whether such legislation would be enacted or the extent to
which the legislation would restrict or disrupt our or the Bank’s
operations.




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
  At the
Company’s Annual Meeting of Stockholders held on October 21, 2009, the
following matters were submitted to and approved by a vote of
stockholders:
  (1)           The
election of three Class II directors for a three-year term ending at the
Annual Meeting of Stockholders to be held in 2012:
  Directors
              
              Votes
      For
              
              
              Votes
      WithheldAlan
      W. Bird
              
              
              1,933,872
              
              
              
              223,972James
      A. Fitch, Jr.
              
              
              2,003,448
              
              
              
              154,396Roger
      L. Hupe
              
              
              2,003,550
              
              
              
              154,294
 
 The
following directors continue to serve after the Annual Meeting:
  Continuing
      Director
              Term
      ExpiresJohn
      T. Dempsey
              2010Leonard
      Szwajkowski
              2010C.
      Michael McLaren
              2011Rodolfo
      Serna
              2011





27
 Table of Contents




(2)           Ratification
of the appointment of Crowe Horwath LLP as the Company’s independent accountants
for the fiscal year ending June 30, 2010.




Total
      votes for
            
            
            2,045,795Total
      votes against
            
            
            72,051Total
      votes abstaining
            
            
            39,999





Item 5.  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.







28
 Table of Contents





SIGNATURES




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




Date:  February
      16, 2010
            ROYAL
      FINANCIAL, INC.
              
              
              By:
      /s/ Leonard
      Szwajkowski
              Leonard
Szwajkowski
              Chief Executive Officer and
      PresidentDate:  February
      16, 2010
            By:
       /s/ Jodi
      A.
      Ojeda
              Jodi A. Ojeda
              Senior Vice President
      and
              Chief Financial
      Officer








29
 Table of Contents





EXHIBIT INDEX




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.






30