Edgar Filing: Ben Franklin Financial, Inc.

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Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED September 30, 2008

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 000-52240

Ben Franklin Financial, Inc.

(Exact name of registrant as specified in its charter)

Federal

20-5838969

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)


830 East Kensington Road, Arlington Heights, Illinois		60004
(Address of principal executive offices)		(Zip Code)

(847) 398-0990

(Registrant’s telephone number, including area code)

Check whether the registrant (1) filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 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 x No ¨

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

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

Number of outstanding shares of common stock as of November 5, 2008: 1,999,976 shares

BEN FRANKLIN FINANCIAL, INC.

INDEX


		PAGE NO.
PART I – Financial Information

	Item 1. Financial Statements of Ben Franklin Financial, Inc.

	Consolidated Statements of Financial Condition (Unaudited) as of September 30, 2008 and December 31, 2007	1

	Consolidated Statements of Income (Unaudited) for the three and nine months ended September 30, 2008 and 2007	2

	Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the nine months ended September 30, 2008 and 2007	3

	Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2008 and 2007	4

	Notes to Consolidated Financial Statements (Unaudited)	5

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	11

	Item 3. Quantitative and Qualitative Disclosures about Market Risk	23

	Item 4. Controls and Procedures	23

PART II – Other Information

	Item 1. Legal Proceedings	23
	Item 1A. Risk Factors	23
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	23
	Item 3. Defaults Upon Senior Securities	24
	Item 4. Submission of Matters to a Vote of Security Holders	24
	Item 5. Other Information	24
	Item 6. Exhibits	24
	Form 10-Q Signatures	25

PART I – Financial Information

Item 1.

Financial Statements

BEN FRANKLIN FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in thousands except share data)

(Unaudited)


	September 30, 2008			December 31, 2007
ASSETS
Cash and due from banks	$	1,361		$	612
Interest-earning deposit accounts		3,049			745
Federal funds sold		1,980			2,412

Cash and cash equivalents		6,390			3,769
Securities available-for-sale		3,243			3,858
Loans, net of allowance for loan losses of $510 at September 30, 2008 and $495 at December 31, 2007		104,527			105,036
Federal Home Loan Bank stock		1,337			1,337
Premises and equipment, net		1,075			1,536
Repossessed assets		43			353
Accrued interest receivable		561			605
Other assets		374			396

Total assets	$	117,550		$	116,890


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Demand deposits-noninterest-bearing	$	1,763		$	2,423
Demand deposits-interest-bearing		6,013			7,012
Savings deposits		7,482			7,788
Money market deposits		9,576			9,625
Certificates of deposit		69,515			68,343

Total deposits		94,349			95,191
Advances from Federal Home Loan Bank		6,500			4,500
Advances from borrowers for taxes and insurance		744			683
Other liabilities		310			690
Common stock in ESOP subject to contingent purchase obligation		56			47

Total liabilities		101,959			101,111

Stockholders’ equity
Common stock, par value $0.01 per share; authorized 20,000,000 shares; issued and outstanding at: September 30, 2008 – 2,000,476 (net of treasury shares) December 31, 2007 – 1,983,750		20			20
Additional paid-in-capital		7,993			7,954
Treasury stock, at cost – 17,750 shares at September 30, 2008		(143	)		—
Retained earnings, substantially restricted		8,453			8,592
Unearned Employee Stock Ownership Plan (ESOP) shares		(680	)		(724	)
Accumulated other comprehensive income (loss)		4			(16	)
Reclassification of ESOP shares		(56	)		(47	)

Total equity		15,591			15,779

Total liabilities and equity	$	117,550		$	116,890

See accompanying notes to consolidated financial statements

BEN FRANKLIN FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands except per share amounts)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008			2007
Interest and dividend income
Loans	$	1,498	$	1,648	$	4,595		$	4,550
Securities		39		59		125			188
Federal funds sold		13		37		56			226
Interest-earning deposit accounts and other		13		37		31			192

		1,563		1,781		4,807			5,156
Interest expense
Deposits		728		906		2,357			2,690
Federal Home Loan Bank advances		73		35		183			81

		801		941		2,540			2,771

Net interest income		762		840		2,267			2,385

Provision for loan losses		32		7		104			12

Net interest income after provision for loan losses		730		833		2,163			2,373

Non-interest income
Service fee income		34		41		106			118
Gain on sale of other assets		116		—		112			—
Other		2		9		8			23

		152		50		226			141
Non-interest expense
Compensation and employee benefits		450		455		1,356			1,385
Occupancy and equipment		149		119		462			364
Data processing services		64		53		189			166
Professional fees		65		52		245			189
Regulatory fees		15		13		41			42
Other		84		76		282			235

		827		768		2,575			2,381

Income (loss) before income taxes		55		115		(186	)		133

Income tax expense (benefit)		29		38		(47	)		42

Net income (loss)	$	26	$	77	$	(139	)	$	91

Earnings (loss) per common share	$	0.01		0.04		(0.07	)		0.05

See accompanying notes to consolidated financial statements

BEN FRANKLIN FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Nine Months Ended September 30, 2008 and 2007 – (Unaudited)


	Common Stock		Additional Paid-In Capital			Treasury Stock			Retained Earnings			Unearned ESOP Shares			Accumulated Other Comprehensive Income (Loss)			Amount Reclassified on ESOP Shares			Total			Comprehensive Income
Balance at January 1, 2007	$	20	$	7,955		$	—		$	8,541		$	(767	)	$	(44	)	$	(11	)	$	15,694
Comprehensive income
Net income		—		—			—			91			—			—			—			91		$	91
Earned ESOP shares		—		2			—			—			30			—			—			32			—
Additional offering costs		—		(2	)		—			—			—			—			—			(2	)		—
Changes in unrealized loss on securities available-for-sale, net of deferred income taxes		—		—			—			—			—			22			—			22			22
Reclassification due to change in fair value of common stock in ESOP subject to contingent repurchase obligation		—		—			—			—			—			—			(29	)		(29	)		—

Total comprehensive income (loss)																								$	113

Balance at September 30, 2007	$	20	$	7,955		$	—		$	8,632		$	(737	)	$	(22	)	$	(40	)	$	15,808

Balance at January 1, 2008	$	20	$	7,954		$	—		$	8,592		$	(724	)	$	(16	)	$	(47	)	$	15,779
Comprehensive income (loss)
Net loss		—		—			—			(139	)		—			—			—			(139	)	$	(139	)
Earned ESOP shares and other stock based compensation		—		39			—			—			44			—			—			83			—
Repurchase of common stock (17,750) shares)		—		—			(143	)		—			—			—			—			(143	)		—
Changes in unrealized loss on securities available-for-sale, net of deferred income taxes		—		—			—			—			—			20			—			20			20
Reclassification due to change in fair value of common stock in ESOP subject to contingent repurchase obligation		—		—			—			—			—			—			(9	)		(9	)		—

Total comprehensive income (loss)																								$	(119	)

Balance at September 30, 2008	$	20	$	7,993		$	(143	)	$	8,453		$	(680	)	$	4		$	(56	)	$	15,591

See accompanying notes to consolidated financial statements

BEN FRANKLIN FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)


	Nine Months Ended September 30,
	2008			2007
Cash flows from operating activities
Net income (loss)	$	(139	)	$	91
Adjustments to reconcile net income (loss) to net cash from operating activities
Depreciation		111			78
ESOP and other stock based compensation		83			32
Amortization of premiums and discounts		38			50
Provision for loan losses		104			12
Gain on sale of other assets		(112	)		—
Changes in:
Deferred loan costs		(82	)		(152	)
Accrued interest receivable		44			(67	)
Other assets		11			28
Other liabilities		(380	)		(31	)

Net cash from operating activities		(322	)		41

Cash flows from investing activities
Principal repayments on mortgage-backed securities		638			759
Net decrease in loans		8,449			(116	)
Purchase of loans		(8,092	)		(11,826	)
Sales of other assets		918			—
Expenditures for premises and equipment		(46	)		(365	)

Net cash from investing activities		1,867			(11,548	)

Cash flows from financing activities
Net decrease in deposits		(842	)		(5,742	)
Purchase of treasury stock		(143	)		—
Additional offering costs		—			(2	)
Advances from FHLB		2,000			2,500
Net change in advances from borrowers for taxes and insurance		61			333

Net cash from financing activities		1,076			(2,911	)

Net change in cash and cash equivalents		2,621			(14,418	)

Cash and cash equivalents at beginning of year		3,769			20,606

Cash and cash equivalents at end of period	$	6,390		$	6,188

Supplemental disclosures
Interest paid	$	2,575		$	2,742
Income taxes paid		—			88
Transfer of office building to other real estate		396			—
Transfer of loans to repossessed assets		295			27
Sale of foreclosed real estate financed by Ben Franklin Bank		195			—

See accompanying notes to consolidated financial statements

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Basis of Financial Statement Presentation

The accompanying consolidated financial statements of Ben Franklin Financial, Inc. (the “Company”) and its wholly owned subsidiary Ben Franklin Bank of Illinois (the “Bank”) have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) and with the rules and regulations of the Securities and Exchange Commission for interim financial reporting. Accordingly they do not include all of the information and footnotes required for complete financial statements. All significant intercompany transactions are eliminated in consolidation. In the opinion of the Company’s management, all adjustments consisting of normal recurring accruals necessary for (i) a fair presentation of the financial condition and results of operations for the interim periods included herein and (ii) to make such statements not misleading have been made. Interim results are not necessarily indicative of results for a full year.

In preparing the financial statements, management is required to make estimates and assumptions that affect the recorded amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the period. Actual results could differ from those estimates. For further information with respect to significant accounting policies followed by the Company in preparation of the financial statements, refer to the Company’s 2007 Annual Report on Form 10-KSB.

The Bank is a federally chartered stock savings bank and a member of the Federal Home Loan Bank (“FHLB”) system. The Bank maintains insurance on deposit accounts with the Deposit Insurance Fund (“DIF”) of the Federal Deposit Insurance Corporation. Ben Franklin Financial, MHC (the “MHC”), a federally chartered mutual holding company, owns 1,091,062 shares of the Company’s common stock and will continue to own at least a majority of the Company’s common stock as long as the MHC exists.

Note 2 – Stock Based Compensation

On October 18, 2006, the Company adopted an employee stock ownership plan (“the ESOP”) for the benefit of substantially all employees. The ESOP borrowed $778,000 from the Company and used those funds to acquire 77,763 shares of the Company’s common stock in connection with the mutual holding company reorganization of the Bank and the Company’s related stock offering at a price of $10 per share.

Shares purchased by the ESOP with the loan proceeds are held in a suspense account and are allocated to ESOP participants on a pro rata basis as principal and interest payments are made by the ESOP to the Company. The loan is secured by shares purchased with the loan proceeds and will be repaid by the ESOP with funds from the Company’s discretionary contributions to the ESOP and earnings on ESOP assets. The annual principal and interest payment of approximately $89,000 was made in September by the ESOP for 2008.

As shares are released from collateral, the Company reports compensation expense equal to the current market price of the shares and the shares become outstanding for earnings-per-share computations. Dividends on allocated ESOP shares will reduce retained earnings; dividends on unearned ESOP shares will reduce accrued interest. Because participants may require the Company to purchase their ESOP shares upon termination of their employment, the fair value of all earned and allocated ESOP shares may become a liability.

The ESOP has a plan year end of December 31. Expense related to the ESOP was $14,000 and $5,000 for the three months ended September 30, 2008 and 2007 and $37,000 and $32,000 for the nine months ended September 30, 2008 and 2007.

Shares held by the ESOP at September 30, 2008 were as follows:


Shares committed to be released		4,485
Allocated shares		5,327
Unearned ESOP shares		67,951

Total ESOP shares		77,763

Fair value of unearned ESOP shares	$	391,000

Fair value of allocated shares subject to repurchase obligation	$	56,000

On March 26, 2008, stockholders of the Company approved the Ben Franklin Financial, Inc. Equity Incentive Plan (the “Plan”) which provides officers, employees, and directors of the Company and the Bank with stock based incentives to promote our growth and performance. The Plan shall remain in effect as long as any awards are outstanding provided, however, that no awards be granted under the plan after ten years from the date of adoption. The Plan authorizes the issuance of up to 136,085 shares of our common stock pursuant to grants of incentive and non-statutory stock options, stock appreciation rights, and restricted stock awards. No more than 38,881 shares may be issued as restricted stock awards. No more than 97,204 shares may be issued pursuant to stock options and stock appreciation rights, all of which may be granted pursuant to the exercise of incentive stock options. On April 17, 2008, we granted restricted stock awards for 34,476 common shares and stock options for 86,740 common shares under the Plan, all of which vest over a five year period. Awards under the Plan may also fully vest upon the participant’s death or disability or change in control of the Company. All of the options granted have an exercise price of $9.36 per share, which was the closing price of the stock on the grant date. No options were vested, exercised or forfeited as of September 30, 2008. The options have no intrinsic value as of September 30, 2008.

The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Since the Company’s stock has been outstanding less than two years, expected volatilities are based on historical stock price volatilities of other micro cap banks and bank holding companies. The expected term represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

The fair value of each option granted in 2008 was $2.28 and was determined using the following weighted-average assumptions as of grant date.


Risk-free interest rate	3.27	%
Expected term	7 years
Expected stock price volatility	12	%
Dividend yield	- 0-	%

Stock option expense was $10,000 and $18,000 during the three months and nine months ended September 30, 2008, respectively. As of September 30, 2008, there was $180,000 of unrecognized compensation cost related to stock options granted under the Plan. The cost is expected to be recognized over a weighted-average period of approximately 4.5 years.

The fair value of the restricted stock awards was $9.36 per share, which was the closing price of the stock on the April 17, 2008 grant date. None of the restricted stock awards were vested or forfeited as of September 30, 2008. Restricted stock award expense was $17,000 and $30,000 during the three months and nine months ended September 30, 2008, respectively. As of September 30, 2008, there was $293,000 of unrecognized compensation cost related to non vested shares granted under the Plan. The cost is expected to be recognized over a weighted-average period of approximately 4.5 years.

The value of stock options and restricted stock awards as of the grant date are expensed over the five year vesting period. Forfeitures of stock options and restricted stock awards are expected to be insignificant.

Note 3 – Earnings Per Share

Basic earnings per share is based on net income (loss) divided by the weighted average number of shares outstanding during the period, including allocated and committed-to-be-released ESOP shares. Diluted earnings per share shows the dilutive effect, if any, of additional common shares issuable under stock option and restricted stock awards, using the treasury stock method. Because of the Company’s net loss for the nine moths ended September 30, 2008, all stock options and non-vested stock awards were excluded from the computation of diluted loss per share. All stock options and awards were anti-dilutive in the third quarter of 2008 because of the decrease in share price since the grant date. Prior to the second quarter of 2008, the Company had no common stock equivalents; consequently, basic and diluted earnings per share were the same in 2007.

The following table presents a reconciliation of the components used to compute basic and diluted earnings (loss) per share:


	For the Three Months Ended				For the Nine Months Ended
	September 30, 2008		September 30, 2007		September 30, 2008			September 30, 2007
Net income (loss)	$	26,000	$	77,000	$	(139,000	)	$	91,000
Weighted average common shares outstanding		1,900,878		1,910,255		1,908,027			1,908,962
Basic and diluted earnings (loss) per share	$	0.01	$	0.04	$	(0.07	)	$	0.05

Note 4 – Stock Repurchase Program

On April 23, 2008 the Company adopted a stock repurchase program (the “Program”) to repurchase up to 44,634 shares or 4.8% of the Company’s outstanding common stock (excluding shares held by the MHC). The Company has entered into a Securities Repurchase Agreement with Keefe, Bruette & Woods, Inc. to act as broker for the repurchase pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934. At September 30, 2008, the Company had repurchased 17,750 shares under the Program.

Note 5 – New Accounting Standards

In September 2006, Statement 157, “Fair Value Measurements”, was issued by the FASB. This Statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This Statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The standard is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued Staff Position (FSP) 157-2, “Effective Date of FASB Statement No. 157”. This FSP delays the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. In October, 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a Financial Asset When the Market for that Asset Is Not Active”, which provides an example that illustrates key considerations in determining the fair value of a financial asset when the market for that asset is not active. This FSP provides clarification for how to consider various inputs in determining fair value under current market conditions consistent with the principles of FAS 157. FSP 157-3 became effective upon issuance. The impact of adopting Statement 157 was not material to the results of operations or financial condition of the Company.

In February 2007, Statement 159, “The Fair Value Option for Financial Assets and Financial Liabilities”, was issued by the FASB. This Statement permits entities to choose to report selected assets and liabilities at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is effective for the Company as of January 1, 2008. The Company did not elect the fair value option for any financial assets or liabilities as of January 1, 2008.

In March 2008, Statement 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133”, was issued by the FASB. This Statement expands the disclosure requirements of

Statement 133 and requires the reporting entity to provide enhanced disclosures about the objectives and strategies for using derivative instruments, quantitative disclosures about fair values and amounts of gains and losses on derivative contracts, and credit-risk related contingent features in derivative agreements. The Statement is effective for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. Management does not expect the adoption of this Statement to have an impact on the results of operations or financial condition of the Company as the Company does not have any derivative instruments and is not involved in any hedging activities.

On November 5, 2007, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 109, “Written Loan Commitments Recorded at Fair Value through Earnings.” Previously, SAB 105, “Application of Accounting Principles to Loan Commitments,” stated that in measuring the fair value of a derivative loan commitment, a company should not incorporate the expected net future cash flows related to the associated servicing of the loan. SAB 109 supersedes SAB 105 and indicates that the expected net future cash flows related to the associated servicing of the loan should be included in measuring fair value for all written loan commitments that are accounted for at fair value through earnings. SAB 105 also indicated that internally-developed intangible assets should not be recorded as part of the fair value of a derivative loan commitment, and SAB 109 retains that view. SAB 109 is effective for derivative loan commitments issued or modified in fiscal periods beginning after December 15, 2007. Adoption of this statement did not have a material impact on the results of operations or financial condition of the Company.

In December 2007, the FASB issued Statement 141R, “Business Combinations.” Statement 141R replaces the current standard on business combinations and will significantly change the accounting for and reporting of business combinations. This Statement requires an entity to measure the business acquired at fair value and to recognize goodwill attributable to any non-controlling interests (previously referred to as minority interests) rather than just the portion attributable to the acquirer. The Statement will also result in fewer exceptions to the principle of measuring assets acquired and liabilities assumed in a business combination at fair value. In addition, the Statement will result in payments to third parties for consulting, legal, audit, and similar services associated with an acquisition to be recognized as expenses when incurred rather than capitalized as part of the business combination. Statement 141R is effective for fiscal years beginning on or after December 15, 2008. Management does not expect the adoption of this Statement will have a material impact on the results of operation or financial condition of the Company.

Note 6 – Fair Value

Statement 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Statement 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

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

Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data, (for example, interest rate and yield curves observable at commonly quoted intervals, prepayment speeds, credit risks, and default rates).

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


	September 30, 2008 Balance		Fair Value Measurements at September 30, 2008 Using
	September 30, 2008 Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
Assets:
Available for sale securities	$	3,243	$	—	$	3,243	$	—

Assets Measured on a Non-Recurring Basis

Assets measured at fair value on a non-recurring basis are summarized below:


			Fair Value Measurements at September 30, 2008 Using
	September 30, 2008 Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
Assets:
Impaired loans	$	386	$	—	$	386	$	—

Impaired loans, which are measured for impairment using the fair value of the collateral (less cost to sell) for collateral dependent loans, had a carrying amount of $386,000, with a $6,000 valuation allowance at September 30, 2008 recorded in the third quarter of 2008. The fair value of collateral is based on appraisals for impaired loans.

Note 7 – Non-performing Assets

The following table sets forth the amounts of our non-performing assets.


	September 30, 2008			December 31, 2007
Non-accrual loans	$	1,630		$	267
Loan greater than 90 days delinquent and still accruing		—			—
Foreclosed and repossessed assets		43			353

Total non-performing assets	$	1,673		$	620
Non-performing loans to total loans		1.55	%		0.25	%
Non-performing assets to total assets		1.42	%		0.53	%

Note 8 – Participation in the Treasury Capital Purchase Program

On October 3, 2008, Congress passed the Emergency Economic Stabilization Act of 2008 (EESA), which provides the U. S. secretary of the Treasury with broad authority to implement certain actions to help restore stability and liquidity to U.S. markets. One of the provisions resulting from the Act is the Treasury Capital Purchase Program (CPP), which provides direct equity investment of perpetual preferred stock by the Treasury in qualified financial

institutions. The program is voluntary and requires an institution to comply with a number of restrictions and provisions, including limits on executive compensation, stock redemptions and declaration of dividends. Applications must be submitted by November 14, 2008 and are subject to approval by the Treasury. The CPP provides for a minimum investment of 1% of Risk-Weighted Assets, with a maximum investment equal to the lesser of 3 percent of Total Risk-Weighted Assets or $25 billion. The perpetual preferred stock investment will have a dividend rate of 5% per year, until the fifth anniversary of the Treasury investment, and a dividend of 9%, thereafter. The CPP also requires the Treasury to receive warrants for common stock equal to 15% of the capital invested by the Treasury. Participation in the program is not automatic and subject to approval by the Treasury. The Company is applying for participation in the CPP, however, we have not determined if we will accept the funds if approved.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This quarterly report on Form 10-Q may contain statements relating to the future results of the Company (including certain projections and business trends) that are considered “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). Such forward-looking statements, in addition to historical information, which involve risk and uncertainties, are based on the beliefs, assumptions and expectations of management. Words such as “expects,” “believes,” “should,” “plans,” “anticipates,” “will,” “potential,” “could,” “intend,” “may,” “outlook,” “predict,” “project,” “would,” “estimates,” “assumes,” “likely,” and variations of such similar expressions are intended to identify such forward-looking statements. Examples of forward-looking statements include, but are not limited to: statements of our goals, intentions, and expectations; statements regarding our business plans and prospects and growth and operating strategies; statements regarding the asset quality of our loan and investment portfolios; and estimates of our risks and future costs and benefits. For this presentation, the Company and its subsidiary claim the protection of the safe harbor for forward-looking statements contained in the PSLRA.

Factors that could cause future results to vary from current management expectations include, but are not limited to: our ability to manage the risk from our multi-family, commercial real estate, construction, commercial, and automobile lending including purchased loans, the future level of deposit premiums applicable to us, significantly increased competition among depository and other financial institutions; our ability to execute our plan to grow our assets on a profitable basis; our ability to execute on a favorable basis any plan we may have to acquire other institutions or branches or establish new offices; changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments and inflation; general economic conditions, either nationally or in our market area; adverse changes in the securities and national and local real estate markets (including loan demand, housing demand, and real estate values); legislative or regulatory changes that adversely affect our business; our ability to enter new markets successfully and take advantage of growth opportunities; changes in consumer spending, borrowing and savings habits; changes in accounting policies and practices, as may be adopted by the bank regulatory agencies and the authoritative accounting bodies; and changes in our organization, compensation and benefit plans; and other factors discussed elsewhere in this report or set forth under Risk Factors’ in our Registration Statement on Form SB-2 under the Securities Act of 1933. The forward-looking statements are made as of the date of this report, and the Company assumes no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements.

General

The Bank is a federally chartered savings bank headquartered in Arlington Heights, Illinois. The Bank was originally founded in 1893 as a building and loan association. We conduct our business from our main office and one branch office. Both of our offices are located in the northwestern corridor of the Chicago metropolitan area.

Our principal business activity is attracting retail deposits from the general public in our market and investing those deposits, together with funds generated from operations and to a lesser extent borrowings, in one- to four-family residential mortgage loans and, to a lesser extent, multi-family real estate loans, commercial real estate loans, construction and land loans, home equity lines-of-credit, and other loans. We have also invested in mortgage-backed securities and have, over the past several years, acquired a significant number of automobile loans. The Bank offers a variety of deposit accounts, including checking, money market, savings, and certificates of deposit, and emphasizes personal and efficient service for its customers. Our primary sources of funds are deposits and principal and interest payments on loans and securities. We also use borrowings, primarily Federal Home Loan Bank of Chicago advances, to supplement cash flow needs, lengthen the maturities of liabilities for interest rate risk purposes and to manage the cost of funds. Our competition for loans and deposits comes principally from commercial banks, savings institutions, mortgage banking firms and credit unions. Our primary focus is to develop and build profitable customer relationships across all lines of business while maintaining our focus as a community bank.

Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets, consisting primarily of loans, securities (including mortgage-backed and other securities), federal funds sold, and other interest-earning assets primarily interest earning deposits, and the interest paid on our interest-bearing liabilities, consisting primarily of savings and transaction accounts, certificates of deposit, and Federal Home Loan Bank of Chicago advances. Our results of operations also are affected by our provision for loan losses, non-interest income and non-interest expense. Non-interest income consists primarily of deposit service charges, loan origination fees charged to other financial institutions, gains on the sale of assets, and miscellaneous other income. Non-interest expense consists primarily of compensation and employee benefits, occupancy and equipment expense, data processing, professional fees, regulatory fees, and other operating expenses. Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates and real estate values, governmental policies and actions of regulatory authorities.

Critical Accounting Policies

Certain of our accounting policies are important to the reporting of our financial results, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but are not limited to, changes in interest rates, changes in performance of the local economy, changes in the financial condition of borrowers, and changes in value of loan collateral such as real estate. As discussed in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2007, management believes that its critical accounting policies include determining the allowance for loan losses and accounting for deferred income taxes. With the implementation of the Company’s Equity Incentive Plan in 2008, management believes that accounting for the stock based compensation, such as stock options and restricted stock awards, is also a critical accounting policy. Our accounting policy for stock options and restricted stock awards is summarized in Note 2 to the interim financial statements included in this Form 10-Q.

Comparison of Financial Condition at September 30, 2008 and December 31, 2007

General. During the third quarter of 2008, the deepening economic problems and tightening in the credit markets affecting the nation and our local market resulted in a decrease in our loan origination volume compared to the prior quarter, although we did experience a modest increase in loan balances during the third quarter. Despite declining real estate values and lower sales activity in the real estate market, we were able to complete the sale of our closed branch office and sell a foreclosed single-family home and repossessed automobiles during the quarter. While we continued the purchase of automobile loans during 2008, we significantly reduced the amount we purchased of these loans during the third quarter of 2008 as the current balance in our automobile portfolio approached levels we believe are appropriate for our overall portfolio mix. As conditions in the economy have become more uncertain, the underwriting standards for the automobile loans have also been tightened by the originating bank. The slowing economy and declining real estate market has resulted in an increase in our non-performing loans and an increase in the number of our repossessed automobiles. We closely monitor the collateral of our non-performing loans to determine any significant change in value and work with the borrowers to resolve these credits. While our customer deposit balances decreased slightly at September 30, 2008 from December 31, 2007, these balances remained relatively unchanged during the third quarter of 2008 despite competitive rates in our market area from other institutions, as liquidity concerns have driven rates higher for certificates of deposit. To extend maturities and meet future liquidity needs, we increased the balance of our Federal Home Loan Bank advances in 2008 which also provided a lower funding cost. We also repurchased $143,000 of our common stock at an average price of $8.05 per share under the repurchase program which was implemented in the second quarter of 2008 in an effort to enhance shareholder value.

Assets. Total assets at September 30, 2008 were $117.6 million compared to $116.9 million at December 31, 2007, an increase of $660,000 or 0.6%. This increase was primarily due to an increase in cash and cash equivalents of $2.1 million offset by decreases in our securities portfolio of $615,000, our loan portfolio of $509,000 and a decrease of $310,000 in repossessed assets.

For the first nine months of 2008, our loan portfolio balance decreased $509,000 or 0.5% to $104.5 million at September 30, 2008 compared to $105.0 million at December 31, 2007. The balance of our automobile loans increased $2.2 million or 24.4% as we purchased $5.3 million in automobile loans during 2008 under the program that began in 2007, bringing our automobile loan portfolio balance to $11.3 million at September 30, 2008, approximately 10.6% of our overall loan portfolio. Our home equity lines of credit increased $4.5 million or 50.1% to $13.6 million at September 30, 2008 as originations and utilization both increased. Our multi-family loans increased $1.9 million or 16.0% to $13.5 million at September 30, 2008. These increases were offset by decreases in the remainder of our loan portfolio due to lower loan originations and regular repayments. For the nine months ended September 30, 2008 our one- to four-family residential loans decreased $5.8 million or 12.4% to $41.0 million, our commercial real estate loans decreased $2.1 million or 13.0% to $13.8 million, and our construction loans decreased $2.8 million or 24.1% to $8.9 million. We anticipate loan origination volume to be lower through the remainder of the year due to weak economic conditions in our market area.

At September 30, 2008, the allowance for loan losses was $510,000 or 0.49% of the total loan portfolio compared to $495,000 or 0.47% of the total loan portfolio at December 31, 2007. During the first nine months of 2008, we charged-off $90,000 related to a construction loan and automobile loans and recorded a $104,000 provision to our allowance for loan losses. Our nonperforming loans, consisting of non-accrual loans and any other loans delinquent 90 days or longer, increased to $1.6 million or 1.55% of total loans at September 30, 2008 compared to $267,000 or 0.25% of total loans at December 31, 2007. Our non-performing assets to total assets at September 30, 2008 increased to 1.42% from 0.53% at December 31, 2008. At September 30, 2008, our non-performing loans consist of four loans secured by real estate, which management does not expect will result in any significant losses based on the collateral value.

Our securities portfolio balances decreased $615,000 or 15.9% to $3.2 million at September 30, 2008 from $3.9 million at December 31, 2007 due primarily to payments on mortgage-backed securities. Our Federal Home Loan Bank stock balance remained unchanged at $1.3 million at September 30, 2008. Cash and cash equivalents increased $2.1 million or 56.6% to $5.9 million at September 30, 2008 to meet projected liquidity needs in the fourth quarter.

During the first nine months of 2008, our repossessed assets decreased $310,000. Sales of foreclosed real estate totaled $515,000 and sales and write downs of repossessed automobiles totaled $90,000. New foreclosures during the first nine months of 2008 totaled $195,000 and new repossessed automobiles totaled $100,000. At September 30, 2008, our repossessed assets totaled $43,000 and consisted of four repossessed automobiles. Our other real estate decreased $396,000 due to the sale of our closed branch office which occurred at the end of September.

Liabilities. Deposit balances decreased slightly by $842,000 or 0.9% to $94.3 million at September 30, 2008 from $95.2 million at December 31, 2007. Our non-certificate accounts decreased $2.0 million or 7.5% to $24.8 million at September 30, 2008. Our certificate of deposit accounts increased $1.2 million or 1.7% to $69.5 million at September 30, 2008. Competition from other banks in our market area, including national and regional banks as well as other community banks, has presented challenges as we try to grow our deposit balances. In the fourth quarter of 2008, changes to our demand and money market products will be introduced including new rate features and service enhancements in an effort to increase balances in these accounts.

Our advances from the Federal Home Loan Bank of Chicago increased $2.0 million to $6.5 million at September 30, 2008. The additional advance has a fixed interest rate of 3.88% and matures in June of 2010.

Equity. Total equity at September 30, 2008 was $15.6 million compared to $15.8 million at December 31, 2007. Equity decreased by $139,000 during the first nine months of 2008 due to our net loss and decreased $143,000 due to the repurchases of 17,750 shares of the Company’s outstanding common stock under the stock repurchase program.

Comparison of Operating Results for the Three Months Ended September 30, 2008 and 2007

General. The easing of monetary policy by the Federal Open Market Committee, as reflected in the decrease in the targeted federal funds rate by 100 basis points in the last four months of 2007 and an additional 225 basis points through April of 2008, impacted our revenue during the third quarter of 2008 compared to the prior year period,

reducing the interest income we earned on our adjustable rate home equity line-of-credit and construction loans and our interest earning deposits and federal funds sold. Non-interest income increased due to the sale of our closed branch office, resulting in a gain of $129,000. Given the continued tight credit markets, any further actions taken by the Federal Reserve Board to ease credit through the reduction of interest rates will continue to have a negative impact on our earnings and margins. In October 2008, the Federal Reserve decreased the targeted federal funds rate by another 100 basis points and, consequently, the prime rate decreased from 5.00% to 4.00%.

Net income decreased $51,000 to $26,000 for the three months ended September 30, 2008 compared to net income of $77,000 for the three months ended September 30, 2007 primarily due to a decrease in net interest income and increases in our loan loss provision and non-interest expense. Our net interest income decreased $78,000 or 9.3% to $762,000 for the three months ended September 30, 2008 compared with the prior year period primarily due to a decrease in our net interest margin to 2.67% for the third quarter of 2008 compared to 3.00% for the prior year period. Our provision for loan losses increased $25,000 to $32,000 for the third quarter of 2008 primarily due to charge-offs related to our automobile portfolio. Non-interest expense increased $59,000 or 7.7% to $827,000 for the three months ended September 30, 2008 from the prior year period primarily due to an increase in occupancy costs and to a lesser extent, increases in professional fees, data processing, and other costs.

Interest Income. Interest income was $1.6 million for the three months ended September 30, 2008, $218,000 or 12.2% less than the prior year period. Interest income from loans decreased $150,000 or 9.1% primarily due to the decrease in the average yield on loans to 5.76% for the three months ended September 30, 2008 compared to 6.53% for the prior year period. The decline in yield was primarily due to our adjustable rate loans, primarily home equity lines of credit and construction loans which generally adjust with changes in the prime lending rate. Interest income for the three months ended September 30, 2007 was affected by a $35,000 payment on a prior loan restructuring. The impact of this decrease in yield was offset somewhat by a $3.0 million increase in the average balance of our loan portfolio to $103.6 million for the three months ended September 30, 2008 compared to the prior year period. The increase in our average loan portfolio balance was attributable to a $5.9 million increase in the average balance of our consumer loans, primarily automobile loans; a $5.1 million increase in the average balance of our home equity lines-of-credit; and a $2.9 million increase in the average balance of our commercial real estate and construction loans. These increases were offset by a $9.9 million decrease in the average balance of our one- to four-family real estate loans due to payments on our adjustable rate loans from prior pool purchases and a $1.0 million decrease in the average balance of our commercial loans.

Interest income from securities decreased $20,000 or 33.9% to $39,000 for the three months ended September 30, 2008. Dividend income from the Federal Home Loan Bank of Chicago stock declined $9,000 due to the suspension of dividend payments at the end of the third quarter in 2007. The average balance of our securities portfolio decreased $967,000 to $4.7 million for the three months ended September 30, 2008 as compared to the prior year period due to payments on mortgage-backed securities. The yield on securities for the three months ended September 30, 2008 was 3.33% compared to 4.23% for the prior year period, primarily due to the suspension of dividend payments on Federal Home Loan Bank stock. The Federal Home Loan Bank does not anticipate the resumption of dividend payments for the remainder of the year. We do not know when or if the Federal Home Bank will resume dividend payments on our $1.3 million of Federal Home Loan Bank stock.

Interest from other interest-earning assets for the three months ended September 30, 2008 decreased $48,000 to $26,000. The average balance of other interest-earning assets decreased $144,000 to $5.7 million for the three months ended September 30, 2008 compared to $5.9 million for the prior year period. The average yield on other interest-earning assets was 1.78% for the third quarter of 2008 compared to 5.02% for the prior year period due to declining interest rates.

Interest Expense. Interest expense for the three months ended September 30, 2008 was $801,000, a decrease of $140,000 or 14.9% from the prior year period. Interest on deposits decreased $178,000 due to a decrease in the average cost of deposits. Our average cost of deposits decreased to 3.13% for the three months ended September 30, 2008 compared to 3.89% for the prior year period. The average balance of interest bearing deposits decreased $386,000 to $92.0 million for the third quarter of 2008 compared to the prior year period. Our portfolio mix changed as the average balance of savings, demand, and money market accounts decreased $1.9 million and the average balance of certificates of deposit increased $1.5 million for the third quarter of 2008 compared to the prior year period. While our rates for deposit products is competitive within our market area, some above market rates for certificates of deposit offered by competitors have affected our ability to decrease costs further in the declining rate environment and slowed our deposit growth.

Interest expense on advances from the Federal Home Loan Bank of Chicago increased $38,000 for the three months ended September 30, 2008 from the prior year period due to additional advances totaling $2.0 million since September 30, 2007. The average balance of Federal Home Loan Bank advances for the three months ended September 30, 2008 was $6.5 million with an average cost of 4.48% compared to an average balance of $2.9 million with a cost of 4.80% for the prior year period.

Net Interest Income. Net interest income for the three months ended September 30, 2008 was $762,000 compared to $840,000 for the three months ended September 30, 2007. The decrease was primarily due to the sharp decline in the federal funds rate and prime rate which reduced the interest income we earned on our adjustable rate loans, interest earning deposits and federal funds sold and, to a lesser extent, the cost of our interest bearing liabilities. For the three months ended September 30, 2008, the average yield on interest-earning assets was 5.46% and the average cost of interest-bearing liabilities was 3.22% compared to 6.33% and 3.92%, respectively, for the three months ended September 30, 2007. These changes resulted in a decrease in our net interest rate spread to 2.24% for the third quarter of 2008 compared to 2.41% for the third quarter of 2007.

Provision for Loan Losses. Our allowance for loan losses is the estimated amount considered necessary for probable incurred losses in the loan portfolio at the balance sheet date. Our analysis includes a review of identified problem loans for which a specific allowance is required as well as a general allowance for the remainder of the portfolio.

Our provision for loan losses increased $25,000 for the three months ended September 30, 2008 to $32,000 from $7,000 for the three months ended September 31, 2007. The increase in our provision was due to the increase in the allowance for our automobile portfolio as a result of increased charge-off and repossession activity for these loans during the comparative period. While underwriting standards for automobile loans have been tightened, further weakening in the economy may impact the performance of our automobile loans, as well as the rest of the loan portfolio.

Non-interest Income. For the three months ended September 30, 2008, non-interest income increased $102,000 to $152,000 compared to $50,000 for the three months ended September 30, 2007 primarily due to the $129,000 gain on the sale of the closed branch office offset by losses from the sale of repossessed automobiles totaling $13,000. Fees received from providing loan origination services for other financial institutions, a component of service fee income, totaled $3,000 for the three months ended September 30, 2008 compared to $15,000 for the prior year period. This decrease was due to lower origination activity which totaled $225,000 for the three months ended September 30, 2008 compared to $1.9 million for the prior year period.

Non-interest Expense. For the three months ended September 30, 2008, non-interest expense totaled $827,000 compared to $768,000 for the three months ended September 30, 2007, an increase of 7.7%. Occupancy and equipment expense increased $30,000 or 25.2% due to the higher lease costs for our new main office and additional depreciation charges related to the build-out and furniture and equipment for the new office. Professional fees increased $13,000 or 25.0% to $65,000 for the third quarter of 2008 primarily due to legal fees for foreclosures. Compensation and employee benefits expense decreased $5,000 or 1.1% to $450,000 for the three months ended September 30, 2008 compared to the prior year period. Compensation increases related to the equity incentive plan adopted in 2008 were offset by decreases in salaries and benefits primarily due to the reduction in staff with the closure of our branch office at the end of 2007.

Income Tax Expense. Income tax expense was $29,000 for the three months ended September 30, 2008 compared to an expense of $38,000 for the three months ended September 30, 2007. The change was primarily due to the decrease in pretax income of $60,000 between the two comparative periods.

Comparison of Operating Results for the Nine Months Ended September 30, 2008 and 2007

General. For the first nine months of 2008, several factors affected our operations including the general declining interest rate environment, the gain on sale of our closed branch office, an increase in our provision for loan losses, and costs related to the implementation of the Company’s Equity Incentive Plan and the Stock Repurchase Program. The Federal Open Market Committee’s actions to reduce the federal funds rate since September of 2007 impacted our revenue for the nine months ended September 30, 2008, primarily by reducing the interest income we earned on our adjustable rate loans, interest earning deposits and federal funds sold and, to a lesser extent, the cost of our interest bearing liabilities.

Net income decreased $230,000 to a net loss of $139,000 for the nine months ended September 30, 2008 compared to net income of $91,000 for the nine months ended September 30, 2007. Our net interest income decreased $118,000 or 5.0% to $2.3 million for the nine months ended September 30, 2008 primarily due to a decrease in our net interest margin to 2.66% for the first nine months of 2008 compared to 2.82% for the prior year period. In evaluating our allowance for loan losses, we determined that an additional $104,000 provision was required primarily due to a non-performing construction loan and an increase in losses on our automobile portfolio. Non-interest expense increased $194,000 or 8.2% to $2.6 million for the nine months ended September 30, 2008 from $2.4 million for the prior year period primarily due to an increase in occupancy and equipment expense, professional fees, and other expenses. These decreases were offset in part by an increase in non-interest income of $85,000 primarily due to the gain on the sale of our closed branch office.

Interest Income. Interest income was $4.8 million for the nine months ended September 30, 2008, $349,000 or 6.8% lower than the prior year period. Interest income from loans increased $45,000 or 1.0% to $4.6 million primarily due to a $7.5 million increase in the average loan portfolio balance for the nine months ended September 30, 2008 compared to the prior year period. The average yield on loans for the nine months ended September 30, 2008 decreased to 5.92% compared to 6.33% for the prior year period. The decrease in our yield was due to declining rates on our adjustable rate loans and the reversal of $42,000 of interest related to non-accrual loans. Interest income for the nine months ended September 30, 2007 was partially affected by a $35,000 payment on a prior loan restructuring. The increase in our average loan portfolio balance was attributable to: a $7.4 million increase in the average balance of our consumer loans, primarily automobile loans; a $3.6 million increase in the average balance of our home equity lines-of-credit; and a $3.4 million increase in the average balance of our construction loans. These increases were offset by a $7.0 million decrease in the average balance of our one- to four-family real estate loans due to payments on our adjustable rate loans from prior pool purchases.

Interest income from securities decreased $63,000 or 33.5% to $125,000 for the nine months ended September 30, 2008. Dividend income from Federal Home Loan Bank of Chicago stock declined $31,000 due to the suspension of dividend payments at the end of the third quarter in 2007. The average balance of our securities decreased $982,000 to $4.9 million for the nine months ended September 30, 2008 due to payments on mortgage-backed securities. The yield on securities for the nine months ended September 30, 2008 was 3.40% compared to 4.27% for the prior year period, primarily due to the suspension of dividend payments on Federal Home Loan Bank stock. The Federal Home Loan Bank does not anticipate the resumption of dividend payments the remainder of the year. We do not know when or if the Federal Home Bank will resume dividend payments on our $1.3 million of Federal Home Loan Bank stock.

Interest from other interest-earning assets for the nine months ended September 30, 2008 decreased $331,000 to $87,000. The average balance of other interest-earning assets decreased $5.5 million to $5.3 million for the nine months ended September 30, 2008 compared to $10.8 million the prior year period which included funds received from our initial public offering which closed on October 18, 2006. The decrease in the average balance of our other interest-earning assets was used to fund the increase in our loan portfolio. The average yield on other interest-earning assets was 2.20% for the first nine months of 2008 compared to 5.17% for the prior year period due to declining market interest rates.

Interest Expense. Interest expense for the nine months ended September 30, 2008 was $2.5 million, a decrease of $231,000 or 8.3% from the prior year period. Interest on deposits decreased $333,000 due to a decrease in the average cost of deposits. Our average cost of deposits decreased to 3.38% for the nine months ended September 30,

2008 compared to 3.83% for the prior year period. The average balance of interest bearing deposits decreased $948,000 to $92.8 million for the nine months ended September 30, 2008 compared to the prior year period due to a $2.5 million decrease in the average balance of savings, demand, and money market accounts. This decrease was offset by an increase of $1.6 million in the average balance of certificates of deposit. While our rates for deposit products is competitive within our market area, some above market rates for certificates of deposit offered by competitors have affected our ability to decrease costs further in the declining rate environment and slowed our deposit growth.

Interest expense on advances from the Federal Home Loan Bank of Chicago increased $102,000 for the nine months ended September 30, 2008 from the prior year period due to an additional advance totaling $2.0 million since September 30, 2007. The average balance of Federal Home Loan Bank advances for the nine months ended September 30, 2008 was $5.4 million with an average cost of 4.51% compared to an average balance of $2.3 million with an average cost of 4.71% for the prior year period.

Net Interest Income. Net interest income for the nine months ended September 30, 2008 was $2.3 million, $118,000 or 5.0% less than for the nine months ended September 30, 2007 as the yields on our federal funds sold and certain prime based adjustable rate loans decreased faster than the cost of our certificates of deposit in a rapidly decreasing interest rate market. For the nine months ended September 30, 2008, the average yield on interest-earning assets was 5.63% and the average cost of interest-bearing liabilities was 3.44% compared to 6.11% and 3.86%, respectively, for the nines month ended September 30, 2007. These changes resulted in a decrease in our net interest rate spread to 2.19% for the nine months ended September 30, 2008 compared to 2.25% in the prior year period.

Our provision for loan losses was $104,000 for the nine months ended September 30, 2008 compared to a $12,000 provision for the prior year period. The increase in our provision resulted primarily from a decline in the value of a partially completed home securing a construction loan and increased losses on our automobile loan portfolio. While underwriting standards for automobile loans have been tightened, further weakening in the economy may impact the performance of our automobile portfolio.

Non-interest Income. For the nine months ended September 30, 2008, non-interest income increased $85,000 or 60.3% to $226,000 primarily due to the $129,000 gain on the sale of the closed branch office offset by losses from the sale of repossessed automobiles which totaled $18,000. Fees received from providing loan origination services for other financial institutions, a component of service fee income, totaled $15,000 for the nine months ended September 30, 2008 compared to $38,000 for the prior year period. This decrease was due to lower origination activity which totaled $1.2 million in the first nine months of 2008 compared to $9.0 million for the prior year period.

Non-interest Expense. For the nine months ended September 30, 2008, non-interest expense increased $194,000 or 8.2% to $2.6 million compared to $2.4 million for the nine months ended September 30, 2007. Compensation and benefits expense decreased $29,000 or 2.1% for the nine months ended September 30, 2008 from the prior year period to $1.4 million primarily due to staff reductions with the closure of our branch office. Professional fees increased $56,000 or 29.6% to $245,000 for the first nine months of 2008 primarily due to legal fees to establish the Company’s Equity Incentive Plan and Stock Repurchase Program. Occupancy and equipment expense increased $98,000 or 26.9% due to the higher lease costs for our new main office and additional depreciation charges related to the build-out and furniture and equipment for the new office. Data processing costs increased $23,000 to $189,000. Other expenses increased $46,000 or 16.6% and included $12,000 related to the special meeting of stockholders and $32,000 related to repossessed assets. Total costs related to the Incentive Plan, special meeting, and Repurchase Program totaled $48,000.

Since the second quarter of 2007, our FDIC insurance assessment has been substantially reduced by a special one time credit. Management believes this credit will be substantially exhausted in 2009. Accordingly, our FDIC assessment could be substantially higher in future periods depending on the premium rates set by the FDIC for such

periods. In October 2008, the FDIC announced its proposal to restore the reserve ratio of the deposit insurance fund to 1.25%. The proposal includes changes in the factors used to calculate the premium as well as increases that would double the premium rates. The proposed changes are expected to take effect the first quarter of 2009. For the nine months ended September 30, 2008, our FDIC premium was $10,000, the same as the prior year period.

Income Tax Expense (Benefit). The benefit for income taxes was $47,000 for the nine months ended September 30, 2008 compared to an expense of $42,000 for the nine months ended September 30, 2007. The change was due to the decrease in pretax income of $319,000 between comparable periods.

Analysis of Net Interest Income

Net interest income represents the difference between the income we earn on interest-earning assets and the interest expense we pay on interest-bearing liabilities. Net interest income also depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them.

The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income.


	Three Months Ended September 30,
	2008						2007
	Average Outstanding Balance		Interest		Yield/Cost		Average Outstanding Balance		Interest		Yield/Cost
	(Dollars in thousands)
Assets:
One- to four-family	$	40,200	$	536	5.33	%	$	50,088	$	697	5.57	%
Multi-family, commercial real estate, and land		28,936		482	6.61			27,263		452	6.58
Construction		6,778		109	6.40			5,532		165	11.79
Commercial business		2,855		56	7.78			3,906		89	9.03
Home equity lines-of-credit		12,830		128	3.97			7,688		141	7.26
Automobile and other consumer		11,952		187	6.19			6,045		104	6.82

Total loans		103,551		1,498	5.76			100,522		1,648	6.53
Securities and FHLB stock		4,672		39	3.33			5,639		59	4.23
Other interest-earning assets		5,736		26	1.78			5,880		74	5.02

Total interest-earning assets		113,959	$	1,563	5.46			112,041	$	1,781	6.33
Non-interest-earning assets		3,362						2,475

Total assets	$	117,321					$	114,516


Liabilities and stockholders’ equity:
Savings deposits	$	7,466	$	9	0.47		$	8,208	$	17	0.84
Money market/demand accounts		15,721		34	0.85			16,903		64	1.50
Certificates of deposit		68,859		685	3.94			67,321		825	4.86

Total deposits		92,046		728	3.13			92,432		906	3.89
FHLB advances		6,500		73	4.48			2,924		35	4.80

Total interest-bearing liabilities		98,546		801	3.22			95,356		941	3.92

Non-interest-bearing liabilities		1,909						1,872
Other liabilities		1,249						1,491

Total liabilities		101,704						98,719
Stockholders’ equity		15,617						15,797

Total liabilities and stockholders’ equity	$	117,321					$	114,516

Net interest income			$	762					$	840

Net interest rate spread					2.24	%					2.41	%

Net interest-earning assets	$	15,413					$	16,685

Net interest margin					2.67	%					3.00	%

Average of interest-earning assets to interest-bearing liabilities					115.64	%					117.50	%


	Nine Months Ended September 30,
	2008						2007
	Average Outstanding Balance		Interest		Yield/Cost		Average Outstanding Balance		Interest		Yield/Cost
	(Dollars in thousands)
Assets:
One- to four-family	$	42,757	$	1,729	5.39	%	$	49,764	$	2,024	5.42	%
Multi-family, commercial real estate, and land		28,116		1,416	6.71			27,119		1,330	6.55
Construction		7,621		378	6.60			4,186		328	10.49
Commercial business		2,999		176	7.83			3,874		260	8.97
Home equity lines-of-credit		10,926		357	4.35			7,362		413	7.50
Automobile and other consumer		11,096		539	6.46			3,680		195	7.10

Total loans		103,515		4,595	5.92			95,985		4,550	6.33
Securities and FHLB stock		4,904		125	3.40			5,886		188	4.27
Other interest-earning assets		5,265		87	2.20			10,815		418	5.17

Total interest-earning assets		113,684	$	4,807	5.63			112,686	$	5,156	6.11
Non-interest-earning assets		3,393						2,352

Total assets	$	117,077					$	115,038


Liabilities and stockholders’ equity:
Savings deposits	$	7,566	$	29	0.50		$	8,587	$	54	0.84
Money market/demand accounts		16,152		113	0.93			17,652		197	1.49
Certificates of deposit		69,118		2,215	4.27			67,544		2,439	4.83

Total deposits		92,836		2,357	3.38			93,783		2,690	3.83
FHLB advances		5,412		183	4.51			2,312		81	4.71

Total interest-bearing liabilities		98,248		2,540	3.44			96,095		2,771	3.86

Non-interest-bearing liabilities		1,868						1,887
Other liabilities		1,236						1,304

Total liabilities		101,352						99,286
Stockholders’ equity		15,725						15,752

Total liabilities and stockholders’ equity	$	117,077					$	115,038

Net interest income			$	2,267					$	2,385

Net interest rate spread					2.19	%					2.25	%

Net interest-earning assets	$	15,436					$	16,591

Net interest margin					2.66	%					2.82	%

Average of interest-earning assets to interest-bearing liabilities					115.71	%					117.27	%

Rate/Volume Analysis

The following table presents the dollar amount of changes in interest income and interest expense for the major categories of Ben Franklin Financial, Inc.’s interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (i) changes attributable to changes in volume (i.e., changes in average balances multiplied by the prior-period average rate) and (ii) changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.


	Three Months Ended September 30, 2008 vs. 2007									Nine Months Ended September 30, 2008 vs. 2007
	Increase (Decrease) Due to						Total Increase (Decrease)			Increase (Decrease) Due to						Total Increase (Decrease)
	Volume			Rate			Total Increase (Decrease)			Volume			Rate			Total Increase (Decrease)
	(Dollars in thousands)
Interest-earning assets:
Loans:
One- to four-family	$	(132	)	$	(29	)	$	(161	)	$	(284	)	$	(11	)	$	(295	)
Multi-family, commercial real estate, and land		27			3			30			52			34			86
Construction		31			(87	)		(56	)		202			(152	)		50
Commercial business		(22	)		(11	)		(33	)		(54	)		(30	)		(84	)
Home equity lines-of-credit		68			(81	)		(13	)		156			(212	)		(56	)
Automobile and other consumer		93			(10	)		83			363			(19	)		344

Total loans		65			(215	)		(150	)		435			(390	)		45
Securities		(9	)		(11	)		(20	)		(29	)		(34	)		(63	)
Other interest-earning assets		(1	)		(47	)		(48	)		(156	)		(175	)		(331	)

Total interest-earning assets		55			(273	)		(218	)		250			(599	)		(349	)

Interest-bearing liabilities:
Savings deposits		(1	)		(7	)		(8	)		(6	)		(19	)		(25	)
Money market/demand accounts		(4	)		(26	)		(30	)		(16	)		(68	)		(84	)
Certificates of deposit		18			(158	)		(140	)		58			(282	)		(224	)

Total deposits		13			(191	)		(178	)		36			(369	)		(333	)
FHLB Advances		40			(2	)		38			105			(3	)		102

Total interest-bearing Liabilities		53			(193	)		(140	)		141			(372	)		(231	)

Change in net interest income	$	2		$	(80	)	$	(78	)	$	109		$	(227	)	$	(118	)

Liquidity and Capital Resources

Our primary sources of funds are deposits and the proceeds from principal and interest payments on loans and mortgage-backed securities. While maturities and scheduled amortization of loans and securities are predicable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. We generally manage the pricing of our deposits to be competitive within our market and to increase core deposit relationships.

Liquidity management is both a daily and long-term responsibility of management. We adjust our investments in liquid assets based upon management’s assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-earning deposits and securities, and (iv) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning overnight deposits, federal funds sold, and short and intermediate-term U.S. Government sponsored entity obligations and mortgage-backed securities of short duration. If we require funds beyond our ability to generate them internally, we have additional borrowing capacity with the Federal Home Loan Bank of Chicago.

Our cash flows are comprised of three primary classifications: (i) cash flows from operating activities, (ii) investing activities, and (iii) financing activities. Net cash from operating activities was ($322,000) and $41,000 for the nine months ended September 30, 2008 and 2007, respectively. Net cash from investing activities consisted primarily of disbursements for loan originations and purchases, offset by principal collections on loans and mortgage-backed securities. Net cash from investing activities was $1.9 million and ($11.5) million for the nine months ended September 30, 2008 and 2007, respectively. Net cash from financing activities consisted primarily of the activity in deposit, borrowing, and escrow accounts. The net cash from financing activities was $1.1 million and ($2.9) million for the nine months ended September 30, 2008 and 2007, respectively.

Our most liquid assets are cash and short-term investments. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period. We may also utilize the sale of securities available-for-sale, federal funds purchased, Federal Home Loan Bank of Chicago advances and other borrowings as sources of funds. At September 30, 2008, cash and cash equivalents totaled $6.4 million.

At September 30, 2008, the Bank exceeded all of its regulatory capital requirements to be well capitalized with a Tier 1 (core) capital level of $11.9 million, or 10.10% of adjusted total assets which was $6.0 million above the required level of $5.9 million, or 5.00%; and total risk-based capital of $12.4 million or 12.88% of risk weighted assets, which was $2.8 million above the required level of $9.6 million or 10.00%. The Bank at September 30, 2008 was categorized as well capitalized. Management is not aware of any conditions or events since the most recent notification that would change the Bank’s category.

At September 30, 2008, we had outstanding commitments to originate loans of $2.6 million. We anticipate that we will have sufficient funds available to meet our current loan commitments. Loan commitments have, in recent periods, been funded through liquidity and normal deposit flows. Certificates of deposit scheduled to mature in one year or less from September 30, 2008 totaled $52.6 million. Management believes, based on past experience that a significant portion of such deposits will remain with us. Based on the foregoing, in addition to our level of core deposits and capital, we consider our liquidity and capital resources sufficient to meet our outstanding short-term and long-term needs.

Off-Balance Sheet Arrangements.

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and available lines of credit. For the nine months ended September 30, 2008, we did not engage in any off-balance sheet transactions other than loan origination commitments in the normal course of our lending activities.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

This item is not applicable because we are a smaller reporting company.

Item 4.

Controls and Procedures

We have adopted disclosure controls and procedures designed to facilitate our financial reporting. The disclosure controls currently consist of communications among the Chief Executive Officer, the Chief Financial Officer and each department head to identify any transactions, events, trends, risks or contingencies which may be material to our operations. Our disclosure controls also contain certain elements of our internal controls adopted in connection with applicable accounting and regulatory guidelines. Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our interim disclosure controls as of the end of the period covered by this report and found them to be effective. Finally, the Chief Executive Officer, Chief Financial Officer, the Audit Committee and our independent registered public accounting firm also meet on a quarterly basis.

We maintain internal control over financial reporting. There have not been any significant changes in such internal control over the financial reporting in the last quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II Other Information

Item 1.

Legal Proceedings

At September 30, 2008 there are no material pending legal proceedings to which the Company or the Bank is a party other than ordinary routine litigation incidental to their respective businesses.

Item 1A.

Risk Factors

This item is not applicable because we are a smaller reporting company.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds


Period	Total Number of Share (or Units) Purchased	Average price Paid per Share (or Unit)		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plan or Program	Maximum Number (or Approximate Dollar Value of Shares (or Units) that May Yet Be Purchased Under the Plan or Program
July 1, 2008 – July 31, 2008	8,000	$	7.13	8,000	30,634
August 1, 2008 – August 31, 2008	3,750	$	7.65	3,750	26,884
September 1, 2008 – September 30, 2008	—		—	—	26,884
Total	11,750	$	7.30	11,750	26,884

On April 23, 2008, the Company announced its Stock Repurchase Program pursuant to which the Company intends to repurchase 44,634 shares of its outstanding common stock (excluding shares owed by the MHC). The Stock Repurchase Program will be in effect through December 31, 2008.

Item 3.

Defaults upon Senior Securities

Not Applicable

Item 4.

Submission of Matters to a Vote of Security Holders

Not Applicable

Item 5.

Other Information

Not Applicable

Item 6.

Exhibits

(a) Exhibits


31.1		Rule 13(a) – 14(a) Certification (Chief Executive Officer)

31.2		Rule 13(a) – 14(a) Certification (Chief Financial Officer)

32.1		Section 1350 Certification (Chief Executive Officer)

32.2		Section 1350 Certification (Chief Financial Officer)

Signatures

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


		BEN FRANKLIN FINANCIAL, INC. (Registrant)

Date: November 14, 2008		/s/ C. Steven Sjogren
		C. Steven Sjogren
		President and Chief Executive Officer

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company