UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED March 31,June 30, 2010

OR

For the transition period from            to            

Commission file number 000-52240

Ben Franklin Financial, Inc.

(Exact name of registrant as specified in its charter)

(847) 398-0990

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files ).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “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 May 14,August 13, 2010: 1,950,383 shares

BEN FRANKLIN FINANCIAL, INC.

INDEX

PART I – Financial Information

Item 1. Financial Statements

BEN FRANKLIN FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in thousands except share data)

(Unaudited)

See accompanying notes to consolidated financial statements

BEN FRANKLIN FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands except per share amounts)

(Unaudited)

See accompanying notes to consolidated financial statements

BEN FRANKLIN FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the threeSix Months Ended March 31,June 30, 2010 and 2009 – (Unaudited)

See accompanying notes to consolidated financial statements

BEN FRANKLIN FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

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. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto that were included in the Company’s Form 10-K for the year ended December 31, 2009. All significant intercompany transactions are eliminated in consolidation. In the opinion of the Company’s management, all adjustments necessary (i) for a fair presentation of the financial statements for the interim periods included herein and (ii) to make such financial statements not misleading have been made and are of a normal and recurring nature. 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 2009 Annual Report on Form 10-K.

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 (“FDIC”). 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 – New Accounting Standards

In January 2010, the FASB issued guidance to improve disclosure requirements related to fair value measurements and disclosures. The guidance requires that a reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers and that activity in Level 3 should be presented on a gross basis rather than one net number for information about purchases, issuances, and settlements. The guidance also requires that a reporting entity should provide fair value measurement disclosures for each class of assets and liabilities and about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. This guidance is effective for interim and annual reporting periods beginning after December 31, 2009 except for the roll forward of activity in Level 3 which is effective for interim and annual reporting periods beginning after December 31, 2010. Adopting this pronouncement did not have a material effect on the results of operations or financial condition of the Company.

In FebruaryApril 2010, the FASB issued guidance relatedfor loan modifications when the loan in question is part of a pool of loans accounted for as a single asset. Diversity in practice developed surrounding how to certain recognition and disclosure requirementsaccount for loans that are part of a pool subsequent events which previously may have conflicted with someto a modification that would constitute a troubled debt restructuring. The purpose of this update is to eliminate the diversity in practice. Under the new guidance loans that are accounted for as part of a pool are not isolated from the pool for accounting purposes subsequent to a modification, even if the modification constitutes a troubled debt restructuring. Upon adoption of the Securities and Exchange Commission (“SEC”) guidance. This guidance removes the requirement for an SEC filer to disclose a date in both issued and revised financial statements. Additionally the Board has clarified that if financial statements have been revised, thenupdate, an entity thatmay make a one-time election to terminate accounting for loans in a pool, and this election may be applied on a pool by pool basis. This accounting treatment for the modification of loans accounted for as part of larger pools is effective for all interim and annual reporting periods beginning on or after July 15, 2010. As the Company does not an SEC filer should disclose both the datecurrently have any loans accounted for in pools, we do not expect that the financial statements were issued or available to be issued and the date the revised financial statements were issued or available to be issued. This guidance is effective upon issuance. Adoptingadoption of this pronouncement did notstandard will have a material effectan impact on the Company’s consolidated financial position, results of operations or financial conditioncash flows.

In July 2010, the FASB updated disclosure requirements with respect to the credit quality of financing receivables and the allowance for credit losses. According to the guidance there are two levels of detail at which credit

information will presented - the portfolio segment and class levels. The portfolio segment level is defined as the level where financing receivables are aggregated in developing a Company’s systematic method for calculating its allowance for credit losses. The class level is the second level at which credit information will be presented and represents the categorization of financing related receivables at a slightly less aggregated level than the portfolio segment level. Companies will now be required to provide the following disclosures as a result of this update: a roll forward of the Company.allowance for credit losses at the portfolio segment level with the ending balances further categorized according to impairment method along with the balance reported in the related financing receivables at period end; additional disclosure of nonaccrual and impaired financing receivables by class as of period end; credit quality and past due/ aging information by class as of period end; information surrounding the nature and extent of loan modifications and troubled debt restructurings and their effect on the allowance for credit losses during the period; and detail of any significant purchases or sales of financing receivables during the period. The increased disclosure requirements become effective for annual/interim periods ending on or after December 15, 2010 with respect to period-end data and December 15, 2011 with respect to activity within a reporting period. The provisions of this update will expand the Company’s current disclosures with respect to our allowance for loan losses.

Note 3 – Securities Available-for-Sale

As of March 31,June 30, 2010 and December 31, 2009, the Company’s securities available-for-sale consisted of residential mortgage-backed securities issued by the Government National Mortgage Association, Federal Home Loan Mortgage Corporation or Federal National Mortgage Association. Gross unrealized gains and losses at March 31,June 30, 2010 were $105,000$127,000 and zero, respectively.

Note 4 – Loans

The following table sets forth the composition of our loan portfolio by type of loan, at the dates indicated. We had no loans held for sale at June 30, 2010 and December 31, 2009.

Non-performing Assets and Troubled Debt Restructurings

All non-performing loans were in non-accrual status at March 31,June 30, 2010 and December 31, 2009. No loans were past due ninety days or more and still accruing interest at March 31,June 30, 2010 or December 31, 2009.

The following table sets forth our non-performing assets and troubled debt restructurings by category at the dates indicated.indicated (dollars in thousands).

At March 31,June 30, 2010, our loans classified as troubled debt restructurings had eitherincluded one loan with a reduction in interest rate orfor twelve months which had an outstanding balance of $807,000 at June 30, 2010 and three loans for which there was a reduction in the payment amount for a twelve month period or less, at which time theless. All of these loans will revert to the original terms.terms at the end of the modifications period. At March 31,June 30, 2010, all of these loans arewere performing under their revised terms. There were no additional commitments to lend on the restructured notes.

Note 5 – Allowance for Loan Losses

The following table sets forth the activity in our allowance for loan losses for the periods indicated:

Note 6 – 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’sCompany's common stock in connection with the Company’s initial public offering at a price of $10 per share.

The ESOP has a plan year end of December 31. Expense related to the ESOP was $3,000 and $7,000 during the three months ended March 31,June 30, 2010 and 2009, respectively and $6,000 and $14,000 for the six months ended June 30, 2010 and 2009, respectively.

Shares held by the ESOP at March 31,June 30, 2010 were as follows:

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. As of March 31,June 30, 2010, 17,34834,696 options had vested. No options were exercised or forfeited as of March 31,June 30, 2010. The options had no intrinsic value as of March 31,June 30, 2010.

Stock option expense was $10,000 for the three months ended March 31,June 30, 2010, and 2009, respectively and $20,000 for the six months ended June 30, 2010, and 2009, respectively. As of March 31,June 30, 2010, $120,000$110,000 of unrecognized compensation cost is expected to be recognized over the next 3.12.8 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. As of March 31,June 30, 2010, 6,89613,792 shares had vested. None of the restricted stock awards were forfeited as of March 31,June 30, 2010. Restricted stock award expense was $16,000 during the three months ended March 31,June 30, 2010 and 2009, respectively and $32,000 for the six months ended June 30, 2010, and 2009, respectively. As of March 31,June 30, 2010, there was $196,000$180,000 of unrecognized compensation cost related to shares granted under the Plan. The cost is expected to be recognized over the next 3.12.8 years.

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

No stock options or restricted stock awards have been granted since April 17, 2008.

Note 7 – Income Taxes

In the third quarter of 2009, the Company recorded a valuation allowance against its net deferred tax asset, thus reducing the net carrying value of deferred tax assets to zero. The valuation allowance is reviewed quarterly and adjusted based on amounts expected to be realized. The valuation allowance for our net deferred tax asset was $569,000$498,000 as of March 31,June 30, 2010.

Note 8 – Stock Repurchase Program

On April 23, 2008, the Company adopted a stock repurchase program to repurchase up to 44,634 shares or 4.8% of the Company’s outstanding common stock (excluding shares held by the MHC). This program was completed in January of 2009. On January 28, 2009, the Company adopted a second stock repurchase program to repurchase up to 42,487 shares representing approximately 5.0% of the Company’s outstanding common stock (excluding shares held by the MHC). As of March 31,June 30, 2010, the Company had repurchased 67,650 shares under both programs.

Note 9 – Earnings Per Share

Basic earnings (loss) 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 (loss) per share shows the dilutive effect, if any, of additional common shares issuable under stock options, using the treasury stock method. All stock options were considered antidilutive and were excluded from the computation of diluted earnings (loss) per share for the three and six months ended March 31,June 30, 2010 and 2009.

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

Note 10 – Fair Value

Fair value is defined 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. GAAP 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. GAAP 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.

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Securities Available for Sale: 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).

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on 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 usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Repossessed Assets: Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned (OREO) and repossessed automobiles are measured at the lower of carrying amount or fair value, less costs to sell. Fair values for OREO are generally based on third party appraisals of the property while fair values for automobiles are based on published values of comparable models, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

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

Assets Measured on a Non-Recurring Basis

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

Impaired loans, which are measured for impairment using the fair value of the collateral (less cost to sell) for collateral dependent loans, had a cost basisaggregate balance of $2,339,000,$2,352,000, with a $338,000$392,000 valuation allowance at March 31,June 30, 2010 resulting in an additional provision for loan losses of $35,000$56,000 for the three months ended March 31,June 30, 2010. Impaired loans at December 31, 2009 had a cost basisan aggregate balance of $3,144,000 with a $303,000 valuation allowance.

Repossessed assets, consisting of other real estate owned and repossessed automobiles are measured at the lower of cost or fair value less cost to sell. Repossessed assets were carried at cost of $220,000$486,000 at March 31,June 30, 2010 and at $991,000 at December 31, 2009, consisting of the cost basis of $1,125,000 and a valuation allowance of $134,000.

The carrying amounts and estimated fair values of the Company’sCompany's financial instruments are as follows:

The methods and assumptions used to determine fair values for each class of financial instrument are presented below.

The estimated fair values for cash and cash equivalents, accrued interest receivable, demand, money market, and savings deposits, and accrued interest payable approximate their carrying values. The estimated fair values for securities available-for-sale are based on matrix pricing. It was not practicable to determine the fair value of FHLB stock due to the restriction placed on transferability. The estimated fair value for loans is based on current market rates for similar loans, applied for the time period until estimated payment. The estimated fair value of certificates of deposit is based on current market rates for such deposits, applied for the time period until maturity. The fair value of FHLB advances is based on current rates for similar financing. Commitments to extend credit are not included in the table above as their estimated fair value is immaterial.

While the above estimates are based on management’smanagement's judgment of the most appropriate factors, there is no assurance that were the Company to have disposed of these items on March 31,June 30, 2010, the fair values would have been achieved, because the market value may differ depending on the circumstances.

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 one-to four family,four-family, home equity line-of-credit, multi-family, commercial real estate, construction, land, commercial business, and automobile lending including purchased loans; the future level of deposit insurance premiums and special assessments 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 including a transaction assisted by the FDIC; changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments; inflation; general economic conditions, both nationally and 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); our ability to originate a satisfactory amount of high quality loans in an unfavorable economic environment; legislative or regulatory changes that adversely affect our business including the recently enacted banking reform legislation currently under consideration by the U.S. Congress; the impact of the U.S. government’s stimulus program and its various financial institution rescue plans including TARP; the effect of the Dodd-Frank Reform Act, 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; the performance of our investment in FHLB of Chicago stock; changes in our organization, compensation and benefit plans; and other factors. 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.

New Federal Legislation

Congress has recently enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act which will significantly change the current bank regulatory structure and affect the lending, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act will eliminate our current primary federal regulator, the Office of Thrift Supervision, and will require the Bank to be regulated by the Office of the Comptroller of the Currency (the primary federal regulator for national banks). The Dodd-Frank Act also authorizes the Board of Governors of the Federal Reserve System to supervise and regulate all savings and loan holding companies like the Company, in addition to bank holding companies which it currently regulates. As a result, the Federal Reserve Board’s current regulations applicable to bank holding companies, including holding company capital requirements, will apply to savings and loan holding companies like the Company. These capital requirements are substantially similar to the capital requirements currently applicable to the Bank. The Dodd-Frank Act also requires the Federal Reserve Board to set minimum capital levels for bank holding companies that are as stringent as those required for the insured depository subsidiaries, and the components of Tier 1 capital would be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions. Bank holding companies with assets of less than $500 million are exempt from these capital requirements. Under the Dodd-Frank Act, the proceeds of trust preferred securities are excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010 by bank or savings and loan holding companies with less than $15 billion of assets. The legislation also establishes a floor for capital of insured depository institutions that cannot be lower than the standards in effect today, and directs the federal banking regulators to implement new leverage and capital requirements within 18 months that take into account off-balance sheet activities and other risks, including risks relating to securitized products and derivatives.

The Dodd-Frank Act also creates a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions such as the Bank, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets will be examined by their applicable bank regulators. The new legislation also weakens the federal preemption available for national banks and federal savings associations, and gives state attorneys general the ability to enforce applicable federal consumer protection laws.

The legislation also broadens the base for Federal Deposit Insurance Corporation insurance assessments. Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act also permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2009, and non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2013. Lastly, the Dodd-Frank Act will increase stockholder influence over boards of directors by requiring companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and authorizing the Securities

and Exchange Commission to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials. The legislation also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not.

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, home equity lines-of-credit, commercial real estate loans, multi-family real estate loans, construction and land loans, and other loans. Over the past several years, we have also purchased automobile loans and commercial loans secured by medical equipment although purchases for automobile loans ended in 2008 and purchases of medical equipment loans ended in 2009. We have also invested in mortgage-backed securities and U.S. Government sponsored entity notes. Our primary sources of funds are deposits and principal and interest payments on loans and securities. 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. We also use borrowings, primarily Federal Home Loan Bank of Chicago advances, to supplement cash flow needs, to 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, mortgage-backed and other securities, and other interest-earning assets, 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 and loan origination service fees charged for loans funded by other institutions, and miscellaneous other income. Non-interest expense consists primarily of compensation and employee benefits, occupancy and equipment expenses, data processing, professional fees, FDIC insurance premiums and assessments, and other operating expenses. Our results of operations may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.

To achieveSince March of 2009 we have experienced a decline in assets primarily due to the decrease in the balance of our growthloan portfolio as loan originations have not kept pace with repayments and profitability objectives, managementpayoffs in the portfolio primarily due to weak loan demand during the current economic recession. We will continue, subject to market conditions, to focus on expanding multi-family, home equity lines-of-credit, commercial real estate and commercial business lending while maintaining our current level of one- to four-family residential lending. We also anticipate, depending on the real estate market and economic conditions, continuing construction lending. In addition, we will pursue other lending alternatives to diversify our loan portfolio and to manage credit and interest rate risks and may pursue other opportunities to achieve growth.

At the beginning of 2010 we bid for another financial institution marketed by the FDIC; however, a larger financial institution was selected based on a higher offer. We may explore additional expansion opportunities in the future, subject to our capital or other limitations.

The current weak economic environment has impacted the value of real estate and has many businesses facing financial pressures, and thus will present challenges to our growth objectives. While we believe growth is essential for our future profitability, we intend to carefully monitor our underwriting standards and the concentration levels within our loan portfolio to manage our exposure to credit risks.

The current weak economic environment has impacted the value of real estate and has many businesses facing financial pressures. We are alsocontinue to focus our efforts on working to reducewith our currentborrowers during these difficult times, however, when appropriate we pursue legal recourse through foreclosure or other actions as part of our goal of reducing our non-performing assets to strengthen our financial condition. assets.

While we have experienced some earnings and asset quality challenges the past several years, primarily due to the local and national economic environment, we are hopeful that development ofbeginning to see some positive signs in our immediate area. A

large regional grocery chain has opened a new store next to our main office and work has begun on the residential areadevelopment immediately surrounding our main officeoffice. We are hopeful that these early signs of recovery will proceed asprovide opportunities to help us meet our growth objectives for the village and developer negotiate terms, continued weaknessfuture. We may also explore additional expansion opportunities in the economy and loan demand may adversely impact this development as well asfuture, subject to our ability to achieve our financial objectives including loan growth in 2010.capital or other limitations.

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 and/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-K for the year ended December 31, 2009, management believes that its critical accounting policies include determining the allowance for loan losses, determination of the fair value of stock options and accounting for stock based compensation under the Company’s Equity Incentive Plan, and accounting for deferred income taxes.

Comparison of Financial Condition at March 31,June 30, 2010 and December 31, 2009

General. The local economy provided mixed signals duringDuring the first quartersix months of 2010, as home sales statewidewe experienced a decrease in Illinois rose 23.5% comparedassets primarily due to the first quarter of 2009; however, foreclosures increased 17.5% over the same period statewide. We continueda decrease in our loan portfolio due to experience lower loan origination activity in the first quarter of 2010originations as loan demand remained weak. Our effortsweak in the current economic environment. In addition, deposit balances decreased during the first half of 2010 primarily due to reducea decrease in certificates of deposit. While certificates of deposit customers pursued higher interest rates, other deposit customers exhibited a preference for liquidity as evidenced by the increase in the balance of our money market accounts. With our excess liquidity, we paid off a maturing Federal Home Loan Bank advance at the end of June.

The prolonged economic downturn continued to impact our borrowers’ ability to meet debt obligations and our efforts to resolve our non-performing assets resulted inloans have been impacted by the salelengthy foreclosure process. During the first half of a2010 we sold one foreclosed single-family property during the first quarter of 2010, reducingwhich reduced the balance of our repossessed assets. Given the current economic environment, we do not anticipate growth during the remainder of the year as we focus on reducing our non-performing assets by $750,000. We also experienced a decrease in deposit accounts since December 31, 2009, primarily certificates of deposit, as interest rates for these accounts have generally decreased in our market area. While we have experienced some contraction in our balance sheet,and improving our capital position has improved and we continue to explore opportunities to deploy our excess liquidity.through earnings.

Assets.Total assets at March 31,June 30, 2010 were $117.3$114.2 million compared to $119.7 million at December 31, 2009, a decrease of $2.4$5.5 million or 2.0%4.6%. This decrease was primarily due to a $2.6$4.7 million decrease in our net loan portfolio balance, and a $771,000$505,000 decrease in our repossessed assets, partially offset byand a $1.3 million increase$370,000 decrease in our cash and cash equivalents.other assets.

Our net loan portfolio balance was $102.0decreased to $99.9 million at March 31,June 30, 2010 compared to $104.6 million at December 31, 2009. During2009 primarily due to loan repayments and payoffs and the three months ended March 31, 2010,transfers of loans to repossessed assets. The decrease included: a $2.1 million decrease in the balance of our construction and automobile loans decreased $1.8loans; a $1.5 million and $667,000 respectively, due to repayments and pay-offs. These decreases were partially offset by a $451,000 increasedecrease in our commercial real estateautomobile loans; and a $1.0 million decrease in our one- to four-family residential loans. Overall, we anticipate our loan origination activityportfolio balance will remain at current levels until real estate values stabilize anddecrease slightly throughout the economy begins to recover.remainder of 2010 as loan demand remains weak.

At March 31,June 30, 2010 our allowance for loan losses was $997,000$1.0 million or 0.97%1.03% of total loans compared to $940,000 or 0.89% of total loans at December 31, 2009. Our allowance reflects the decrease in value of collateral securing non-performing real estate loans and an increase in the loss factors applied to pools of performing loans due to declining real estate values. Our non-performing loans and loans classified as troubled debt restructurings totaled $5.0$8.5 million or 4.89%8.43% of total loans at March 31,June 30, 2010 compared to $5.0$5.6 million or 4.77%5.29% of total loans at December 31, 2009. Our non-performing assets totaled $7.3 million or 6.24% of total assets at March 31, 2010 compared to $6.6 million or 5.49% of total assets at December 31, 2009 primarily due to a $1.5$3.1 million increase in our loans classified as troubled debt restructurings partially offset by a $750,000 decrease in repossessedwhich included three multi-family loans that totaled $2.9 million. Our foreclosed assets fromtotaled $486,000 at June 30, 2010 compared to $991,000 at December 31, 2009 primarily due to the $751,000 sale of a single-family residence.residence partially offset by the transfer to repossessed assets of a $222,000 multi-family residential property.

Our securities portfolio decreased $123,000$215,000 or 5.0%8.7% to $2.3$2.2 million at March 31,June 30, 2010 primarily due to repayments on mortgage-backed securities. Cash and cash equivalents increased $1.3 million$516,000 to $9.1$8.3 million at March 31,June 30, 2010. Subject to market conditions, management anticipates reducing the balance of cash and cash equivalents in the future to generate additional income.

Our other assets decreased $370,000 primarily due to the collection of federal tax refunds resulting from the carryback of our 2009 net operating loss against taxable income reported in prior years.

Liabilities. Our customer deposits decreased by $2.2$3.5 million or 2.1%3.4% to $100.9$99.6 million at March 31,June 30, 2010 compared to $103.1 million at December 31, 2009. Our certificate of deposit accounts decreased $4.0$7.8 million or 5.3%10.3% to $71.6$67.9 million at March 31,June 30, 2010 primarily due to lower market rates offered by the Company.Bank compared to our competition. Our non-certificate of deposit accounts increased $1.9$4.3 million or 6.8%15.5% to $29.3$31.7 million at March 31,June 30, 2010 primarily due to an increase in our money market accounts.accounts as customers sought liquid alternatives for their funds. With our excess liquidity, we paid off the remaining $2.0 million Federal Home Loan Bank advance at the end of June 2010.

Equity. Total stockholders’ equity at March 31,June 30, 2010 was $13.9$14.0 million, an increase of $100,000$157,000 or 0.7%1.1% from $13.8 million at December 31, 2009. The increase resulted primarily from our net income of $59,000$92,000 for the threesix months ended March 31,June 30, 2010, an increase of $35,000$59,000 for ESOP and other stock based compensation and an increase of $6,000$20,000 due to unrealized gains on available-for-sale securities.

Comparison of Operating Results for the Three Months Ended March 31,June 30, 2010 and 2009

General.For the three months ended March 31,June 30, 2010 our net income was $59,000$33,000 compared to a net loss of $96,000$423,000 for the three months ended March 31,June 30, 2009 primarily due to a decrease in our provision for loan losses of $305,000, an increase of $304,000 in our net interest income as deposit costs continued to decrease, due to maturing certificatesand a decrease of deposit repricing at current low market rates. Our valuation allowance$97,000 in non-interest expenses. These increases were offset by the change in our income tax of $242,000, as taxes for the balance ofperiod ended June 30, 2010 were impacted by adjustments to our net deferred tax asset also decreased incompared to the first quarter of 2010 resulting inprior year period which reflected a small tax benefit of $4,000 compared to $51,000 in 2009.primarily based on the entire net operating loss.

Interest IncomeIncome.. Interest income was $1.4 million for the three months ended March 31,June 30, 2010, $132,000$61,000 or 8.6%4.2% less than the prior year period. Interest income from loans decreased $119,000$50,000 or 7.9%3.6% to $1.4 million for the three months ended March 31,June 30, 2010 primarily due to a $5.7$5.6 million decrease in the average balance of our loan portfolio to $103.4$100.8 million for the three months ended March 31,June 30, 2010 compared to the prior year period. The average balance of our construction loans, automobile and consumer loans, and one -to four- family real estatehome equity line-of-credit loans decreased $3.8$3.6 million, $3.3$3.2 million, and $1.9 million$202,000 respectively for the comparative period primarily due to repayments and pay-offs.pay-offs and lower origination volume. These decreases were partially offset by a $1.7 million$753,000 increase in the average balance of our commercial business loans due to the purchase of medical equipment loans during 2009 and a $1.5 million$706,000 increase in the average balance of our multi-family, commercial real estate, and land loans. The decrease in interest income from loans was also due to a decreasepartially offset by an increase in the average yield of our loan portfolio which was 5.38% for the firstsecond quarter of 2010 compared to 5.54%5.28% for the prior year period primarily due to interest reversals for non-accrual loans for the downward repricing of our adjustable rate loans.three months ended June 30, 2009.

Interest income from securities decreased $12,000$9,000 or 34.3%29.0% to $23,000$22,000 for the three months ended March 31,June 30, 2010. The average balance of our securities portfolio decreased $743,000$647,000 to $2.3$2.2 million for the three months ended March 31,June 30, 2010 as compared to the prior year period due to repayments on mortgage-backed securities. The average yield on securities for the three months ended March 31,June 30, 2010 was 4.05%4.06% compared to 4.55%4.42% for the prior year period, primarily due to the downward repricing of our adjustable rate mortgage-backed securities.

Interest income from interest earning deposits was $2,000 for the three months ended June 30, 2010 compared to $4,000 for the prior year period primarily due to a $5.9 million decrease in the average balance to $7.4 million for the three months June 30, 2010.

Interest ExpenseExpense.. Interest expense for the three months ended March 31,June 30, 2010 was $490,000,$396,000, a decrease of $301,000$365,000 or 38.1%48.0% from the prior year period primarily due to the decrease in interest expense on deposits as a result of the general decline inlow market interest rates.rates and their impact on repricing maturing certificate of deposit accounts. Interest expense on deposits decreased $248,000 as our$313,000 primarily due to the decrease in the average cost of deposits decreased to 1.91%1.55% for the three months ended March 31,June 30, 2010 compared to 2.86%2.69% for the prior year period.period as the average cost of our certificates of deposit decreased to 1.93% from 3.29% for the respective periods. The average balance of interest

bearing deposits decreased $1.8$4.8 million to $100.1$97.7 million for the firstsecond quarter of 2010 compared to the prior year period primarily due to a $5.5$9.4 million decrease in the average balance of our certificate of deposit accounts to $74.0$69.2 million. The average balance of our non-certificate of deposit accounts increased to $26.1$28.5 million for the firstsecond quarter of 2010 compared to $22.3$24.0 million from the prior year period. Interest expense on advances from the Federal Home Loan Bank of Chicago was $19,000$20,000 for the three months ended March 31,June 30, 2010 compared to $72,000 for the prior year period primarily due to a $4.5 million decrease in the average balance of our advances due to the repayments in the second half of 2009. The average cost of our Federal Home Loan Bank advances was 3.93% for the second quarter of 2010 compared to 4.48% for the prior year period.

Net Interest IncomeIncome.. Net interest income for the three months ended March 31,June 30, 2010 was $914,000$980,000 compared to $745,000$676,000 for the three months ended March 31,June 30, 2009. For the three months ended March 31,June 30, 2010, the average yield on interest-earning assets was 4.99% and the average cost of interest-bearing liabilities was 1.59% compared to 4.70% and 2.80%, respectively, for the three months ended June 30, 2009. These changes resulted in an increase in our net interest rate spread to 3.40% and net interest margin to 3.55% for the second quarter of 2010 compared to a net interest rate spread of 1.90% and net interest rate margin of 2.21% for the second quarter of 2009.

Provision for Loan Losses. Our provision for loan losses was $173,000 for the three months ended June 30, 2010 compared to $478,000 for the three months ended June 30, 2009. Our provision for the three months ended June 30, 2010 was primarily related to the decrease in value of collateral securing non-performing real estate loans, $121,000 of which related to a loan secured by a multi-family residence which was foreclosed and transferred to repossessed assets. Our provision for the three months ended June 30, 2009 reflected: a $340,000 provision for a loan to a commercial leasing company; an increase in charge-offs primarily from the sale of collateral securing a non-performing commercial real estate loan, which we accepted in lieu of foreclosure, and automobile loans.

Non-interest Income. For the three months ended June 30, 2010, non-interest income was $30,000 compared to $38,000 for the three months ended June 30, 2009 primarily due to a $7,000 decrease in fees received for originating loans for other institutions.

Non-interest Expense. For the three months ended June 30, 2010, non-interest expense totaled $813,000 compared to $910,000 for the three months ended June 30, 2009, a decrease of 10.7%. FDIC insurance premiums decreased $60,000 primarily due to the special assessment imposed on all FDIC insured institutions in the second quarter of 2009, which totaled approximately $57,000. Compensation and employee benefit expense decreased $50,000 primarily due to staff reductions. Professional fees increased $19,000 primarily due to an increase in legal fees. All other expenses decreased $6,000 on a net basis.

Income Tax.Since the third quarter of 2009, we have maintained a valuation allowance for substantially all of our deferred tax assets. Our income tax benefit was $9,000 for the three months ended June 30, 2010 compared to $251,000 for the three months ended June 30, 2009. Our review of the allowance for our deferred tax asset resulted in the $9,000 tax benefit in the second quarter of 2010. The tax benefit for the three months ended June 30, 2009 was a result of our pretax loss of $674,000, prior to recording a valuation allowance in the third quarter of 2009.

Comparison of Operating Results for the Six Months Ended June 30, 2010 and 2009

General.For the six months ended June 30, 2010, our net income was $92,000 compared to a net loss of $519,000 for the six months ended June 30, 2009 primarily due to a decrease of $313,000 in our provision for loan losses, an increase of $473,000 in our net interest income as deposit costs continued to decrease, and a decrease of $108,000 in non-interest expenses. These increases were offset by the change in our income tax of $289,000, as taxes for the six months ended June 30, 2010 were impacted by adjustments to our deferred tax asset compared to the prior year period which reflected a tax benefit related to the net operating loss, prior to recording a valuation allowance in the third quarter of 2009.

Interest Income. Interest income was $2.8 million for the six months ended June 30, 2010, $193,000 or 6.5% less than the prior year period. Interest income from loans decreased $169,000 or 5.8% to $2.7 million for the six months ended June 30, 2010 primarily due to a $5.7 million decrease in the average balance of our loan portfolio to $102.1 million for the six months ended June 30, 2010 compared to the prior year period. The average balance of our construction loans, automobile and consumer loans, and one -to four- family real estate loans decreased $3.6

million, $3.3 million, and $965,000 respectively for the comparative period primarily due to repayments and pay-offs and lower origination volume. These decreases were partially offset by a $1.2 million increase in the average balance of our commercial business loans due to the purchase of medical equipment loans during 2009 and a $1.1 million increase in the average balance of our multi-family, commercial real estate, and land loans. The average yield of our loan portfolio was 5.38% for the first six months of 2010 compared to 5.41% for the prior year period.

Interest income from securities decreased $21,000 or 31.8% to $45,000 for the six months ended June 30, 2010. The average balance of our securities portfolio decreased $695,000 to $2.2 million for the six months ended June 30, 2010 compared to the prior year period due to repayments on mortgage-backed securities. The average yield on securities for the six months ended June 30, 2010 was 4.05% compared to 4.49% for the prior year period, primarily due to the downward repricing of our adjustable rate mortgage-backed securities.

Interest income from interest earning deposits was $3,000 for the six months ended June 30, 2010 compared to $6,000 for the prior year period primarily due to a $2.9 million decrease in the average balance to $7.5 million for the first six months of 2010.

Interest Expense. Interest expense for the six months ended June 30, 2010 was $886,000, a decrease of 666,000 or 42.9% from the prior year period primarily due to the decrease in interest expense on deposits as a result of the general low market interest rates and their impact on repricing maturing certificate of deposit accounts. Interest expense on deposits decreased $561,000 primarily due to the decrease in our average cost of deposits to 1.73% for the six months ended June 30, 2010 compared to 2.78% for the prior year period as the average cost of our certificates of deposit decreased to 2.16% from 3.38% for the respective periods. The average balance of interest bearing deposits decreased $3.3 million to $98.9 million for the first six months of 2010 compared to the prior year period primarily due to a $7.5 million decrease in the average balance of our certificate of deposit accounts to $71.6 million. The average balance of our non-certificate of deposit accounts increased to $27.3 million for the first six months of 2010 compared to $23.1 million from the prior year period. Interest expense on advances from the Federal Home Loan Bank of Chicago was $39,000 for the six months ended June 30, 2010 compared to $144,000 for the prior year period primarily due to a $4.5 million decrease in the average balance of our advances due to repayments during the second half of 2009. The average cost of our Federal Home Loan Bank advances was 3.93% for the first six months of 2010 compared to 4.48% for the prior year period.

Net Interest Income. Net interest income for the six months ended June 30, 2010 was $1.9 million compared to $1.4 million for the six months ended June 30, 2009. For the six months ended June 30, 2010, the average yield on interest-earning assets was 5.00% and the average cost of interest-bearing liabilities was 1.95%1.77% compared to 5.18%4.94% and 2.96%2.88%, respectively, for the threesix months ended March 31,June 30, 2009. These changes resulted in an increase in our net interest rate spread to 3.05%3.23% and net interest margin to 3.25%3.40% for the first quartersix months of 2010 compared to a net interest rate spread of 2.22%2.06% and net interest rate margin of 2.50%2.35% for the first quarter ofcomparative period in 2009.

Provision for Loan Losses. Our provision for loan losses was $69,000$242,000 for the threesix months ended March 31,June 30, 2010 compared to $77,000$555,000 for the threesix months ended March 31,June 30, 2009. Our provision for the threesix months ended March 31,June 30, 2010 was primarily related toreflected the decrease in value of collateral securing non-performing real estate loans and an increase in the loss factors applied to pools of performing loans due to weak real estate values. Our provision for the comparative period in 2009 reflected: a $340,000 provision for a loan to a commercial leasing company; an increase in charge-offs primarily from the sale of collateral securing a non-performing commercial real estate loan, which we accepted in lieu of foreclosure, and automobile loans; and the decline in collateral value for other non-performing loans which resulted in an increase in estimated loss factors applied to various performing loan segments of our portfolio.

Non-interest IncomeIncome.. For the threesix months ended March 31,June 30, 2010, non-interest income was $37,000$67,000 compared to $23,000$61,000 for the threesix months ended March 31,June 30, 2009 primarily due to a $9,000 decrease in losses on the sale of other assets.

Non-interest ExpenseExpense.. For the threesix months ended March 31,June 30, 2010, non-interest expense totaled $827,000decreased $108,000 to $1.6 million compared to $838,000 for the three months ended March 31, 2009,prior year period, a decrease of 1.3%6.2%. Compensation and employee benefit expensesexpense decreased $54,000$104,000 primarily due to staff reductions and a 5.0% salary reduction for senior officers’ which was effective May 2009. Other real estate losses and holding expensesFDIC insurance premiums decreased $13,000. Occupancy and equipment expense decreased $6,000. These decreases were partially offset by a $31,000 increase$37,000 primarily due to the special assessment imposed

on all FDIC insured institutions in professionalthe second quarter of 2009 which totaled approximately $57,000. Professional fees increased $50,000, including $27,000 for legal and advisory fees related to our bid for a financial institution in an FDIC assisted transaction in January of 2010. FDIC insurance premiums increased $23,000 due to the increase in assessment rates.All other expenses decreased $1,000 on a net basis.

Income Tax.Our income tax benefit was $4,000$13,000 for the threesix months ended March 31,June 30, 2010 compared to $51,000$302,000 for the threesix months ended March 31,June 30, 2009. Our review of the allowance for our deferred tax asset resulted in a $4,000the $13,000 tax benefit in the first quartersix months of 2010. The tax benefit for the threesix months ended March 31,June 30, 2009 was a result ofprimarily due to our pretax loss of $147,000.$821,000, prior to recording a valuation allowance for substantially all of our deferred tax assets in the third quarter of 2009.

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 table setstables 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.