SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549


__________




FORM
10-K




ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)




OF
THE SECURITIES EXCHANGE ACT OF 1934




For
the fiscal year ended December 31, 2008




Commission
File Number 000-51876




MUTUAL
FEDERAL BANCORP, INC.


(Exact
name of registrant as specified in its charter)




Federal
              (State
      or other jurisdiction of incorporation or organization)
            33-1135091
              (IRS
      Employer Identification No.)




2212
West Cermak Road


Chicago,
Illinois 60608


(Address
of principal executive offices)




(773) 847-7747


(Registrant’s
telephone number)




Securities
registered pursuant to Section 12(b) of the Act:  None




Securities
registered pursuant to Section 12(g) of the Act:  Common Stock, par value $0.01 per
share




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes  ̈   No
ý




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.  Yes  ̈   No
ý




Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act 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 ý   No
 ̈




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.   ̈




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




Large
      accelerated filer  ̈
            Accelerated
      filer  ̈Non-accelerated
      filer  ̈
              (Do
      not check if a smaller reporting company)
            Smaller
      reporting company ý





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




The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant was approximately $7,703,619 as of the last
business day of the registrant’s most recently completed second fiscal quarter,
based upon the last reported trade price of $10.90 on such date on the OTC
Bulletin Board.




There
were 3,334,273 shares of common stock of the registrant outstanding as of
March 20, 2009.




Documents
Incorporated by Reference:  Portions of the registrant’s definitive
proxy statement for its 2009 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A are incorporated
by reference into Part III, Items 10–14.













MUTUAL
FEDERAL BANCORP, INC.




Form
10-K for Fiscal Year Ended




December 31,
2008




Table
of Contents




PagePART I
                            1Item 1.  Business
                            1Item 1A.  Risk Factors
                            25Item 2.  Properties
                            27Item 3.  Legal Proceedings
                            27Item 4.  Submission of Matters to a Vote of
      Security Holders
                            27PART II
                            28Item 5.  Market for Registrant’s Common Equity,
      Related Stockholder Matters and Issuer Purchases of Equity
      Securities
                            28Item 7.  Management’s Discussion and Analysis
      of Financial Condition and Results of Operations
                            29Item 8.  Financial Statements and
      Supplementary Data
                            44Item 9.  Changes in and Disagreements with
      Accountants on Accounting and Financial Disclosure
                            44Item 9A(T).  Controls and
    Procedures
                            44Item 9B.  Other Information
                            44PART III
                            45Item 10.  Directors, Executive Officers and Corporate
      Governance
                            45Item 11.  Executive Compensation
                            45Item 12.  Security Ownership of Certain Beneficial
      Owners and Management and Related Stockholder Matters
                            45Item 13.  Certain Relationships and Related
      Transactions, and Director Independence
                            46Item 14.  Principal Accountant Fees and
      Services
                            46PART IV
                            46Item 15.  Exhibits and Financial Statement
      Schedules
                            46Mutual Federal Bancorp, Inc. Consolidated Financial
      Statements December 31, 2008 and 2007
                            F-1SIGNATURES
                            S-1EXHIBIT INDEX








i
 Table of Contents





PART I




ITEM
1.                      BUSINESS




General




Mutual
Federal Bancorp, Inc. (“the Company”) was formed in 2006 as a federally
chartered, mid-tier stock holding company of Mutual Federal Savings and Loan
Association of Chicago, a federally chartered savings and loan association
headquartered in Chicago, Illinois (referred to herein, together with its wholly
owned subsidiaries, EMEFES Service Corporation and 2212 Holdings, LLC, as “the
Bank”).  At December 31, 2008, Mutual Federal Bancorp, MHC (“MHC”),
was the majority (75%) stockholder of the Company.  MHC is owned by
the depositors of the Bank.




Through
the Bank, our principal business consists of attracting retail deposits from the
general public in the areas surrounding our office location in Chicago, Illinois
and investing those deposits, together with funds generated from operations,
primarily in one- to four-family fixed-rate residential mortgage loans and
multifamily residential mortgage loans, and in investment
securities.  We also offer consumer loans secured by deposits as an
accommodation to our customers.  Our revenues are derived principally
from interest on loans and securities, and from loan origination and servicing
fees.  Our primary sources of funds are deposits, FHLB advances, and
principal and interest payments on loans and securities.




Business
Strategy




Our
business strategy is to operate as a well-capitalized and profitable community
bank dedicated to providing quality customer service.  A main focus of
our business strategy has been to emphasize one- to four-family residential
mortgage lending, and we intend to continue to emphasize this type of
lending.  Management, however, has determined to broaden the range of
our products and services to enhance profitability, consistent with maintaining
our safety and soundness.  We intend to introduce additional products
and services, such as free checking and interest-bearing checking accounts,
debit cards, and on-line banking and bill payment during 2009.  There
can be no assurances, however, that we will successfully implement our business
strategy.




Highlights
of our business strategy are as follows:




· Continuing to emphasize fixed-rate
one- to four-family residential real estate
lending.  Historically, we have emphasized fixed-rate one- to
four-family residential lending within our market area.  As of
December 31, 2008, $32.6 million, or 61.6%, of our total loan portfolio
consisted of fixed-rate one- to four-family residential mortgage
loans.  During the year ended December 31, 2008, we originated
$1.5 million of one- to four-family residential mortgage loans compared to
$4.5 million of such loans during 2007.  We originate all loans
for portfolio and do not sell loans in the secondary market.  While we
will continue to emphasize one- to four-family lending, we also originate loans
secured by multi-family properties.  During the year ended December
31, 2008, we experienced an increase in demand for this type of loan and
originated $4.6 million of multi-family residential mortgage loans compared
to $2.7 million of such loans during 2007.  As of
December 31, 2008, $20.2 million, or 38.2%, of our total loan
portfolio consisted of multi-family residential mortgage loans.




· Offering new products and
services.  We currently are developing and seek to develop in
the future new services and deposit products for our customers, such as free
checking and interest-bearing checking accounts, debit cards, and on-line
banking and bill payment.  We






1
 Table of Contents




expect to
be able to begin offering some of these new products and services beginning in
the first half of 2009.  We believe that these new products will
increase our deposit base and our fee income.





· Opening a new drive-up
facility.During 2008 we acquired property next to our current
banking offices for the purpose of adding a drive-up facility, including two
drive-up lanes and an additional ATM.  We expect to open this facility
by fall of 2009.  We believe that the additional convenience offered
to our customers will attract new customers and increase our deposit
base.




· Maintaining high asset
quality.  Historically, we have maintained and will continue to
emphasize strong asset quality by following conservative underwriting criteria
and originating loans secured by real estate.  The Company does not
originate or purchase nontraditional loans such as interest-only, negative
amortization, or payment option adjustable rate mortgages.  The
Company does not originate or purchase sub-prime or alternative documentation
(Alt-A) loans.  However, primarily due to the continuing economic
recession and its impact on the residential real estate market in our market
area, our non-performing assets at December 31, 2008, increased to $3.2
million, or 4.48% of total assets, compared to $259,000, or 0.35% of total
assets at December 31, 2007.  We have and will continue to work
diligently to resolve our problem loans.  See “Allowance for Loan
Losses” below for further discussion of our non-performing loans.




· Maintaining high levels of interest
earning assets.  We intend to continue to maintain our high
level of interest earning assets.  At December 31, 2008, our
interest earning assets were 88.2% of total assets and our average interest
earning assets for 2008 were 156.0% of average interest-bearing
liabilities.  In spite of the increase in non-performing assets in
2008, we maintained a net interest rate margin of 3.97%, reflecting the high
level of interest earning assets and our strong capital position.




· Seeking growth through
expansion.  We believe our best opportunities for growth are
through potential acquisitions or through de novo branching, although
we currently have no specific plans to acquire an existing financial institution
or open a de novo
branch.  Completing an acquisition or opening a new branch would
provide us with an additional location, thereby increasing the potential number
of households and businesses we could serve.  An acquisition also may
provide us with an opportunity to enhance our management depth and augment our
current product offerings.  Additionally, any future acquisition may
provide us with an opportunity to pursue an alternate branding strategy for the
Bank by capitalizing on the brand awareness a potential target may have already
established in its market area.




Historically,
we have not experienced rapid growth in our business, but rather have sought to
grow our business consistently over time.  While our business plan
contemplates growth by pursuing acquisition opportunities and establishing new
branches, we have not in the past been successful in identifying suitable
acquisitions or locations to establish new branches.  If we ultimately
are not successful in identifying and completing suitable acquisitions or
establishing new branches, we may not be able to grow our business as we
hope.




In
February 2009, the Company entered into a non-binding agreement for a proposed
investment by the Company in Great American Bank (“Great American”), a de novo Illinois state
commercial bank in organization.  Pursuant to the non-binding terms,
the Company would purchase $2 million of common stock of Great American, which
would represent an approximate 20% ownership interest in Great American assuming
the it raises a minimum






2
 Table of Contents




amount of
capital from other possible investors.  See “Management’s Discussion
and Analysis of Financial Condition and Results of Operations—Overview and
Recent Developments” for a discussion of this proposed investment.




· Remaining a community-oriented
institution.  The Bank was established in Chicago, Illinois in
1905 and has been operating continuously since that time.  We have
been, and continue to be, committed to meeting the financial needs of the
communities in which we operate and remain dedicated to providing high-quality
personal and efficient service to our customers.




Competition




We face
intense competition within our market area both in making loans and attracting
deposits.  Cook County, Illinois, and specifically the Chicago
metropolitan area have a high concentration of financial institutions including
money centers and other large commercial banks, community banks and credit
unions.  Some of our competitors offer products and services that we
currently do not offer, such as trust services, private banking and internet
banking.  As of June 30, 2008, based on the FDIC’s annual Summary
of Deposits Report, our market share of deposits represented 6.89% of the
deposits in our zip code and 0.02% of deposits in Cook County.




Our
competition for loans and deposits comes principally from commercial banks,
savings institutions, mortgage banking firms and credit unions in our market
area.  We face additional competition for deposits from short-term
money market funds, brokerage firms, mutual funds and insurance
companies.  Our primary focus is to build and develop profitable
customer relationships across all lines of business while maintaining our role
as a community bank.




Market
Area




We
operate in a primarily urban market area that has a stable population and
household base.  Our primary deposit gathering area is concentrated in
the communities immediately surrounding our headquarters located in the
southwestern Chicago metropolitan area, which includes predominantly Hispanic
neighborhoods.  Our primary lending area is broader than our
deposit-gathering area and includes all of Cook County, with some limited
lending activities in the counties surrounding Cook County and included in the
Chicago metropolitan area.  At December 31, 2008, 96% of our
mortgage loan portfolio consisted of loans secured by real estate located in
Cook County, Illinois.




The
economy of our market area is characterized by a large number of small retail
establishments and small industry.  Major employers in our immediate
market area include county government facilities, large medical complexes,
including hospitals, the University of Illinois at Chicago and a rail and
trucking transportation hub.




Lending
Activities




Historically,
our principal lending activity has been the origination of first mortgage loans
for the purchase or refinancing of one- to four-family residential real
property.  We retain all loans that we originate.




One- to
four-family residential real estate mortgage loans represented $32.6 million, or
61.6%, of our loan portfolio at December 31, 2008.  We also offer
multifamily real estate loans.  Multifamily real estate loans
represented $20.2 million, or 38.2% of our loan portfolio at December 31,
2008.  We also have a small number of consumer loans secured by
deposit accounts as an accommodation to customers.







3
 Table of Contents





Loan Portfolio
Composition.  The following table sets forth the composition of
our loan portfolio by type of loan and percentage of portfolio at the dates
indicated.




At
      December 31,2008
              
              
              2007
              
              
              2006Amount
              
              
              Percent
              
              
              Amount
              
              
              Percent
              
              
              Amount
              
              
              Percent(dollars
      in thousands)One-
      to four-family residential mortgage
              
              $
              32,568
              
              
              
              61.60
              %
              
              $
              34,163
              
              
              
              63.90
              %
              
              $
              33,270
              
              
              
              63.62
              %Multi-family
              
              
              20,202
              
              
              
              38.21
              
              
              
              19,217
              
              
              
              35.94
              
              
              
              18,965
              
              
              
              36.27Total
      mortgage loans
              
              
              52,770
              
              
              
              99.81
              
              
              
              53,380
              
              
              
              99.84
              
              
              
              52,235
              
              
              
              99.89Consumer
      loans
              
              
              101
              
              
              
              0.19
              
              
              
              88
              
              
              
              0.16
              
              
              
              59
              
              
              
              .11Total
      loans
              
              
              52,871
              
              
              
              100.00
              %
              
              
              53,468
              
              
              
              100.00
              %
              
              
              52,294
              
              
              
              100.00
              %Less:Deferred
      loan origination fees, net
              
              
              120
              
              
              
              
              
              
              
              122
              
              
              
              
              
              
              
              121Undisbursed
      portion of loans
              
              
              —
              
              
              
              
              
              
              
              9
              
              
              
              
              
              
              
              9Allowance
      for loan losses
              
              
              1,287
              
              
              
              
              
              
              
              290
              
              
              
              
              
              
              
              240Total
      loans, net
              
              $
              51,464
              
              
              
              
              
              
              $
              53,047
              
              
              
              
              
              
              $
              51,924





Loan Portfolio
Maturities and Yields.  The following table summarizes the
remaining contractual maturity of our loans at December 31,
2008.  The table does not include the effect of possible
prepayments.  We had no adjustable-rate loans at December 31,
2008.




One-
      to Four-Family
              
              
              Multi
      Family
              
              
              Consumer
              
              
              TotalAmount
              
              
              Weighted
      Average Rate
              
              
              Amount
              
              
              Weighted
      Average Rate
              
              
              Amount
              
              
              Weighted
      Average Rate
              
              
              Amount
              
              
              Weighted
      Average Rate(dollars
      in thousands)Due
      during the years ending December 31, 2009
              
              $
              4
              
              
              
              8.25
              %
              
              $
              -
              
              
              
              0.00
              %
              
              $
              101
              
              
              
              3.35
              %
              
              $
              105
              
              
              
              3.51
              %2010
      to 2011
              
              
              79
              
              
              
              6.94
              
              
              
              36
              
              
              
              6.16
              
              
              
              —
              
              
              
              —
              
              
              
              115
              
              
              
              6.702012
      to 2013
              
              
              739
              
              
              
              6.11
              
              
              
              429
              
              
              
              6.13
              
              
              
              —
              
              
              
              —
              
              
              
              1,168
              
              
              
              6.122014
      to
      2018
              
              
              3,693
              
              
              
              6.22
              
              
              
              3,711
              
              
              
              6.31
              
              
              
              —
              
              
              
              —
              
              
              
              7,404
              
              
              
              6.272019
      to
      2028
              
              
              11,521
              
              
              
              6.19
              
              
              
              10,510
              
              
              
              6.78
              
              
              
              —
              
              
              
              —
              
              
              
              22,031
              
              
              
              6.472029
      and beyond
              
              
              16,532
              
              
              
              6.38
              
              
              
              5,516
              
              
              
              6.74
              
              
              
              —
              
              
              
              —
              
              
              
              22,048
              
              
              
              6.47Total
              
              $
              32,568
              
              
              
              6.29
              %
              
              $
              20,202
              
              
              
              6.67
              %
              
              $
              101
              
              
              
              3.35
              %
              
              $
              52,871
              
              
              
              6.43
              %





The
following table sets forth the remaining contractual maturity of fixed-rate
loans at December 31, 2008 that are contractually due after
December 31, 2009.  We had no adjustable-rate loans at
December 31, 2008.




Due
      After December 31, 2009Fixed
              
              
              Total(dollars
      in thousands)One-
      to four-family residential mortgage loans
              
              $
              32,564
              
              
              $
              32,564Multi-family
              
              
              20,202
              
              
              
              20,202Total
      mortgage loans
              
              
              52,766
              
              
              
              52,766Total
      loans
              
              $
              52,766
              
              
              $
              52,766





One- to
Four-Family Residential Loans.  Our primary lending activity
consists of the origination of one- to four-family residential mortgage loans
that are secured primarily by properties principally located in Cook
County.  At December 31, 2008, $32.6 million, or 61.6% of our
loan portfolio, consisted of one- to four-family residential mortgage
loans.  Included within these one- to four-family loans were
$1.5 million in second mortgage loans at December 31,
2008.  At December 31, 2008, we had 330 one-to four-family loans
with an average balance of $99,000.  Generally, one- to four-family
residential mortgage loans are originated in amounts up to 80% of the appraised
value of the property.  All one- to







4
 Table of Contents





four-family
residential loans are fixed-rate loans generally originated for terms up to 20
years and for owner occupied one- to four-family residential loans, up to 30
years.  At December 31, 2008, our largest loan secured by one- to
four-family real estate had a principal balance of $998,000.  We
currently do not offer adjustable-rate mortgage loans.




All one-
to four-family residential mortgage loans that we originate include
“due-on-sale” clauses, which give us the right to declare a loan immediately due
and payable in the event that, among other things, the borrower sells or
otherwise disposes of the real property subject to the mortgage and the loan is
not repaid.




Our
second mortgage loans are fixed-rate and offered in amounts up to 80% of the
appraised value of the property securing the loan (including prior liens) and
only where we have secured a first-priority lien on the subject
property.  Our second mortgage loans generally are made with
maturities of 15 years or less and are secured by the borrower’s
property.  Our procedures for underwriting these loans include an
assessment of an applicant’s prior loan history, credit history and an
assessment of the value of the collateral in relation to the proposed loan
amount.




Regulations
limit the amount that a savings institution may lend relative to the appraised
value of the real estate securing the loan, as determined by an appraisal of the
property at the time the loan is originated.  For all loans originated
by the Bank, we utilize outside independent appraisers approved by the Bank’s
board of directors.  All borrowers are required to obtain title
insurance.  We also require homeowner’s insurance and fire and
casualty insurance and, where circumstances warrant, flood insurance on
properties securing real estate loans.




Multi-Family Real
Estate Loans.  Loans secured by multi-family real estate
totaled $20.2 million, or 38.2%, of our total loan portfolio at
December 31, 2008.  Multi-family real estate loans generally are
secured by small apartment buildings with fewer than 10 units and includes two-
to four-family residential properties that may also include a commercial or
income-producing element, such as a first floor store-front
business.  Generally, all of our multi-family real estate loans are
secured by properties located within our lending area.  At
December 31, 2008, we had 120 multi-family real estate loans with an
average principal balance of $168,000, and the largest multi-family real estate
loan had a principal balance of $1.2 million.  Multi-family real
estate loans are offered with fixed interest rates.  Multi-family
loans generally are originated for terms of up to 20 years, and in some cases
for owner-occupied multi-family properties, up to 30 years.




We
consider a number of factors in originating multi-family real estate
loans.  We evaluate the qualifications and financial condition of the
borrower (including credit history), profitability and expertise, as well as the
value and condition of the mortgaged property securing the loan.  When
evaluating the qualifications of the borrower, we consider the financial
resources of the borrower, the borrower’s experience in owning or managing
similar property and the borrower’s payment history with us and other financial
institutions.  In evaluating the property securing the loan, the
factors we consider include the net operating income of the mortgaged property
before debt service and depreciation, the debt service coverage ratio (the ratio
of net operating income to debt service), and the ratio of the loan amount to
the appraised value of the mortgaged property.  Multi-family real
estate loans are originated in amounts up to 75% of the lower of the sale price
or the appraised value of the mortgaged property securing the loan and up to 80%
if owner occupied.  All multi-family real estate loans are appraised
by outside independent appraisers approved by the Bank’s board of
directors.  All multi-family borrowers are required to sign notes in
their individual capacity.




While
loans secured by multi-family real estate offer larger balances and higher
yields, such loans generally involve a greater degree of credit risk than one-
to four-family residential mortgage loans.  This







5
 Table of Contents





increased
credit risk is a result of several factors, including the concentration of
principal in a limited number of loans and borrowers, the effects of general
economic conditions on income producing properties, and the increased difficulty
of evaluating and monitoring these types of loans.  Furthermore, the
repayment of loans secured by multi-family real estate typically depends upon
the successful operation of the real estate property securing the
loan.  If the cash flow from the project is reduced, the borrower’s
ability to repay the loan may be impaired.




Consumer
Loans.  We offer a small number of consumer loans, secured by
deposits, to our customers.  Our consumer loans amounted to $101,000,
or 0.2%, of our total loan portfolio at December 31, 2008.




Origination and
Servicing of Loans.  Loan origination activities are primarily
concentrated in Cook County, with some limited loan originations in the counties
surrounding Cook County.  New loans are generated primarily from
current and former borrowers, walk-in customers, customer referrals, realtors
and other parties with whom we do business, and from the efforts of employees
and advertising.  Loan applications are underwritten and processed at
our single banking office.  We service all loans that we
originate.




Loan Approval
Procedures and Authority.  The loan approval process is
intended to assess the borrower’s ability to repay the loan, the viability of
the loan, and the adequacy of the value of the property that will secure the
loan.  To assess the borrower’s ability to repay, we review the
employment and credit history and information on the historical and projected
income and expenses of mortgagors.  All owner occupied mortgage loans
up to $650,000 and all non-owner occupied mortgage loans up to $500,000 may be
approved by any two members of the loan committee of the board of directors,
which consists of the President and three outside directors.  All
consumer loans secured by deposits require the approval of an
officer.  All other loans must be approved by the Bank’s board of
directors.




Non-Performing
and Problem Assets




We
commence collection efforts when a loan becomes 15 days past due with a
system-generated late-charge notice.  Subsequent delinquent notices
are issued and the account is monitored on a regular basis
thereafter.  Personal, direct contact with the borrower is attempted
early in the collection process as a courtesy reminder and later to determine
the reason for the delinquency and to safeguard our collateral.  When
a loan is more than 30 days past due, the credit file is reviewed and, if deemed
necessary, information is updated or confirmed and collateral
re-evaluated.  We make efforts to contact the borrower and develop a
plan of repayment to cure the delinquency.  A summary report of all
loans 90 days or more past due is reported to the board of directors on a
monthly basis.  If no repayment plan is in process, the file is
referred to counsel for the commencement of foreclosure or other collection
efforts.




Mortgage
loans are reviewed on a regular basis and such loans are placed on non-accrual
status when they become more than 90 days delinquent.  When loans are
placed on a non-accrual status, unpaid accrued interest is fully reversed, and
further income is recognized only to the extent received.







6
 Table of Contents





Non-Performing
Loans and Non-Performing Assets.  Our non-performing loans and
non-performing assets are as shown in the following table for the periods
indicated.  At each date presented, we had no troubled debt
restructurings (loans for which a portion of interest or principal has been
forgiven and loans modified at interest rates materially less than current
market rates).




At
      December 31,2008
              
              
              2007
              
              
              2006(dollars
      in thousands)Non-accrual
      loans:One-
      to four-family
              
              $
              2,672
              
              
              $
              259
              
              
              $
              226Multi-family
              
              
              281
              
              
              
              -
              
              
              
              217Consumer
              
              
              -
              
              
              
              -
              
              
              
              -Total
      non-accrual loans
              
              
              2,953
              
              
              
              259
              
              
              
              443Accruing
      loans delinquent 90 days or more:One-
      to four-family
              
              
              -
              
              
              
              -
              
              
              
              -Multi-family
              
              
              -
              
              
              
              -
              
              
              
              -Consumer
              
              
              -
              
              
              
              -
              
              
              
              -Total
      non-performing loans
              
              
              2,953
              
              
              
              259
              
              
              
              443Real
      estate owned:Total
      real estate owned
              
              
              235
              
              
              
              -
              
              
              
              -Total
      non-performing assets
              
              $
              3,188
              
              
              $
              259
              
              
              $
              443Ratios:Non-performing
      loans to gross loans
              
              
              5.59
              %
              
              
              0.48
              %
              
              
              0.85
              %Non-performing
      assets to total assets
              
              
              4.48
              
              
              
              0.35
              
              
              
              0.59





The
following table sets forth certain information with respect to our loan
portfolio delinquencies at the dates indicated.




Loans
      Delinquent for60-89
      Days
              
              
              90
      Days and Over
              
              
              TotalNumber
              
              
              Amount
              
              
              Number
              
              
              Amount
              
              
              Number
              
              
              Amount(dollars
      in thousands)At
      December 31, 2008One-
      to four-family
              
              
              8
              
              
              $
              1,503
              
              
              
              9
              
              
              $
              2,672
              
              
              
              17
              
              
              $
              4,175Multi-family
              
              
              4
              
              
              
              701
              
              
              
              1
              
              
              
              281
              
              
              
              5
              
              
              
              982Consumer
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
              
              
              12
              
              
              $
              2,204
              
              
              
              10
              
              
              $
              2,953
              
              
              
              22
              
              
              $
              5,157At
      December 31, 2007One-
      to four-family
              
              
              8
              
              
              $
              1,893
              
              
              
              1
              
              
              $
              259
              
              
              
              9
              
              
              $
              2,152Multi-family
              
              
              2
              
              
              
              748
              
              
              
              —
              
              
              
              —
              
              
              
              2
              
              
              
              748Consumer
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Total
              
              
              10
              
              
              $
              2,641
              
              
              
              1
              
              
              $
              259
              
              
              
              11
              
              
              $
              2,900At
      December 31, 2006One-
      to four-family
              
              
              1
              
              
              $
              101
              
              
              
              4
              
              
              $
              226
              
              
              
              5
              
              
              $
              327Multi-family
              
              
              1
              
              
              
              284
              
              
              
              1
              
              
              
              217
              
              
              
              2
              
              
              
              501Consumer
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Total
              
              
              2
              
              
              $
              385
              
              
              
              5
              
              
              $
              443
              
              
              
              7
              
              
              $
              828







Real Estate
Owned.  Real estate we
acquire as a result of foreclosure or by deed in lieu of foreclosure is
classified as real estate owned until sold.  When property is
acquired, it is recorded at fair







7
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market
value at the date of foreclosure, less estimated selling expenses, establishing
a new cost basis.  Holding costs and declines in fair value result in
charges to expense after acquisition.  At December 31, 2008, we
held one two-unit residential rental property in real estate owned, with title
residing in 2212 Holdings LLC, a newly formed, wholly owned subsidiary of the
Bank.  The subsidiary was established in 2008 to hold title and to
manage other real estate owned.




Classified
Assets.  OTS regulations provide that loans and other assets
considered to be of lesser quality be classified as “substandard,” “doubtful” or
“loss” assets.  An asset is considered “substandard” if it is
inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any.  “Substandard” assets
include those characterized by the “distinct possibility” that the institution
will sustain “some loss” if the deficiencies are not
corrected.  Assets classified as “doubtful” have all of the weaknesses
inherent in those classified “substandard,” with the added characteristic that
the weaknesses present make “collection or liquidation in full,” on the basis of
currently existing facts, conditions, and values, “highly questionable and
improbable.”  Assets classified as “loss” are those considered
“uncollectible” and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not
warranted.  Not all classified assets constitute non-performing
assets.




An
insured institution is required to establish general allowances for loan losses
in an amount deemed prudent by management for loans classified substandard or
doubtful, as well as for other problem loans.  General allowances
represent loss allowances which have been established to recognize the probable
incurred losses associated with lending activities, but which, unlike specific
allowances, have not been allocated to particular problem
assets.  When an insured institution classifies problem assets as
“loss,” it is required either to establish a specific allowance for losses equal
to 100% of the amount of the asset so classified or to charge off such
amount.  An institution’s determination as to the classification of
its assets and the amount of its valuation allowances is subject to review by
the Office of Thrift Supervision which can order the establishment of additional
general or specific loss allowances.




At
December 31, 2008, $3.0 million in non-accrual loans were classified as
substandard, and none of our other assets were classified as substandard,
doubtful or loss.  The loan portfolio is reviewed on a regular basis
to determine whether any loans require classification or reclassification in
accordance with applicable regulations.




Allowance
for Loan Losses




Our
allowance for loan losses is maintained at a level necessary to absorb probable
incurred loan losses.  Management, in determining the allowance for
loan losses, considers the losses inherent in our loan portfolio and changes in
the nature and volume of loan activities, along with the general economic and
real estate market conditions.  The Bank’s loan committee determines
the type of loans to be evaluated for impairment on an individual basis and the
types of loan to be evaluated on a collective basis based on similarities in
loss performance, such as our one-to-four family residential loans and
multifamily residential loans.  We then utilize a two-tier
approach:  (1) for the types of loans to be evaluated on an
individual basis, identification of impaired loans and establishment of specific
loss allowances on such loans, and (2) for the types of loans to be
evaluated on a collective basis, establishment of general valuation
allowances.




Once a
loan becomes delinquent, we may establish a specific loan loss allowance should
we determine that the loan is impaired.  A loan will be considered
impaired when, based on current information and events (such as, among other
things, delinquency status, the size of the loan, the type and market value of
collateral and the financial condition of the borrower), it is probable that we
will be unable to collect all amounts due according to the contractual terms of
the loan agreement.  All loans







8
 Table of Contents





identified
as impaired are evaluated independently.  We do not aggregate such
loans for evaluation purposes.  Specific allowances for impaired loans
are established based on the present value of expected future cash flows
discounted at the loan’s effective interest rate or, as a practical measure, at
the loan’s observable market price or the fair value of the collateral if the
loan is collateral dependent.




General
loan loss allowances are based upon historical loan loss experience as adjusted
after evaluation of other factors that may or may not be present, including
changes in the composition of the loan portfolio, current national and local
economic conditions, changes in lending policies and procedures and personnel
changes in our lending management or staff.  The allowance is
increased through provisions charged against current earnings and recoveries of
previously charged-off loans.  Loans that are determined to be
uncollectible are charged against the allowance.  While management
uses available information to recognize probable and reasonably estimable loan
losses, future loss provisions may be necessary based on changing economic
conditions or other factors.  The allowance for loan losses as of
December 31, 2008 was maintained at a level that represents management’s
best estimate of probable incurred losses in the loan portfolio.




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




At
      or for the Years Ended December 31,2008
              
              
              2007
              
              
              2006(dollars
      in thousands)Balance
      at beginning of year
              
              $
              290
              
              
              $
              240
              
              
              $
              170Charge-offs:One-
      to four-family
              
              
              (26
              )
              
              
              —
              
              
              
              —Multi-family
              
              
              (143
              )
              
              
              —
              
              
              
              —Consumer
              
              
              —
              
              
              
              —
              
              
              
              —Total
      charge-offs
              
              
              169
              
              
              
              —
              
              
              
              —Recoveries:One-
      to four-family
              
              
              —
              
              
              
              —
              
              
              
              —Multi-family
              
              
              —
              
              
              
              —
              
              
              
              —Consumer
              
              
              —
              
              
              
              —
              
              
              
              —Total
      recoveries
              
              
              —
              
              
              
              —
              
              
              
              —Net
      (charge-offs) recoveries
              
              
              (169
              )
              
              
              —
              
              
              
              —Provision
      for loan losses
              
              
              1,166
              
              
              
              50
              
              
              
              70Balance
      at end of year
              
              $
              1,287
              
              
              $
              290
              
              
              $
              240Ratios:Net
      charge-offs to average loans outstanding
              
              
              0.32
              %
              
              
              —
              
              
              
              —Allowance
      for loan losses to non-performing loans
              
              
              43.58
              %
              
              
              112.02
              %
              
              
              54.18
              %Allowance
      for loan losses to gross loans
              
              
              2.43
              %
              
              
              0.54
              %
              
              
              0.46
              %





Our
non-performing loans increased to $3.0 million at December 31, 2008, from
$259,000 at December 31, 2007.  Loans delinquent for 60-89 days
decreased to $2.2 million at December 31, 2008, from $2.6 million at
December 31, 2007.




At
December 31, 2008 and 2007, total impaired loans were $3.8 million and $0, with
specific loan loss allowances of $850,000 and $0,
respectively.  Impaired loans with specific loan loss allowances
included seven one-to-four family residential loans with balances of $2.6
million and specific loan loss allowances of $850,000.   Included
in this total, we had one single-family residential loan of $1.0 million, with a
specific loan loss allowance of $536,000, which accounted for 26.5% of impaired
loans and 63.1%







9
 Table of Contents





of
specific loan loss allowances at December 31, 2008.  We had no
multi-family loans with specific loan loss allowances at December 31,
2008.




During
the year ended December 31, 2008, we established $1.0 million in specific loan
loss allowances for nine loans we considered impaired, and we charged off
$169,000 against the allowances for two of these loans.  We added
$147,000 to general reserves based on the increasing trend in delinquent loans,
generally declining real estate values in Cook County, and our actual loss
experience.




During
2007, using the same methodology, management determined that a $50,000 provision
for loan losses was necessary for the year ended December 31,
2007.




Allocation of
Allowance for Loan Losses.  The following tables set forth the
allowance for loan losses allocated by loan category, the total loan balances by
category and the percent of loans in each category to total loans at the dates
indicated.  The allowance for loan losses allocated to each category
is not necessarily indicative of future losses in any particular category and
does not restrict the use of the allowance to absorb losses in other
categories.




At
      December 31,2008
              
              
              2007Allowance
      for Loan Losses
              
              
              Loan
      Balances by Category
              
              
              Percent
      of Loans in Each Category to Total Loans
              
              
              Allowance
      for Loan Losses
              
              
              Loan
      Balances by Category
              
              
              Percent
      of Loans in Each Category to Total Loans(dollars
      in thousands)One-
      to four-family
              
              $
              1,021
              
              
              $
              32,568
              
              
              
              61.60
              %
              
              $
              100
              
              
              $
              34,163
              
              
              
              63.90
              %Multi-family
              
              
              266
              
              
              
              20,202
              
              
              
              38.21
              
              
              
              190
              
              
              
              19,217
              
              
              
              35.94Consumer
              
              
              -
              
              
              
              101
              
              
              
              0.19
              
              
              
              —
              
              
              
              88
              
              
              
              0.16Total
      allowance
              
              $
              1,287
              
              
              $
              52,871
              
              
              
              100.00
              %
              
              $
              290
              
              
              $
              53,468
              
              
              
              100.00
              %





Each
quarter, management evaluates the total balance of the allowance for loan losses
based on several factors that are not loan specific, but are reflective of the
probable incurred losses in the loan portfolio.  This process
includes, but is not limited to, a periodic review of loan collectibility in
light of historical experience, the nature and volume of loan activity,
conditions that may affect the ability of the borrower to repay, underlying
value of collateral, if applicable, and economic conditions in our immediate
market area.  First, we group loans by delinquency
status.  All loans 90 days or more delinquent are evaluated
individually, based primarily on the value of the collateral securing the
loan.  Specific loss allowances are established as required by the
results of this analysis.  The remaining loans are segregated by type
and delinquency status and a loss allowance is established by using loss
experience data and management’s judgment concerning other matters it considers
significant.  The allowance is allocated to each category of loan
based on the results of the above analysis.




This
analysis process is inherently subjective, as it requires us to make estimates
that are susceptible to revisions as more information becomes
available.  Although we believe that we have established the allowance
at levels to absorb probable and estimable losses, future additions may be
necessary if economic or other conditions in the future differ from the current
environment.  In addition, the Office of Thrift Supervision, as an
integral part of their examination process, periodically reviews our allowance
for loan losses, and could require additional reserves.




Investments




Investments and
Mortgage-backed Securities.  Our investment portfolio at
December 31, 2008, includes $4.2 million in U.S. agency and
government-sponsored entity bonds that are all classified as







10
 Table of Contents





available-for-sale,
which represent 5.9% of total assets.  Our investment policy
objectives are to maintain liquidity, manage risk and maximize returns within
the guidelines established by the bank’s board of directors, which specify
eligible investments and approved securities dealers.




Our
investment portfolio also includes mortgage-backed securities and collateralized
mortgage obligations, all of which are guaranteed by the United States
government or agencies thereof, all of which are classified as
available-for-sale.  At December 31, 2008, our mortgage-backed
securities portfolio totaled $6.6 million, or 9.3% of total
assets.  The portfolio consisted of $4.5 million in fixed-rate
mortgage-backed securities, and $2.1 million in adjustable-rate mortgage-backed
securities, all guaranteed by the Federal Home Loan Mortgage Corporation, or
FHLMC, the Federal National Mortgage Association, or FNMA, or the Government
National Mortgage Association, or GNMA.




We
currently hold 10,000 shares of FHLMC preferred stock. The preferred stock pays
a non-cumulative preferred dividend of 5.79%, but dividends were suspended in
2008 when the Federal Housing Finance Authority was appointed as conservator for
FHLMC.   The market price of the preferred stock fell during
2008, due to the appointment of the conservator and the turmoil and uncertainty
in the secondary mortgage market.  As a result, at December 31, 2008,
the Company reduced its cost basis in the preferred stock to $7,000, its closing
price at December 31, 2008, with a $394,000 pre-tax charge to earnings, because
we were unable to forecast a recovery in value in the foreseeable
future.




Trading
Securities.The Company has investments in several mutual
funds including an adjustable rate mortgage fund, a U.S. government mortgage
fund, and a short-term government fund.  The funds are invested in
U.S. government and agency obligations and mortgage-backed securities primarily
guaranteed by FHLMC, FNMA or GNMA.  As of January 1, 2008, the Company
reclassified these securities from available-for-sale to trading securities and
now records the changes in fair value through income.   For the
year ended December 31, 2008, the Company recorded a loss of $368,000 on
reductions in the fair value of these securities.  At December 31,
2008, these funds are carried at a fair value of $2.1
million.  Restrictions on redemption of these securities have been
imposed by the manager of these funds, limiting cash redemptions to $250,000 per
fund (there are three funds) per quarter.  Depending on our liquidity
requirements and/or market conditions relating to the funds, we may decide that
redemption of some or all of the funds is prudent during 2009.







11
 Table of Contents





Securities
Available-for-Sale Portfolio.  The following table sets forth
the composition of our securities available-for-sale portfolio at the dates
indicated.




At
      December 31,2008
              
              
              2007
              
              
              2006Amortized
      Cost
              
              
              Fair
      Value
              
              
              Amortized
      Cost
              
              
              Fair
      Value
              
              
              Amortized
      Cost
              
              
              Fair
      Value(in
      thousands)Investment
      Securities:U.S.
      agency and government-sponsored entity bonds
              
              $
              3,998
              
              
              $
              4,195
              
              
              $
              5,496
              
              
              $
              5,605
              
              
              $
              6,695
              
              
              $
              6,654Mutual
      funds
              
              
              —
              
              
              
              —
              
              
              
              2,423
              
              
              
              2,423
              
              
              
              2,357
              
              
              
              2,293FHLMC
      common stock
              
              
              —
              
              
              
              —
              
              
              
              8
              
              
              
              273
              
              
              
              8
              
              
              
              543FHLMC
      preferred stock
              
              
              7
              
              
              
              7
              
              
              
              402
              
              
              
              402
              
              
              
              500
              
              
              
              487Mortgage-backed
      Securities:GNMA
              
              
              791
              
              
              
              754
              
              
              
              1,049
              
              
              
              1,021
              
              
              
              1,555
              
              
              
              1,532FNMA
              
              
              2,763
              
              
              
              2,820
              
              
              
              3,596
              
              
              
              3,618
              
              
              
              4,582
              
              
              
              4,489FHLMC
              
              
              2,607
              
              
              
              2,655
              
              
              
              2,524
              
              
              
              2,531
              
              
              
              3,067
              
              
              
              3,000Collateralized
      mortgage obligations
              
              
              408
              
              
              
              381
              
              
              
              486
              
              
              
              472
              
              
              
              578
              
              
              
              561Total
      available for sale
              
              $
              10,574
              
              
              $
              10,812
              
              
              $
              15,984
              
              
              $
              16,345
              
              
              $
              19,342
              
              
              $
              19,559





Portfolio
Maturities and Yields.  The composition and maturities of the
investment securities portfolio and the mortgage-backed securities portfolio at
December 31, 2008, are summarized in the following
table.  Maturities are based on the final contractual payment dates
and do not reflect the impact of prepayments or early redemptions that may
occur.  FHLMC stock is not included because it does not have a
contractual maturity date.




One
      Year or Less
              
              
              More
      Than One Year Through Five Years
              
              
              More
      Than Five Years Through Ten YearsAmortized
      Cost
              
              
              Weighted
      Average Yield
              
              
              Amortized
      Cost
              
              
              Weighted
      Average Yield
              
              
              Amortized
      Cost
              
              
              Weighted
      Average Yield(dollars
      in thousands)Available-for-SaleInvestment
      Securities:U.S.
      agency and government-sponsored entity bonds
              
              $
              500
              
              
              
              4.80
              %
              
              $
              3,498
              
              
              
              4.94
              %
              
              $
              —
              
              
              
              —
              %Mortgage-backed
      Securities:GNMA
              
              
              1
              
              
              
              6.50
              
              
              
              —
              
              
              
              —
              
              
              
              71
              
              
              
              5.38FNMA
              
              
              3
              
              
              
              7.61
              
              
              
              680
              
              
              
              4.57
              
              
              
              1,460
              
              
              
              4.85FHLMC
              
              
              —
              
              
              
              —
              
              
              
              779
              
              
              
              4.65
              
              
              
              481
              
              
              
              5.54Collateralized
      mortgage obligations
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Total
      available for sale
              
              $
              504
              
              
              
              4.82
              %
              
              $
              4,957
              
              
              
              4.84
              %
              
              $
              2,012
              
              
              
              5.03
              %




12
 Table of Contents





More
      Than Ten Years
              
              
              Total
      SecuritiesAmortized
      Cost
              
              
              Weighted
      Average Yield
              
              
              Amortized
      Cost
              
              
              Fair
      Value
              
              
              Weighted
      Average Yield(dollars
      in thousands)Available-for-SaleInvestment
      Securities:U.S.
      agency and government-sponsored entity bonds
              
              $
              —
              
              
              
              —
              %
              
              $
              3,998
              
              
              $
              4,195
              
              
              
              4.92
              %Mortgage-backed
      Securities:GNMA
              
              
              719
              
              
              
              4.76
              
              
              
              791
              
              
              
              754
              
              
              
              4.82FNMA
              
              
              620
              
              
              
              4.70
              
              
              
              2,763
              
              
              
              2,820
              
              
              
              4.75FHLMC
              
              
              1,347
              
              
              
              4.85
              
              
              
              2,607
              
              
              
              2,655
              
              
              
              4.91FNMA,
      FHLMC collateralized mortgage obligations
              
              
              408
              
              
              
              2.65
              
              
              
              408
              
              
              
              381
              
              
              
              2.65Total
      securities available for sale
              
              $
              3,094
              
              
              
              4.51
              %
              
              $
              10,567
              
              
              $
              10,805
              
              
              
              4.78
              %





Sources
of Funds




General.  Deposits
have traditionally been our primary source of funds for use in lending and
investment activities.  In addition to deposits, funds are derived
from scheduled loan payments, investment calls, maturities and sales, loan
prepayments, retained earnings and income on earning assets.  While
scheduled loan payments and income on earning assets are relatively stable
sources of funds, deposit inflows and outflows can vary widely and are
influenced by prevailing interest rates, market conditions and levels of
competition.  Borrowings from the Federal Home Loan Bank of Chicago
have been used to compensate for reductions in deposits and to fund loan
growth.




Deposits.  Deposits
are not actively solicited outside of the Chicago metropolitan area, and a
majority of our depositors are persons who work or reside in Cook County,
Illinois.  We offer deposit instruments, including
non-interest-bearing checking accounts, passbook savings and fixed-term
certificates of deposit.  Deposit account terms vary, with the
principal differences being the minimum balance required, the amount of time the
funds must remain on deposit and the interest rate.  We do not accept
brokered deposits.




Interest
rates paid, maturity terms, service fees and withdrawal penalties are
established on a periodic basis.  Deposit rates and terms are based
primarily on current operating strategies and market rates, liquidity
requirements, rates paid by competitors and growth goals.  To attract
and retain deposits, we rely upon personalized customer service, long-standing
relationships and generally rates in the upper half of those offered in our
market area.




The flow
of deposits is influenced significantly by general economic conditions, changes
in money market and other prevailing interest rates, competition and our single
office location.  We believe the products we offer allow us to be
competitive in obtaining funds and responding to changes in consumer
demand.  Based on historical experience, management believes our
deposits are relatively stable.  However, the ability to attract and
maintain certificates of deposit, and the rates paid on these deposits, have
been and will continue to be significantly affected by market
conditions.  At December 31, 2008, $19.6 million, or 51.0% of our
deposit accounts were certificates of deposit, of which $17.2 million had
maturities of one year or less.







13
 Table of Contents





The
following table sets forth the distribution of total deposit accounts, by
account type, at the dates indicated.




At
      December 31,2008
                
                2007
                
                
                2006Balance
                
                Percent
                
                Weighted
                    Average
                    Rate
                
                Balance
                
                Percent
                
                Weighted
                    Average
                    Rate
                
                
                Balance
                
                
                Percent
                
                
                Weighted
                    Average
                    Rate(dollars
      in thousands)Savings
      deposits
                
                $
                18,666
                
                
                48.49
                %
                
                1.24
                %
                $
                18,854
                
                
                47.47
                %
                
                1.24
                %
                
                $
                20,334
                
                
                
                46.95
                %
                
                
                1.24
                %Certificates
      of deposit
                
                
                19,627
                
                
                50.99
                
                
                3.11
                
                
                20,534
                
                
                51.70
                
                
                4.27
                
                
                
                22,246
                
                
                
                51.37
                
                
                
                4.16Non-interest-bearing
      checking accounts
                
                
                199
                
                
                0.52
                
                
                -
                
                
                331
                
                
                0.83
                
                
                —
                
                
                
                728
                
                
                
                1.68
                
                
                
                —Total
      deposits
                
                $
                38,492
                
                
                100.00
                %
                
                2.20
                %
                $
                39,719
                
                
                100.00
                %
                
                2.80
                %
                
                $
                43,308
                
                
                
                100.00
                %
                
                
                2.72
                %








The
following table sets forth certificates of deposit by time remaining until
maturity as of December 31, 2008.




Maturity3
      Months or Less
              
              
              Over
      3 to 6 Months
              
              
              Over
      6 to 12 Months
              
              
              Over
      12 Months
              
              
              Total(in
      thousands)Certificates
      of deposit less than $100,000
              
              $
              4,839
              
              
              $
              3,531
              
              
              $
              2,622
              
              
              $
              1,736
              
              
              $
              12,728Certificates
      of deposit of $100,000 or more(1)
              
              
              2,417
              
              
              
              2,913
              
              
              
              922
              
              
              
              647
              
              
              
              6,899Total
      of certificates of deposit
              
              $
              7,256
              
              
              $
              6,444
              
              
              $
              3,544
              
              
              $
              2,383
              
              
              $
              19,627





(1)
            The
      weighted average interest rates for these accounts, by maturity period,
      are:  2.77% for 3 months or less; 3.21% for 3 to 6 months; 3.25%
      for 6 to 12 months; and 4.14% for over 12 months.  The overall
      weighted average interest rate for accounts of $100,000 or more was
      3.15%.




The
following table sets forth, by interest rate range, information concerning
certificates of deposit as of December 31, 2008.




At
      December 31, 2008Period
      to MaturityLess
      Than One Year
              
              
              One
      to Two Years
              
              
              Two
      to Three Years
              
              
              More
      Than Three Years
              
              
              Total
              
              
              Percent
      of Total(dollars
      in thousands)Interest
      Rate Range:2.00%
      to 2.49%
              
              $
              8,110
              
              
              $
              12
              
              
              $
              18
              
              
              $
              —
              
              
              $
              8,140
              
              
              
              41.48
              %2.50%
      to 2.99%
              
              
              2,270
              
              
              
              736
              
              
              
              —
              
              
              
              —
              
              
              
              3,006
              
              
              
              15.323.00%
      to 3.49%
              
              
              1,736
              
              
              
              103
              
              
              
              —
              
              
              
              147
              
              
              
              1,986
              
              
              
              10.123.50%
      to 3.99%
              
              
              3,082
              
              
              
              101
              
              
              
              —
              
              
              
              59
              
              
              
              3,242
              
              
              
              16.514.00%
      to 4.49%
              
              
              1,401
              
              
              
              653
              
              
              
              6
              
              
              
              107
              
              
              
              2,167
              
              
              
              11.044.50%
      to 4.99%
              
              
              645
              
              
              
              426
              
              
              
              1
              
              
              
              14
              
              
              
              1,086
              
              
              
              5.53Total
              
              $
              17,244
              
              
              $
              2,031
              
              
              $
              25
              
              
              $
              327
              
              
              $
              19,627
              
              
              
              100.00
              %





Borrowings




The Bank
had $6.0 million in fixed-rate borrowings from the Federal Home Loan Bank at
December 31, 2008, with maturities from June 2009 through February 2011, and at
a weighted average interest rate of 3.59%.  The Bank may borrow up to
$12.2 million under its present credit arrangement with the Federal Home Loan
Bank.







14
 Table of Contents





Properties




The
following table provides certain information with respect to our banking office
as of December 31, 2008 and December 31, 2007:




Location
            Leased
      or Owned
            Year
      Acquired
            Net
      Book Value of Real Property at December 31,
2008
            Net
      Book Value of Real Property at December 31,
  20072212
      W. Cermak Road
              Chicago,
      Illinois 60608
            Owned
            1964
            $158,000
            $170,0002218-2220
      W. Cermak Road
              Chicago,
      Illinois 60608
            Owned
            2008
            $690,000
            —





During
the year ended December 31, 2008, the Company purchased 2218 and 2220 West
Cermak Road, adjacent to the present Bank building, at a cost of
$672,000.  The Company will use this property for a drive-up facility
to be completed in 2009.  The anticipated cost of the drive-up
facility to be built is currently estimated to be $925,000.  The net
book value of our premises, land and equipment was $918,000 at December 31,
2008 and $250,000 at December 31, 2007.




Subsidiary
Activities




The
Company’s only subsidiary is the Bank.  The Bank currently operates
two subsidiaries, EMEFES Service Corporation, which provides insurance brokerage
services to our customers, and 2212 Holdings, LLC, which was formed in 2008 to
hold title to real estate acquired through foreclosure.  Brokerage
commissions earned by EMEFES totaled approximately $4,000 for the twelve months
ended December 31, 2008.  Presently, there are no plans to expand
the insurance brokerage operations.




2212
Holdings, LLC, owned one two-unit apartment building at December 31, 2008, which
it intends to manage until real estate market conditions allow for an orderly
sale.




Personnel




As of
December 31, 2008, we had 12 full-time employees and one part-time
employee.  Our employees are not represented by any collective
bargaining group.  Management believes that we have good relations
with our employees.




FEDERAL
AND STATE TAXATION




Federal
Taxation




General.  We are
subject to federal income taxation in the same general manner as other
corporations, with some exceptions discussed below.  Our federal
income tax returns have not been audited by the Internal Revenue Service during
the past five years.  The following discussion of federal income
taxation is intended only to summarize certain pertinent federal income tax
matters and is not a comprehensive description of the tax rules applicable to
the Company or the Bank.




Method of
Accounting.  For federal income tax purposes, the Company and
the Bank currently report their income and expenses on the accrual method of
accounting and use a tax year ending December 31 for filing their federal
income tax returns.  The Company and the Bank file a consolidated
federal income tax return.







15
 Table of Contents





Bad Debt
Reserves.  Prior to the Small Business Protection Act of 1996
(the “1996 Act”), the Bank was permitted to establish a reserve for bad debts
and to make annual additions to the reserve.  These additions could,
within specified formula limits, be deducted in arriving at our taxable
income.




Taxable Distributions and
Recapture.  Prior to the 1996 Act, bad debt reserves created
prior to January 1, 1988 were subject to recapture into taxable income if
the Bank failed to meet certain thrift asset and definitional
tests.  Federal legislation has eliminated these thrift related
recapture rules.  At December 31, 2008, our total federal
pre-1988 base year reserve was approximately
$2.6 million.  However, under current law, pre-1988 base year
reserves remain subject to recapture if the Bank makes certain non-dividend
distributions, repurchases any of its stock, pays dividends in excess of tax
earnings and profits, or ceases to maintain a bank charter.




Alternative Minimum
Tax.  The Internal Revenue Code of 1986, as amended (the “Code”
or “Internal Revenue Code”), imposes a corporate alternative minimum tax (“AMT”)
at a rate of 20% on a base of regular taxable income plus or minus certain AMT
adjustments, plus certain tax preferences (“alternative minimum taxable income”
or “AMTI”).  The AMT is payable to the extent such AMTI is in excess
of an exemption amount and the AMT exceeds the regular corporate income
tax.  Net operating losses can generally offset no more than 90% of
AMTI.  Certain payments of alternative minimum tax may be used as
credits against regular tax liabilities in future years.  The Company
has not been subject to the alternative minimum tax and has no such amounts
available as credits for carryover.




Net Operating Loss
Carryovers.  A financial institution may carry back net
operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years.  At December 31, 2008, the Company
had no net operating loss carryforwards for federal income tax
purposes.




Corporate Dividends-Received
Deduction.  The Company may exclude from its income 100% of
dividends received from the Bank as a member of the same affiliated group of
corporations.  The corporate dividends-received deduction is 80% in
the case of dividends received from corporations with which a corporate
recipient owns at least 20% of the stock of the corporation but does not file a
consolidated return with such corporation, and corporations which own less than
20% of the stock of a corporation distributing a dividend may deduct only 70% of
dividends received or accrued on their behalf.




State
Taxation




We are
required to file Illinois income tax returns and pay tax at a stated tax rate of
7.3% of Illinois taxable income.  For these purposes, Illinois taxable
income generally means federal taxable income subject to certain adjustments,
including without limitation, the exclusion of interest income on United States
obligations.




SUPERVISION
AND REGULATION




General




Banking
is a highly regulated industry.  The MHC, the Company, and the Bank
are subject to numerous laws and regulations and supervision and examination by
various regulatory agencies.  Certain of the regulatory requirements
that are or will be applicable to us are described below.  This
description is not intended to be a complete explanation of such statutes and
regulations and their effect on us and is qualified in its entirety by reference
to the actual statutes and regulations.  These statutes and
regulations may change in the future, and we cannot predict what effect these
changes, if made, will have on our operations.







16
 Table of Contents





The Bank
is subject to extensive regulation, examination and supervision by the Office of
Thrift Supervision (“OTS”), as its primary federal regulator, and the Federal
Deposit Insurance Corporation (the “FDIC”), as the insurer of its
deposits.  The Bank is also a member of the Federal Home Loan Bank
(the “FHLB”) of Chicago and may be subject to examination by the FHLB of
Chicago.  The Bank’s deposit accounts are insured up to applicable
limits by the FDIC’s Deposit Insurance Fund.  The Bank must file
reports with the OTS and the FDIC concerning its activities and financial
condition, in addition to obtaining regulatory approvals prior to entering into
certain transactions, such as mergers with, or acquisitions of, other financial
institutions.  The OTS and, under certain circumstances, the FDIC
perform periodic examinations to evaluate the Bank’s safety and soundness and
compliance with various regulatory requirements.  This regulatory
structure is intended primarily for the protection of customers, the insurance
fund and depositors.  The regulatory structure also gives the
regulatory authorities extensive discretion with respect to their supervisory
and enforcement activities and examination policies, including policies
governing the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes.  Any change in such policies,
whether by the OTS, the FDIC or Congress, could have a material adverse impact
on us and our operations.




The MHC
and the Company, as savings and loan holding companies, are required to file
certain reports with, are subject to examination by and otherwise must comply
with the rules and regulations of the OTS.  The Company is also
subject to the regulations of the Securities and Exchange Commission under the
federal securities laws.




Regulation
of Federal Savings Institutions




Business
Activities.  Federal law and regulations, primarily the Home
Owners’ Loan Act and the regulations of the OTS, govern the activities of
federal savings institutions such as the Bank.  These laws and
regulations delineate the nature and extent of the activities in which federal
savings institutions may engage.  In particular, certain lending
authority for federal savings institutions with regard to commercial,
nonresidential real property loans and consumer loans is limited to a specified
percentage of an institution’s capital or assets.




Branching.  Federal
savings institutions are authorized to establish branch offices in any state or
states of the United States and its territories, subject to the approval or
non-objection, as applicable, of the OTS.




Capital
Requirements.  The OTS capital regulations require federal
savings institutions to meet three minimum capital standards:  a 1.5%
tangible capital to adjusted total assets ratio, a 4% core capital to adjusted
total assets ratio (“leverage ratio”) (3% for institutions receiving the highest
examination rating), and an 8% risk-based capital ratio.  In addition
to the above ratios, the prompt corrective action standards discussed below also
establish, in effect, certain minimum ratios, which, if not met, will result in
supervisory actions.




The
risk-based capital standard requires federal savings institutions to maintain a
Tier 1, or “core,” capital to risk-weighted assets ratio of at least 4% and
a total capital to risk-based assets ratio of at least
8%.  Risk-weighted assets include the following:  all assets
(including certain off-balance-sheet assets), certain recourse obligations, and
direct credit substitutes, multiplied by a risk-weight factor of 0% to 100%,
which is assigned by the OTS capital regulation based on the risks believed to
be inherent in each type of asset.  Core capital is defined as common
stockholders’ equity (including retained earnings), certain non-cumulative
perpetual preferred stock and related surplus, minority interests in equity
accounts of consolidated subsidiaries, non-withdrawable accounts and pledged
deposits meeting certain criteria and a certain amount of remaining goodwill;
less certain intangible assets, certain servicing rights, certain
credit-enhancing interest-only strips and certain investments in certain
subsidiaries.  The components of







17
 Table of Contents





supplementary
capital include certain permanent capital instruments, certain maturing capital
investments, allowances for loan and lease losses (limited to a maximum of 1.25%
of risk-weighted assets), and up to 45% of unrealized gains on
available-for-sale equity securities with readily determinable fair market
values.  Overall, the amount of supplementary capital included as part
of total capital cannot exceed 100% of core capital.




The OTS
also has authority to establish individual minimum capital requirements in
appropriate cases upon a determination that an institution’s capital level is or
may become inadequate in light of particular circumstances.  At
December 31, 2008, the Bank met each of these capital
requirements.




Prompt Corrective Regulatory
Action.  The OTS is required to take certain supervisory
actions against institutions that do not meet certain minimum capital ratios,
the severity of which depends upon the institution’s degree of
undercapitalization.  Generally, a savings institution that has a
total risk-based capital ratio of less than 8%, a Tier 1 risk-based capital
ratio of less than 4%, or a leverage ratio of less than 4% (or less than 3% for
institutions with the highest examination rating) is considered to be
“undercapitalized.”  A savings institution that has a total risk-based
capital ratio of less than 6%, a Tier 1 risk-based capital ratio of less
than 3%, or a leverage ratio of less than 3% is considered to be “significantly
undercapitalized.”  A savings institution that has a ratio of tangible
equity to total assets equal to or less than 2% is deemed to be “critically
undercapitalized.”  Subject to a narrow exception, the OTS is required
to appoint a receiver or conservator within specified time frames for an
institution that is “critically undercapitalized.”  If an institution
receives a notice that it is “undercapitalized,” “significantly
undercapitalized,” or “critically undercapitalized,” the institution must file a
capital restoration plan with the OTS within 45 days of the receipt of such
notice.  Compliance with the capital restoration plan must be
guaranteed by the parent holding company.  In addition, numerous
mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion.  “Significantly undercapitalized” and “critically
undercapitalized” institutions are subject to more extensive mandatory
regulatory actions.  The OTS could also take any one of a number of
discretionary supervisory actions, including the issuance of a capital directive
and the replacement of senior executive officers and directors.




Loans to One
Borrower.  Federal law provides that savings institutions
generally are subject to the limits on loans to one borrower applicable to
national banks.  A savings institution may not make a loan or extend
credit, if not fully secured, to a single or related group of borrowers in
excess of 15% of its unimpaired capital and surplus.  An additional
amount may be lent or extended, equal to 10% of the institution’s unimpaired
capital and surplus, if such additional amount is fully secured by readily
marketable collateral.




Standards for Safety and
Soundness.  As required by statute, the federal banking
agencies have adopted interagency guidelines prescribing standards for safety
and soundness.  The guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes
impaired.  If the OTS determines that a savings institution fails to
meet any standard prescribed by the guidelines, the OTS may require the
institution to submit an acceptable plan to achieve compliance with the
standard.  The Bank has not received any notice that it has failed to
meet any standard prescribed by the guidelines.




Limitation on Capital
Distributions.  OTS regulations impose limitations upon all
capital distributions by a savings institution, including cash dividends,
payments to repurchase its shares, and payments to stockholders of another
institution in a cash-out merger.  Under the regulations, an
application to and the prior approval of the OTS is required before the
institution makes any capital distribution if the institution does not meet the
criteria for “expedited treatment” of applications under OTS regulations (i.e.,
generally, examination and Community Reinvestment Act ratings in the
two







18
 Table of Contents





highest
categories), if the total capital distributions for the calendar year exceed net
income for that year plus the amount of retained net income for the preceding
two years, if the institution would be undercapitalized following the
distribution or if the distribution would otherwise be contrary to a statute,
regulation, agreement with the OTS or condition imposed by the
OTS.  If an application is not required, the institution must still
provide prior notice to the OTS of the capital distribution if the institution
meets certain criteria (e.g., if the institution is a subsidiary of a holding
company).  If the Bank’s capital were to fall below its regulatory
requirements or the OTS notified the Bank of necessary increased supervision,
its ability to make capital distributions could be restricted.  In
addition, the OTS could prohibit a proposed capital distribution that would
otherwise be permitted by the regulations if the OTS determined that such
distribution would constitute an unsafe or unsound practice.




Qualified Thrift Lender
Test.  Federal law requires savings institutions to meet a
qualified thrift lender test.  Under the test, a savings institution
is required to either qualify as a “domestic building and loan association”
under the Internal Revenue Code or maintain at least 65% of its “portfolio
assets” (total assets less:  (i) specified liquid assets up to
20% of total assets; (ii) intangibles, including goodwill; and
(iii) the value of property used to conduct business) in certain “qualified
thrift investments” in at least nine months out of each twelve-month
period.  “Qualified thrift investments” primarily consist of
residential mortgages and related investments, including certain mortgage-backed
securities.




A savings
institution that fails the qualified thrift lender test is subject to certain
operating restrictions, such as restrictions on investments, activities and
branching.  As of December 31, 2008, the Bank maintained 97.2% of
its portfolio assets in qualified thrift investments and, therefore, met the
qualified thrift lender test.




Transactions with Related
Parties.  Federal law limits the Bank’s authority to extend
credit to, and engage in certain other transactions (collectively, “covered
transactions”) with, “affiliates” (e.g., any company that controls or is under
common control with an institution, including MHC, the Company, and their
non-savings institution subsidiaries).  The aggregate amount of
covered transactions with any individual affiliate is limited to 10% of the
unimpaired capital and surplus of the savings institution.  The
aggregate amount of covered transactions with all affiliates is limited to 20%
of the savings institution’s unimpaired capital and surplus.  Loans
and other specified transactions with affiliates are required to be secured by
collateral in an amount and of a type described in federal law.  The
purchase of low-quality assets from affiliates is permitted only under certain
circumstances.  Transactions with affiliates must be on terms and
under circumstances that are at least as favorable to the institution as those
prevailing at the time for comparable transactions with
non-affiliates.  In addition, savings institutions are generally
prohibited from lending to any affiliate that is engaged in activities that are
not permissible for bank holding companies; and no savings institution may
purchase the securities of any affiliate other than a subsidiary.




The
Bank’s authority to extend credit to its executive officers, directors and
stockholders that own, control or have the power to vote more than 10% of any
class of the institution’s voting stock (“insiders”), as well as entities
affiliated with such persons, is limited.  The Bank is restricted both
in the individual and the aggregate amount of loans it may make to insiders
based, in part, on the Bank’s capital position and the requirement that the Bank
follow certain board approval procedures.  Such loans must be made on
terms substantially the same as those offered to non-insiders and not involve
more than the normal risk of repayment.  There is an exception for
loans made pursuant to a benefit or compensation program that is widely
available to all employees of the institution and does not give preference to
insiders over other employees.  Certain additional restrictions apply
to loans or extensions of credit to executive officers.







19
 Table of Contents





Enforcement.  The
OTS has primary enforcement responsibility over federal savings institutions and
has the authority to bring actions against the institution and all
institution-affiliated parties, including stockholders, attorneys, appraisers,
and accountants who knowingly or recklessly participate in wrongful action
likely to have an adverse effect on an insured institution.  Formal
enforcement action may range from the issuance of a capital directive or cease
and desist order to removal of officers and/or directors or termination of
deposit insurance.  An insured institution or institution-affiliated
party may also be assessed civil money penalties and/or criminal penalties for
certain violations.




Assessments.  Federal
savings institutions must pay assessments to the OTS to fund its
operations.  The general assessments, paid on a semiannual basis, are
based upon the savings institution’s size, condition, and complexity of
business.




Insurance of Deposit
Accounts.  Under FDIC laws and regulations, FDIC-insured
institutions, such as the Bank, are required to pay deposit insurance premiums
based on the risk they pose to the Deposit Insurance Fund
(“DIF”).  The FDIC has authority to raise or lower assessment rates on
insured deposits in order to achieve statutorily required reserve ratios in the
insurance funds and to impose special additional assessments.  Each
depository institution is assigned to one of three capital
groups:  “well capitalized,” “adequately capitalized,” or
“undercapitalized.” Within each capital group, institutions are assigned to one
of three supervisory subgroups: “A” (institutions with few minor weaknesses);
“B” (institutions demonstrating weaknesses that, if not corrected, could result
in significant deterioration of the institution and increased risk of loss to
the DIF); and “C” (institutions that pose a substantial probability of loss to
the DIF unless effective corrective action is taken).  Accordingly,
there are nine combinations of capital groups and supervisory subgroups to which
varying assessment rates would be applicable.  An institution’s
assessment rate depends on the capital category and supervisory category to
which it is assigned.




Pursuant
to the 2008 Emergency Economic Stabilization Act (described more fully below),
the maximum deposit insurance on individual accounts was increased from $100,000
to $250,000 until December 31, 2009.  The FDIC may terminate an
institution’s deposit insurance upon a finding that the institution has engaged
in unsafe or unsound practices, is in an extremely unsafe or unsound condition,
or has violated any applicable law, regulation, rule, order or condition imposed
by the FDIC or the OTS.  We do not know of any practice, condition or
violation that might lead to termination of the Bank’s deposit
insurance.




On
October 16, 2008, the FDIC published a restoration plan to reestablish the DIF
to the statutory required minimum reserve ratio of 1.15% within five
years.  As part of the restoration plan, the FDIC indicated that it
would increase risk-based assessment rates uniformly by seven basis points on an
annual basis for the first quarter of 2009.  On February 27, 2009, the
FDIC published the final rule on assessment rates and amended the restoration
plan.  The final rule increases base rates for insured institutions to
a range of 12 to 45 basis points, based on the capital category and the
supervisory category of each institution.  The FDIC also extended the
time period within which the restoration plan must achieve the statutory minimum
reserve ratio of 1.15% of assets to seven years from five years.




On
February 27, 2009, the FDIC also published an interim rule that proposed an
emergency 20 basis point assessment on all insured
institutions.  Pursuant to the interim rule, the FDIC would impose the
emergency assessment based on the institution’s assets as of June 30, 2009, and
payment would be due on September 30, 2009.  The interim rule also
allows the FDIC to impose an additional emergency assessment of up to 10 basis
points if, after June 30, 2009, the DIF reserve ratio falls to a level the FDIC
believes could erode public confidence in the deposit insurance
program.  It should be noted that the emergency assessment is an
interim rule and subject to change.







20
 Table of Contents





Federal Home Loan Bank (FHLB)
System.  The Bank is a member of the FHLB of
Chicago.  The FHLB system consists of twelve regional Federal Home
Loan Banks.  The FHLB provides a central credit facility primarily for
member institutions.  The Bank, as a member of the FHLB of Chicago, is
required to acquire and hold shares of capital stock in the FHLB in an amount at
least equal to 1.0% of the aggregate principal amount of its unpaid loans, or 5%
of its aggregate amount of outstanding advances (borrowings) from the FHLB,
whichever is greater.  The Bank was in compliance with this
requirement with an investment in FHLB stock at December 31, 2008, of
$610,000.




The
Federal Home Loan Banks are required to provide funds for the resolution of
insolvent thrifts and to contribute funds for affordable housing
programs.  These requirements could reduce the amount of dividends
that the Federal Home Loan Banks pay to their members and could also result in
the Federal Home Loan Banks imposing a higher rate of interest on advances to
their members.  During 2007 the FHLB of Chicago terminated its
dividend, and we cannot predict when that dividend will be
resumed.  The elimination of the dividend has reduced our net interest
income.  If interest on future Federal Home Loan Bank advances were
increased, our net interest income would likely also be reduced.




Community Reinvestment
Act.  Under the Community Reinvestment Act, as implemented by
OTS regulations, a savings institution has a continuing and affirmative
obligation consistent with safe and sound operations to help meet the credit
needs of its entire community, including low- and moderate-income
neighborhoods.  The Community Reinvestment Act does not establish
specific lending requirements or programs for financial institutions, nor does
it limit an institution’s discretion to develop the types of products and
services that it believes are best suited to its particular community,
consistent with the safe and sound operations.  The Community
Reinvestment Act requires the OTS, in connection with its examination of a
savings institution, to assess the institution’s record of meeting the credit
needs of its community and to take such record into account in its evaluation of
certain applications by such institution.




The
Community Reinvestment Act requires public disclosure of an institution’s
Community Reinvestment Act examination rating and requires the OTS to provide a
written evaluation of a bank’s Community Reinvestment Act performance utilizing
a four-tiered descriptive rating system.  The Bank received a
“satisfactory” rating as a result of its most recent Community Reinvestment Act
assessment.




Liquidity.  A
federal savings institution is required to maintain a sufficient amount of
liquid assets to ensure its safe and sound operation.




Prohibitions Against Tying
Arrangements.  Federal savings institutions are prohibited,
subject to certain exceptions, from extending credit or offering any other
service, or fixing or varying the consideration for such extension of credit or
service, on the condition that the customer obtain some additional service from
the institution or its affiliates or not obtain services of a competitor of the
institution.




Privacy
Requirements.  Federal laws and regulations govern an
institution’s treatment of nonpublic personal information with respect to an
institution’s consumers.  Generally, the law requires an institution
to provide notice to consumer customers about its privacy policies and
practices, permits an institution to disclose nonpublic personal information
about consumer customers to nonaffiliated third parties only under certain
conditions, and requires an institution to provide consumer customers with a
method and reasonable opportunity to “opt out” before the institution discloses
any of the consumer customer’s information to certain nonaffiliated third
parties.




Anti-Money Laundering and the Bank
Secrecy Act.  Under the Bank Secrecy Act (“BSA”), a financial
institution is required to have systems in place to detect certain transactions,
based on the size







21
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and
nature of the transaction.  Financial institutions are generally
required to report cash transactions involving more than $10,000 to the United
States Treasury.  In addition, financial institutions are required to
file suspicious-activity reports for transactions that involve more than $5,000
and that the financial institution knows, suspects or has reason to suspect
involve illegal funds, are designed to evade the requirements of the BSA or have
no lawful purpose.




The USA
PATRIOT Act of 2001 (the “PATRIOT Act”), which amended the BSA, contains
anti-money laundering and financial transparency laws, as well as enhanced
information collection tools and enforcement mechanisms for the U.S.
government.  PATRIOT Act provisions include the
following:  standards for verifying customer identification when
opening accounts; rules to promote cooperation among financial institutions,
regulators and law enforcement; and due diligence requirements for financial
institutions that administer, maintain or manage certain bank
accounts.




The Bank
is subject to BSA and PATRIOT Act requirements.  The OTS carefully
reviews an institution’s compliance with these requirements when examining an
institution and considers the institution’s compliance when evaluating an
application submitted by an institution.  The OTS may require an
institution to take various actions to ensure that it is meeting the
requirements of these acts.




Consumer Protection
Laws.  The Bank is subject to many consumer protection laws and
regulations, such as the following:




·
            the
      Truth-In-Lending Act, governing disclosures of credit terms to consumer
      borrowers;




·
            the
      Home Mortgage Disclosure Act of 1975, requiring financial institutions to
      provide information to enable the public and public officials to determine
      whether a financial institution is fulfilling its obligation to help meet
      the housing needs of the community it
serves;




·
            the
      Equal Credit Opportunity Act, prohibiting discrimination on the basis of
      race, creed, or other prohibited factors when extending
      credit;




·
            the
      Fair Credit Reporting Act of 1978, governing the use and provision of
      information to credit reporting agencies;
and




·
            rules
      and regulations of the various federal agencies charged with the
      responsibility of implementing such federal
  laws.




Savings
and Loan Holding Company Regulation




General.  MHC and
the Company are savings and loan holding companies within the meaning of federal
law.  As such, they are registered with the OTS and are subject to OTS
regulations, examinations, supervision, and reporting
requirements.  In addition, the OTS has enforcement authority over the
Company, MHC and their subsidiaries.  Among other things, this
authority permits the OTS to restrict or prohibit activities that are determined
to be a serious risk to the Bank.




Restrictions Applicable to Savings
and Loan Holding Companies.  According to federal law and OTS
regulations, savings and loan holding companies, such as MHC and the Company,
may engage only in certain activities.  Activities permissible for
savings and loan holding companies include:  (1) acquiring
control of a savings association; (2) furnishing or performing management
services for a subsidiary savings association of such holding company;
(3) holding, managing or liquidating assets owned or acquired from a
savings association subsidiary of such holding company; (4) holding or
managing







22
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properties
used or occupied by a savings association subsidiary of such holding company;
and (5) any activity approved by the Federal Reserve Board for a bank
holding company or financial holding company or previously approved by the OTS
for multiple savings and loan holding companies.




Federal
law prohibits a savings and loan holding company from directly or indirectly, or
through one or more subsidiaries, acquiring more than 5% of a savings
association or a savings and loan holding company without prior written approval
of the OTS.  Federal law also prohibits a savings and loan holding
company from acquiring more than 5% of a company engaged in activities other
than those authorized for savings and loan holding companies by federal law or
acquiring or retaining control of a depository institution that is not insured
by the FDIC.  In evaluating applications by savings and loan holding
companies to acquire savings institutions, the OTS must consider the financial
and managerial resources and future prospects of the company and institution
involved, the effect of the acquisition on the risk to the insurance funds, the
convenience and needs of the community and competitive factors.




The OTS
is prohibited from approving any acquisition that would result in a multiple
savings and loan holding company controlling savings institutions in more than
one state, unless the laws of the state of the target savings institution
specifically permit such acquisitions.  The states vary in the extent
to which they permit interstate savings and loan holding company
acquisitions.




Stock Holding Company Subsidiary
Regulation.  The OTS has adopted regulations governing the
two-tier holding company form of organization where there are subsidiary stock
holding companies that are controlled by mutual holding
companies.  This two-tier structure is currently the form of
organization that has been adopted for the MHC and the Company, and we
anticipate that it will continue in place.  The Company is the stock
holding company and is a subsidiary of MHC, the mutual holding
company.




Waivers of Dividends by
MHC.  MHC may only waive receipt of dividends from the Company
under certain circumstances:  (i) when no insider of the mutual
holding company, associate of an insider, or tax-qualified or non-tax-qualified
employee stock benefit plan of the mutual holding company holds any share of
stock in the class of stock to which the waiver would apply or (ii) MHC notifies
the OTS prior to waiving receipt of dividends from the Company, and the OTS does
not object.  The OTS reviews dividend waiver notices on a case-by-case
basis, and, in general, does not object to any such waiver
if:  (i) the mutual holding company’s board of directors
determines that such waiver is consistent with such directors’ fiduciary duties
to the mutual holding company’s members; and (ii) the waiver would not be
detrimental to the safe and sound operation of the savings
association.  The OTS will not consider waived dividends in
determining an appropriate exchange ratio in the event of a full conversion to
stock form.  During the year ended December 31, 2008, MHC did waive
dividends paid by the Company.  We anticipate, but make no
representation, that, to the extent the law allows, MHC will waive future
dividends that the Company may pay, if any.




Conversion of Mutual MHC to Stock
Form.  OTS regulations permit MHC to convert from the mutual
form of organization to the capital stock form of organization.  There
can be no assurance when, if ever, a conversion transaction will occur, and it
is our understanding that MHC’s board of directors has no current intention or
plan to undertake a conversion transaction.




Acquisition of
Control.  Under the federal Change in Bank Control Act, a
notice must be submitted to the OTS if any person (including a company), or
group acting in concert, seeks to acquire “control” of a savings and loan
holding company or savings institution.  An acquisition of “control”
can occur upon the acquisition of 10% or more of the voting stock of a savings
and loan holding company or savings institution or in a manner otherwise defined
by the OTS.  Under the Change in Bank Control Act, the OTS has 60 days
from the filing of a complete notice to act, taking into consideration certain
factors, including the financial and managerial resources of the acquirer and
the antitrust effects of the acquisition.







23
 Table of Contents





Any
company that acquires control would then be subject to regulation as a savings
and loan holding company.




2008
Emergency Economic Stabilization Act




On
October 3, 2008 the U.S. Congress enacted the Emergency Economic Stabilization
Act (“EESA”).  EESA authorized the Secretary of the U.S. Department of
the Treasury to purchase up to $700 billion in troubled assets from qualifying
financial institutions pursuant to the Troubled Asset Relief Program
(“TARP”).  On October 14, 2008, the U.S. Department of the Treasury
(“Treasury”), pursuant to its authority under EESA, announced the Capital
Purchase Program (“CPP”), pursuant to which qualifying financial institutions
would issue certain securities to Treasury in an amount not less than 1% of
risk-weighted assets and not more than 3% of risk weighted assets or $25
billion, whichever is less.  The type of securities issued to the
Treasury depends on whether the qualifying financial institution is a public
entity, non-public entity, or S corporation.  The proceeds from the
issuance of CPP securities generally qualify as Tier 1
capital.  Financial institutions participating in the CPP must agree
and comply with certain restrictions, including restrictions on redemptions,
dividends, repurchases and executive compensation.  In addition,
Treasury may unilaterally amend any provision of the CPP to comply with changes
in applicable federal statutes.  Neither MHC, the Company, nor the
Bank has applied to participate in the CPP.




On
February 17, 2009, the American Recovery and Reinvestment Act of 2009 (“ARRA”)
was signed into law.  The ARRA amends certain provisions of EESA,
affecting financial institutions participating in TARP.  The
amendments to EESA primarily affect the executive compensation and the
redemption of preferred stock provisions of EESA.  These provisions
are not applicable to MHC, the Company or the Bank, because none are
participating in TARP.




On
February 25, 2009, the Treasury announced the Capital Assistance Program (“CAP”)
applicable to public financial institutions.  The CAP consists of two
components.  First, the Treasury will conduct a coordinated
supervisory capital assessment exercise with each banking organization whose
assets exceed $100 billion.  Second, the Treasury will purchase
mandatorily convertible preferred stock from qualifying public financial
institutions “as a bridge to private capital in the future.”  The CAP
does not replace the CPP, and institutions participating in the CPP can also
apply to participate in the CAP.  Proceeds from the issuance of
securities under CAP will generally qualify as Tier 1 capital for holding
companies.  Financial Institutions participating in CAP must agree to
a similar set of restrictions as the CPP, including restrictions on dividends,
repurchases, redemptions and executive compensation.  Neither MHC, the
Company, nor the Bank intends to apply to CAP at this time.




FDIC
Temporary Liquidity Guarantee Program




On
October 15, 2008, the FDIC announced the Temporary Liquidity Guarantee Program
(“TLGP”) to strengthen confidence and encourage liquidity in the banking
system.  The program consists of two voluntary
components:  the Debt Guarantee Program (“DGP”) and the Transaction
Account Guarantee Program (“TAGP”).  Eligible entities not wishing to
participate must have formally opted-out of each of the DGP and TAGP by December
5, 2008.




Debt Guarantee
Program.  Pursuant to the DGP, eligible entities may issue
FDIC-guaranteed senior unsecured debt up to 125% of the entity’s senior
unsecured debt outstanding as of September 30, 2008.  If an eligible
depository institution had no senior unsecured debt, as defined in FDIC
regulations, outstanding as of September 30, 2008, then the depository
institution may have unsecured debt guaranteed up to an amount equal to 2% of
the institution’s total liabilities.  For eligible entities that are
not depository institutions and had no outstanding senior unsecured debt as of
September 30, 2008, the







24
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FDIC
along with the entity’s primary regulator will assess on a case-by-case basis
whether the entity may participate in the DGP and determine the amount of its
debt guarantee limit.  Guaranteed debt issued under the DGP must be
issued on or before June 30, 2009, and the guarantee will end on the earlier of
the maturity date of the debt or June 30, 2012, although guaranteed debt may
have a maturity date beyond June 30, 2012.  The FDIC will assess
participating entities a fee based on a tiered fee schedule ranging from 50 to
100 basis points, based on the term of the debt and the type of
institution.  The fee is assessed only after the participating entity
issued guaranteed debt.  Neither MHC, the Company, nor the Bank is
participating in the DGP.




Transaction Account Guarantee
Program.  Pursuant to the TAGP, the FDIC will fully insure,
without limit, qualifying transaction accounts held at qualifying depository
institutions through December 31, 2009.  Qualifying transaction
accounts include non-interest-bearing transaction accounts, Interest on Lawyers
Trust Accounts (IOLTAs) and NOW accounts with interest rates less than
0.5%.  For participating institutions, the FDIC will assess a fee
equal to 10 basis points on qualifying transaction account deposit balances in
excess of the current $250,000 insured limit.  The Bank is
participating in the TAGP.




Sarbanes-Oxley
Act of 2002




Through
the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, public companies (including
publicly held holding companies such as the Company) became subject to a broad
range of corporate governance and accounting
measures.  Sarbanes-Oxley’s principal provisions, many of which have
been interpreted and implemented through recently adopted rules, provide for and
include, among other things, corporate governance and responsibility measures,
including the requirement that the chief executive officer and chief financial
officer of a public company certify its financial statements.




In
addition, Section 404 of Sarbanes-Oxley, as implemented, requires that a
public company report management’s evaluation of the effectiveness of such
company’s internal control over financial reporting.  Additionally,
such company’s senior management must evaluate, as of the end of each fiscal
period, any change in the company’s internal control over financial reporting
that occurred during the period that materially affected, or is reasonably
likely to materially affect, the company’s internal control over financial
reporting.  As a result of the expiration of the rules that had
extended Section 404 compliance deadlines for smaller public companies, we
are required to provide our report on internal control over financial reporting
in this annual report covering the fiscal year ended December 31,
2008.  However, management’s report is not subject to attestation by
the Company’s independent registered public accounting firm pursuant to
temporary rules of the SEC that have delayed the effectiveness of the rules
requiring this attestation.




ITEM
1A.                      RISK
FACTORS




Our
business, operating results and financial condition are subject to various risks
and uncertainties, including, without limitation, those set forth below, any of
which could cause our actual results to vary materially from recent results or
from our anticipated future results.  Before making an investment
decision with respect to our securities, you should carefully consider the risks
and uncertainties described below together with all of the other information
included in this report.  The risks and uncertainties described below
are not the only risks and uncertainties we face. Additional risks and
uncertainties not presently known or that are currently deemed immaterial also
may have a material adverse effect on our business, operating results and
financial condition.




Continued
adverse conditions in the U.S. economy, and in particular the greater Chicago
area, could have an material adverse effect on our business and results of
operations.







25
 Table of Contents





Recently
the strength of the U.S. economy in general, and the strength of the economy in
the Chicago area in particular, has declined. A sustained deterioration in
national or local economic conditions could result in, among other things,
further deterioration of credit quality or reduced demand for credit, including
a resultant effect on our loan portfolio and allowance for loan
losses.  Continued, sustained weakness in business and economic
conditions generally or in the Chicago-area market may decrease the demand for
loans and other products and services that we offer and/or increase the number
of borrowers or other counterparties who become delinquent, file for protection
under bankruptcy laws or default on their loans or other obligations to
us.  Increased delinquencies, bankruptcies or defaults could result in
a higher level of nonperforming assets, net charge-offs, provision for loan
losses, and valuation adjustments on loans held for sale, which would materially
adversely affect our business, financial condition and results of
operations.




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




The
volume and credit quality of our one-to-four family residential mortgages and
home equity loans may decrease during economic downturns due to the effects of,
among other things, decreased real estate values, higher unemployment, decreased
housing price appreciation or housing price declines, or increased interest
rates.  These factors could reduce our earnings and consequently our
financial condition because borrowers may not be able to repay their loans, the
value of the collateral securing our loans and the quality of our loan portfolio
may decline and customers may not want or need our products and
services.  Any of these scenarios could continue to cause an increase
in delinquencies and non-performing assets in future periods, require us to
charge off a higher percentage of our loans, increase substantially our
provision for losses on loans, or make fewer loans, which would reduce
income.




Our
allowance for loan losses may be insufficient to absorb losses in our loan
portfolio.




Lending
money is a substantial part of our business. Every loan we make carries a
certain risk of non-payment. This risk is affected by, among other
things:




·
            the
      credit risks posed by the particular
borrower;




·
            changes
      in economic conditions;




·
            the
      duration of the loan; and




·
            in
      the case of a collateralized loan, the changes and uncertainties as to the
      future value of the collateral.




We
maintain an allowance for loan losses that we believe is sufficient to absorb
credit losses inherent in our loan portfolio.  See
“Item 1.—Business—Allowance for Loan Losses.”  The allowance for
loan losses represents our estimate of probable losses in the portfolio at each
balance sheet date and is supported by all available and relevant
information.  As a percentage of gross loans, the allowance was 2.43%
at December 31, 2008. Over the past year, we increased our allowance as a
percentage of gross loans based on management’s analysis of our credit quality,
including an increase in non-performing loans, and other factors.  Our
regulators review the adequacy of our allowance and, through the examination
process, have authority to compel us to increase our allowance even if we
believe it is adequate.  We cannot predict whether our regulators
would ever compel us to increase our allowance.  Although we believe
our loan loss allowance is adequate to absorb probable and reasonably
estimable







26
 Table of Contents





losses in
our loan portfolio, the allowance may not be adequate. If our actual loan losses
exceed the amount that is anticipated, our earnings could suffer.




We
may be adversely affected by interest rate changes.




Our
operating results are largely dependent on our net interest income. Fluctuations
in interest rates may significantly affect our net interest income, which is the
difference between the interest income earned on earning assets, usually loans
and investment securities, and the interest expense paid on deposits and
borrowings. The interest rate environment over the last year has continued to
compress our net interest margin. Over the long term, we expect our net interest
margin to benefit during a rising rate environment and alternatively, if market
rates decrease, we expect our net interest margin to continue to decrease. We
are unable to predict fluctuations in interest rates, which are affected by a
number of factors including monetary policy of the Federal Reserve, inflation or
deflation, recession, unemployment rates, money supply and instability in
domestic and foreign financial markets.




We
may not be able to access sufficient or cost-effective sources of liquidity to
fund our requirements in the future.




We depend
on access to a variety of funding sources to provide sufficient liquidity to
meet our commitments and business needs and to accommodate the transaction and
cash management needs of our customers, including funding current loan
commitments.  Currently, our primary sources of liquidity are our
customers’ deposits, as well as Federal Home Loan Bank advances, amortization
and prepayment of loans, maturities of investment securities and other
short-term investments, and earnings and funds provided from
operations.




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




ITEM
2.                      PROPERTIES




The
Company is located and conducts its business at the Bank’s sole office at 2212
West Cermak Road, Chicago, Illinois 60608.  The Bank owns the building
at that location.  During 2008 the Company acquired two adjacent lots
that will be used for a drive-up facility to be completed in
2009.  The Company believes that the current and new facilities are
adequate to meet its present and immediately foreseeable needs.  See
“Business—Properties.”




ITEM
3.                      LEGAL
PROCEEDINGS




The
Company and the Bank are not involved in any pending proceedings other than the
legal proceedings occurring in the ordinary course of business.  Such
legal proceedings in the aggregate are believed by management to be immaterial
to the Company’s business, financial condition, results of operations and cash
flows.




ITEM
4.                      SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS




None.







27
 Table of Contents





PART II




ITEM
5.                      MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES




The
Company’s common stock is traded on the OTC Bulletin Board under the symbol
“MFDB.OB.”  At March 20, 2009, the Company had 76 record holders
of its common stock.  The table below shows the reported high and low
bid price of the Company’s common stock, as reported on the OTC Bulletin Board,
and any dividends declared during the periods indicated in 2008 and
2007.




2008
                    
                    High
                    
                    
                    Low
                    
                    
                    Dividends
      DeclaredFirst
      quarter
                    
                    $
                    11.50
                    
                    
                    $
                    10.35
                    
                    
                    
                    —Second
      quarter
                    
                    
                    11.35
                    
                    
                    
                    10.50
                    
                    
                    $
                    0.06Third
      quarter
                    
                    
                    10.90
                    
                    
                    
                    8.00
                    
                    
                    
                    0.06Fourth
      quarter
                    
                    
                    10.00
                    
                    
                    
                    8.00
                    
                    
                    
                    0.062007First
      quarter
                    
                    $
                    14.41
                    
                    
                    $
                    12.40
                    
                    
                    
                    —Second
      quarter
                    
                    
                    14.00
                    
                    
                    
                    12.70
                    
                    
                    
                    —Third
      quarter
                    
                    
                    13.15
                    
                    
                    
                    10.05
                    
                    
                    
                    —Fourth
      quarter
                    
                    
                    12.05
                    
                    
                    
                    10.35
                    
                    
                    
                    —





Dividend
Policy




The
Company’s board of directors has the authority to declare dividends on the
Company’s common stock, subject to statutory and regulatory
requirements.  During the second quarter of 2008 the Company declared
its first quarterly dividend of $0.06 per share of its common stock, and
maintained this same dividend in the third and fourth quarters.  The
payment of dividends in the future, if any, would depend upon a number of
factors, including capital requirements, our financial condition and results of
operations, tax considerations, statutory and regulatory limitations and general
economic conditions.  Special cash dividends, stock dividends or
returns of capital may, to the extent permitted by OTS policy and regulations,
be paid in addition to, or in lieu of, regular cash dividends.




Any
dividends that we pay in the future may depend, in part, upon receipt of
dividends from the Bank, because the Company generally has no source of income
other than dividends from the Bank, earnings from the investment of proceeds
from the sale of shares of common stock, and interest payments with respect to
the loan to the employee stock ownership plan.  A regulation of the
OTS imposes limitations on “capital distributions” by savings
institutions.  See “Supervision and Regulation—Regulation of Federal
Savings Institutions—Limitation on Capital Distributions”.




When we
pay dividends to our stockholders, we also are required to pay dividends to MHC,
unless MHC elects to waive the receipt of dividends.  MHC waived its
right to receive dividends during 2008 and we anticipate that MHC will continue
to waive receipt of any dividends in the future.  Any decision to
waive dividends will be subject to regulatory approval.  Under OTS
regulations, public stockholders would not be diluted for any dividends waived
by MHC in the event MHC converts to stock form.  See “Supervision and
Regulation—Holding Company Regulation”.







28
 Table of Contents





Purchase
of Equity Securities




Period
                  
                  Total
      number of shares purchased
                  
                  
                  Average
      price paid per share
                  
                  
                  Total
      number of shares purchased as part of publicly announced plans or
      programs
                  
                  
                  Maximum
      number of shares that may yet be purchased under the plans or
      programs(1)10/1/08–10/31/08
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  136,04411/1/08–11/30/08
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  136,04412/1/08–12/31/08
                  
                  
                  69,000
                  
                  
                  $
                  9.17
                  
                  
                  
                  69,000
                  
                  
                  
                  67,044





(1)
            On
      May 29, 2008 the Company announced that its Board of Directors had
      approved a stock repurchase program that authorized the purchase of up to
      5%, or 175,500 shares, of the Company’s then outstanding shares of common
      stock, from time to time in open market or privately negotiated
      transactions.  Unless terminated or amended earlier by the Board
      of Directors, the stock repurchase program will end when the Company has
      repurchased all 175,500 shares authorized for
  repurchase.




ITEM
7.                      MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS




General




This
discussion and analysis reflects our consolidated financial statements and other
relevant statistical data and is intended to enhance your understanding of our
financial condition and results of operations.  You should read the
information in this section in conjunction with our audited consolidated
financial statements, which begin on page F-1, and the other business and
financial information provided in this annual report.




Forward-Looking
Statements




This
report contains forward-looking statements, which can be identified by the use
of such words as estimate, project, believe, intend, anticipate, plan, seek,
expect and similar expressions.  These forward-looking statements
include:




· 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.




These
forward-looking statements are subject to significant risks, assumptions and
uncertainties, including, among other things, the following important factors
that could affect the actual outcome of future events:




· general
economic conditions, either nationally or in our market area, continue to
deteriorate or become worse than expected;




· adverse
changes or continued volatility or disruption in the securities and credit
markets;




· significantly
increased competition among depository and other financial
institutions;







29
 Table of Contents





· inflation
and changes in the interest rate environment that reduce our margins or reduce
the fair value of financial instruments, which can decrease our
earnings;




· fluctuations
in market rates of loan and deposit pricing in our market areas;




· deterioration
in asset quality;




· the need
to continue to increase our allowance for loan losses;




· charges
related to asset impairments;




· adverse
developments in our loan or investment portfolios;




· our
ability to enter new markets successfully and take advantage of growth
opportunities;




·our ability
to successfully implement our business plan;




· legislative
or regulatory changes that adversely affect our business;




· changes
in consumer spending, borrowing and savings habits;




· changes
in accounting policies and practices, as may be adopted by the bank regulatory
agencies, the Financial Accounting Standards Board, the SEC and the PCAOB;
and




· changes
in our organization, compensation and benefit plans.




These
risks and uncertainties should be considered in evaluating forward-looking
statements, and undue reliance should not be placed on such
statements.  Because of these and other uncertainties, our actual
future results may be materially different from the results indicated by these
forward-looking statements.




Overview
and Recent Developments




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,
investment securities, mortgage-backed securities and other interest-earning
assets (primarily cash and cash equivalents), and the interest we pay on our
interest-bearing liabilities, consisting of savings accounts, time deposits and
FHLB advances.  Our results of operations also are affected by our
provisions for loan losses, non-interest income and non-interest
expense.  Non-interest income currently consists primarily of gains
and losses on the sale of securities and miscellaneous other
income.  Non-interest expense currently consists primarily of salaries
and employee benefits, occupancy, data processing, professional 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, governmental policies and actions of regulatory
authorities.




Throughout
2008 and continuing into 2009, there have been severe disruptions in the
mortgage, credit and housing markets, both locally and
nationally.  These disruptions have had a significant negative impact
on real estate and related industries, which has led to decreases in commercial
and residential real estate sales, construction and property
values.  These disruptions have had a significant negative impact on
the Bank’s loan portfolio, resulting in a reduction in demand for new loans,
with a consequential effect in the size of our loan portfolio, and an increase
in the number of non-performing loans.  At December 31, 2008,
non-performing loans represented 5.59% of gross loans, which is significantly in
excess of the







30
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historical
experience of the Bank.  We also recorded loan charge-offs of
$169,000, our first loan charge-offs in over a decade.  Accordingly,
the decreased demand for new residential mortgage loans and the significant
increase in non-performing loans has had a materially adverse impact on the
financial condition and results of operations of the Company during 2008,
including a contraction in net interest margin and the need to increase the
provision for loan losses.  Should the housing market and economic
conditions in the Chicago-area stagnate or continue to deteriorate, it may
continue to have a negative effect on the Company’s business and results of
operation.




In
February 2009, the Company entered into a non-binding agreement for a proposed
investment by the Company in Great American Bank (“Great American”), a de novo
Illinois state commercial bank in organization.  Pursuant to the
non-binding terms, the Company would purchase $2 million of common stock of
Great American, which would represent an approximate 20% ownership interest in
Great American assuming it raises a minimum amount of capital from other
possible investors.  If the investment is completed, the Company would
receive the right to nominate annually one member to the board of directors of
Great American for so long as it holds at least 10% of its outstanding common
stock and would be granted certain preemptive purchase and sale
rights.  No definitive agreement has been reached at this time as the
Company continues to conduct its due diligence review, and any investment would
be subject to regulatory approval.  Accordingly, the proposed
investment may not occur or may occur in an amount and on terms different than
the terms proposed in the non-binding agreement.  However, based on
the Company’s preliminary assessment, the Company believes that an investment in
Great American represents an attractive long-term investment opportunity for the
Company and a good use of the Company’s current excess capital.




Critical
Accounting Policies




We
consider accounting policies involving significant judgments and assumptions by
management that have, or could have, a material impact on the carrying value of
certain assets or on income to be critical accounting policies.  We
consider our critical accounting policies to be those related to our allowance
for loan losses.




Allowance for
Loan Losses.  The allowance for loan losses is the estimated
amount considered necessary to cover probable incurred losses in the loan
portfolio at the balance sheet date.  The allowance is established
through a provision for loan losses that is charged against
income.  In determining the allowance for loan losses, management
makes significant estimates and has identified this policy as one of our most
critical.




Management
performs a quarterly evaluation of the adequacy of the allowance for loan
losses.  We consider a variety of factors in establishing this
estimate including, but not limited to, current economic conditions, delinquency
statistics, geographic and industry concentrations, the adequacy of the
underlying collateral, the financial strength of the borrower, results of
internal loan reviews and other relevant factors.  This evaluation is
inherently subjective as it requires material estimates that may be susceptible
to significant change.




The
analysis has two components:  specific and general
allocations.  Specific allocations are made for loans that are
determined to be impaired.  Impairment is measured by determining the
present value of expected future cash flows or, for collateral-dependent loans,
the fair value of the collateral adjusted for market conditions and selling
expenses.  The general allocation is determined by segregating the
remaining loans by type of loan, risk weighting (if applicable) and payment
history.  We also analyze historical loss experience, delinquency
trends, general economic conditions and geographic and industry
concentrations.  This analysis establishes factors that are applied to
the loan groups to determine the







31
 Table of Contents





amount of
the general allowance for loan losses.  Actual loan losses may be
significantly more than the allowances we have established which could have a
material negative effect on our financial results.







32
 Table of Contents





Selected
Consolidated Financial and Other Data




The
following tables set forth our selected historical financial and other data for
the periods and at the dates indicated.  The information should be
read in conjunction with the Consolidated Financial Statements and Notes thereto
contained elsewhere herein.




At
      December 31,2008
              
              
              2007(dollars
      in thousands)Selected
      Financial Condition Data:Total
      assets
              
              $
              71,208
              
              
              $
              73,011Loans,
      net
              
              
              51,464
              
              
              
              53,047Interest-bearing
      deposits
              
              
              1,846
              
              
              
              1,172Trading
      securities
              
              
              2,100
              
              
              
              —Securities
      available-for-sale
              
              
              10,812
              
              
              
              16,345Federal
      Home Loan Bank stock, at cost
              
              
              610
              
              
              
              610Deposits
              
              
              38,492
              
              
              
              39,719Equity
              
              
              24,771
              
              
              
              26,911





Year
      Ended December 31,2008
              
              
              2007(dollars
      in thousands)Selected
      Operating Data:Total
      interest and dividend income
              
              $
              3,990
              
              
              $
              4,360Total
      interest expense
              
              
              1,196
              
              
              
              1,297Net
      interest income
              
              
              2,794
              
              
              
              3,063Provision
      for loan losses
              
              
              1,166
              
              
              
              50Net
      interest income after provision for loan losses
              
              
              1,628
              
              
              
              3,013Gain
      on sale of securities
              
              
              152
              
              
              
              —Loss
      on impairment of securities
              
              
              (394
              )
              
              
              (152
              )Changes
      in fair value of trading securities
              
              
              (368
              )
              
              
              —Other
      non-interest income
              
              
              48
              
              
              
              46Total
      non-interest expense
              
              
              2,494
              
              
              
              2,393Income
      before income tax expense
              
              
              (1,428
              )
              
              
              514Income
      tax (benefit) expense
              
              
              (522
              )
              
              
              219Net
      income (loss)
              
              $
              (906
              )
              
              $
              295






33
 Table of Contents




At
      or for the Years Ended
                  December 31,2008
              
              
              2007Selected
      Financial Ratios and Other Data:Performance
      Ratios:Return
      on average assets
              
              
              (1.24
              )%
              
              
              0.40
              %Return
      on average equity
              
              
              (3.44
              )
              
              
              1.06Average
      interest rate spread(1)
              
              
              3.02
              
              
              
              3.13Net
      interest margin(2)
              
              
              3.97
              
              
              
              4.26Efficiency
      ratio(3)
              
              
              87.76
              
              
              
              76.97Non-interest
      expense to average total assets
              
              
              3.40
              
              
              
              3.22Average
      interest-earning assets to average interest-bearing
      liabilities
              
              
              155.98
              
              
              
              162.89Asset
      Quality Ratios:Non-performing
      assets to total assets
              
              
              4.48
              %
              
              
              0.35
              %Non-performing
      loans to gross loans
              
              
              5.59
              
              
              
              0.48Allowance
      for loan losses to non-performing loans
              
              
              .44
              x
              
              
              1.12
              xAllowance
      for loan losses to gross loans
              
              
              2.43
              %
              
              
              0.54
              %Capital
      Ratios:Equity
      to total assets
              
              
              34.79
              %
              
              
              36.86
              %Tangible
      capital(4)
              
              
              31.72
              
              
              
              32.85Tier 1
      (core) capital(4)
              
              
              31.72
              
              
              
              32.85Tier 1
      risk-based ratio(4)
              
              
              50.43
              
              
              
              58.14





(1)
            The
      average interest rate spread represents the difference between the
      weighted-average yield on interest-earning assets and the weighted-average
      cost of interest-bearing liabilities for the
  period.


(2)
            The
      net interest margin represents net interest income as a percent of average
      interest-earning assets for the
period.


(3)
            The
      efficiency ratio represents other expense as a percent of net interest
      income plus other income less securities gains or plus securities losses,
      including securities impairment and fair value adjustments on trading
      securities.


(4)
            Tangible
      capital and Tier 1 (core) capital ratios are for the Bank
      only.  Tier 1 risk-based ratio represents Tier 1
      capital of the Bank divided by its risk-weighted assets as defined in
      federal regulations on required
capital.







34
 Table of Contents





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




Our total
assets decreased by $1.8 million, or 2.5%, to $71.2 million at December 31,
2008, from $73.0 million at December 31, 2007.  The primary
reason for the decrease in total assets was that funds from securities
repayments and Federal Home Loan Bank advances were used to meet deposit
withdrawals and to fund repurchases of the Company’s common stock.




Loans
receivable decreased $1.6 million, or 3.0%, to $51.5 million at
December 31, 2008, from $53.0 million at December 31,
2007.  Multi-family residential mortgage loans increased by $985,000,
or 5.1%, to $20.2 million at December 31, 2008, from $19.2 million at
December 31, 2007, but were offset by a decrease in one-to-four family
residential mortgage loans of $1.6 million, or 4.7%, to $32.6 million at
December 31, 2008, from $34.2 million at December 31, 2007.  Net loans
receivable was further reduced by a $997,000 net increase in the allowance for
loan losses.




Upon
adoption of SFAS 159, The Fair
Value Option for Financial Assets and Financial Liabilities, on
January 1, 2008,the Company elected to
account for $2.4 million in mutual fund investments held in its securities
portfolio as trading securities rather than
available-for-sale.  Trading securities decreased to $2.1 million at
December 31, 2008, primarily due to $368,000 in fair value
reductions.  Securities available-for-sale decreased $5.5 million, or
33.9%, to $10.8 million at December 31, 2008, from $16.3 million at
December 31, 2007, primarily due to the designation of these mutual funds
as trading securities and a result of the calls and/or maturities of agency
securities and principal payments and prepayments received on mortgage-backed
securities.   The Company purchased one $641,000 agency
guaranteed mortgage-backed security during 2008.




Total
deposits decreased $1.2 million, or 3.1%, to $38.5 million at December 31,
2008, from $39.7 million at December 31, 2007.  The decrease in
deposits resulted, in management’s opinion, primarily from increased competition
for funds based on rate.  We did not utilize any brokered deposits
during 2008 or 2007.




Stockholders’
equity decreased $2.1 million, or 8.0%, to $24.8 million at December 31,
2008, from $26.9 million at December 31, 2007.  The decrease in
stockholders’ equity was attributable in part to a net loss of $906,000, and a
$76,000 decrease in accumulated unrealized gains in the fair value of securities
available-for-sale.  The vesting of previously awarded Company stock
grants resulted in a $156,000 charge to earnings and corresponding increase in
stockholders’ equity, and the vesting of previously awarded Company stock
options resulted in a $107,000 charge to earnings and corresponding increase in
stockholders’ equity.  Stockholders’ equity also decreased by $1.3
million as the Company repurchased 129,000 shares of its common stock during
2008, which is held as treasury stock.  During the second quarter of
2008 the Company paid its first quarterly dividend on its common stock of $0.06
per share, and for the full year 2008 paid total dividends of
$170,000.  MHC, the majority shareholder of the Company, waived
receipt of its quarterly dividends.




Comparison
of Operating Results for the Years Ended December 31, 2008 and
2007




General.  Net
income decreased $1.2 million, to a loss of $906,000 for the year ended
December 31, 2008, from net income of $295,000 for the year ended
December 31, 2007.  The decrease in net income resulted primarily
from a provision for loan losses of $1.2 million, a $394,000 write-down of FHLMC
preferred stock to fair value, and a $368,000 reduction in the fair value of
trading securities, partially offset by a $152,000 gain on sale of FHLMC common
stock.  Net interest income decreased by $269,000, or 8.8%, to $2.8
million for the year ended December 31, 2008, from $3.1 million for the year
ended December 31, 2007.   Operating expenses increased $101,000,
or 4.2%, to $2.5 million in 2008, from $2.4 million in 2007.  Return
on average assets was (1.24)% for the year ended December 31,
2008,







35
 Table of Contents





compared
to 0.40% for the year ended December 31, 2007, and return on equity was
(3.44)% and 1.06% for these same two periods.




Interest
Income.  Interest and dividend income decreased $370,000, or
8.5%, to $4.0 million for the year ended December 31, 2008, from $4.4
million for the year ended December 31, 2007.  A 40 basis point
decrease in the average yield earned on interest-earning assets, to 5.67% in
2008, from 6.07% in 2007, combined with a $1.4 million decrease in the average
balance of interest-earning assets, resulted in the decrease.




Interest
income and fees from loans receivable decreased $196,000, or 5.7%, to
$3.3 million for the year ended December 31, 2008, from $3.5 million
for the year ended December 31, 2007.  The decrease was due
primarily to the increase in non-accrual loans.  The average balance
of loans was approximately $53.0 million in both 2008 and 2007, but there was a
38 basis point decrease in the average yield on loans to 6.18% in 2008, from
6.56% in 2007.  The increase in non-accrual loans reduced the yield on
the loan portfolio by 31 basis points.




Interest
and dividend income from securities and deposits decreased $174,000, or 19.6%,
to $714,000 for the year ended December 31, 2008 from $888,000 for the year
ended December 31, 2007.  The decrease resulted from a decrease
in the average balance of these investments of $1.5 million, or 7.9%, to
$17.4  million in 2008, from $18.9 million in 2007, and by a decrease
in the average yield earned on securities and deposits to 4.11% in 2008, from
4.70% in 2007.  During 2008, FHLMC discontinued paying dividends on
its common and preferred stock, resulting in a decrease of $25,000, to $18,000
in total dividends received for 2008, compared to $43,000 in
2007.  The Company sold its holdings of FHLMC common stock in 2008,
but still owns 10,000 shares of FHLMC preferred stock.  There has been
no indication from FHLMC as to when or if the payment of preferred dividends
will resume.




The
Company currently owns shares of Federal Home Loan Bank of Chicago
stock.  During the last quarter of 2007, the FHLB Chicago suspended
dividends on its stock.  That resulted in no dividends received for
2008 compared to $12,000 for the year ended December 31, 2007.  There
has been no indication from the FHLB as to when or if the payment of dividends
will resume.




Interest
Expense.  Total interest expense decreased $101,000, or 7.8%,
to $1.2 million for the year ended December 31, 2008, from $1.3 million for the
year ended December 31, 2007.  The decrease in interest expense
resulted from a 33 basis point decrease in the average cost of deposits, to
2.46% in 2008, from 2.79% in 2007, and by a $2.1 million decrease in the average
balance of interest-bearing deposits.  Interest expense on
certificates of deposit decreased $176,000, or 19.4%, due to a 64 basis point
decrease in the average rate paid on such deposits, to 3.59% for the year ended
December 31, 2008, from 4.23% for the year ended December 31,
2007.




During
2008 the Company used advances from the Federal Home Loan Bank to fund a portion
of its loan originations, deposit withdrawals, and the repurchase of shares of
Company common stock.  As a result of the increase in the amount of
these borrowings, interest on borrowings increased by $88,000, or 61.5%, to
$231,000 for the year ended December 31, 2008, compared to $143,000 for the year
ended December 31, 2007.  However, the average rate paid for advances
decreased 136 basis points, to 3.93% in 2008, from 5.29% in 2007.




Net Interest
Income.  Net interest income decreased $269,000, or 8.8%, to
$2.8 million for the year ended December 31, 2008, from $3.1 million for
the year ended December 31, 2007.  Our net interest margin
decreased to 3.97% during 2008, from 4.26% during 2007, and our interest rate
spread decreased to 3.02% in 2008, from 3.13% in 2007.  The average
yield on interest earning assets decreased







36
 Table of Contents





to 5.67%
for the year ended December 31, 2008, from 6.07% for the year ended
December 31, 2007. The average rate paid on interest bearing liabilities
decreased to 2.65% for 2008, from 2.94% for 2007.




Provision for
Loan Losses.  We make provisions for loan losses, which are
charged to earnings, so that our allowance for loan losses is maintained at a
level necessary to absorb probable incurred loan losses at the date of the
financial statements.  The Bank evaluates the level of the allowance
for loan losses quarterly.  Management, in determining the allowance
for loan losses and the resulting provision necessary, considers the losses
inherent in our loan portfolio and changes in the nature and volume of loan
activities, along with the general economic and real estate market conditions,
as well as peer group data.   The Bank’s loan committee
determines the type of loans to be evaluated for impairment on an individual
basis and the types of loan to be evaluated on a collective basis based on
similarities in loss performance, such as our one-to-four family residential
loans and multifamily residential loans.  We then utilize a two-tier
approach:  (1) for the types of loans to be evaluated on an
individual basis, identification of impaired loans and establishment of specific
loss allowances on such loans, and (2) for the types of loans to be
evaluated on a collective basis, establishment of loan loss allocations on pools
of loans.




Once a
loan becomes delinquent, we may establish a specific loan loss allowance should
we determine that the loan is impaired.  A loan will be considered
impaired when, based on current information and events (such as, among other
things, delinquency status, the size of the loan, the type and market value of
collateral and the financial condition of the borrower), it is probable that we
will be unable to collect all amounts due according to the contractual terms of
the loan agreement.  All loans identified as impaired are evaluated
individually.  We do not aggregate such loans for evaluation
purposes.  Specific allowances for impaired loans are established
based on the present value of expected future cash flows discounted at the
loan’s effective interest rate or, as a practical measure, at the loan’s
observable market price or the fair value of the collateral if the loan is
collateral dependent.




Loan loss
allocations on pools of loans are based upon historical loan loss experience as
adjusted after evaluation of other factors that may or may not be present,
including changes in the composition of the loan portfolio, current national and
local economic conditions, changes in lending policies and procedures, peer
group information, and personnel changes in our lending management or
staff.  Determining the amount of the allowance for loan losses
necessarily involves a high degree of judgment.  Assumptions and
allocation percentages based on loan types and classification status have been
consistently applied.  We have allocated the allowance among
categories of loan types as well as classification status at each period-end
date.




Non-performing
loans increased to $3.0 million at December 31, 2008, from $259,000 at
December 31, 2007.  Loans delinquent for 60-89 days decreased to
$2.2 million at December 31, 2008, from $2.6 million at December 31,
2007.  Typically non-performing loans are assigned a higher percentage
of allowance allocation.  During the year ended December 31, 2008, we
made provisions for loan losses of $1.2 million and we experienced charge-offs
of $169,000, our first charge-offs since 1996. The allowance for loan losses was
$1.3 million, or 2.43% of gross loans outstanding at December 31, 2008, as
compared with $290,000, or 0.54% of gross loans outstanding at December 31,
2007.




In
reviewing the allowance during 2008 and at December 31, 2008, we considered
various subjective factors including actual loss experience, the increasing
delinquency trends in our portfolio, our non-performing loans, and the overall
current economic conditions, and determined that a provision of $1.2 million was
necessary for the year then ended.  In a similar evaluation of the
allowance for loan losses during 2007 and at December 31, 2007, management
determined that a provision of $50,000, driven primarily by the growth in the
loan portfolio, was necessary for the year then ended.







37
 Table of Contents





Although
we believe that we use the best information available to establish the allowance
for loan losses, future additions to the allowance may be necessary based on
estimates that are susceptible to change as a result of changes in economic
conditions and other factors.  In addition, the Office of Thrift
Supervision, as an integral part of its examination process, periodically
reviews our allowance for loan losses, and could require additional
reserves.




Non-Interest
Income.  Non-interest income decreased $456,000, to a loss of
$562,000 for the year ended December 31, 2008, from a loss of $106,000 for
year ended December 31, 2007.  The Company recognized a $394,000
pre-tax charge for other-than-temporary impairment of FHLMC preferred stock held
as available-for-sale, because the fair value of the preferred stock has
continued to decline since FHFA was appointed conservator for FHLMC in September
2008, and we are unable to forecast a recovery.  Partially offsetting
this loss, and prior to the conservator appointment, the Company sold its
remaining shares of FHLMC common stock and realized a gain of
$152,000.  The Company holds 10,000 shares of FHLMC preferred stock
valued at $0.74 per share at December 31, 2008.




The
Company has investments in various mutual funds that invest in U. S. government
and government agency debt securities, and government agency insured fixed-rate
and adjustable-rate mortgage-backed securities.  The Company
recognized a $368,000 fair value loss adjustment on these mutual funds, carried
as trading securities and accounted for under FAS 159,which was adopted on
January 1, 2008.




Non-Interest
Expense.  Non-interest expense increased $101,000, or 4.2%, to
$2.5 million for the year ended December 31, 2008, compared to $2.4
million for the year ended December 31, 2007.




Compensation
and employee benefits increased $109,000, or 8.0%, to $1.5 million in 2008, from
$1.4 million in 2007, primarily due to a $67,000 increase in health insurance
premiums, an increase of $25,000 for new employees and salary increases in the
ordinary course of business, and a $15,000 increase in stock based compensation
expense.




Professional
fees, including legal, accounting and consulting fees, decreased $44,000, or
9.8%, to $405,000 in 2008, from $449,000 in 2007.   Professional
fees are primarily due to compliance testing and legal and consulting fees
associated with the implementation of new products being introduced in 2009, as
well as ongoing SEC reporting compliance, internal audit outsourcing, and other
costs associated with being a public company.




Occupancy
expense increased $13,000, or 8.6%, to $164,000 in 2008, from $151,000 in 2007,
primarily due to repairs to our parking lot drainage system.  Data
processing costs increased $6,000, or 5.6%, to $114,000 in 2008, from $108,000
in 2007, primarily due to preparations associated with new product
introductions.  Miscellaneous other expenses increased $17,000, or
5.4%, to $332,000 in 2008, from $315,000 in 2007.  The ratio of
non-interest expense to average assets was 3.40% for the year ended
December 31, 2008, compared to 3.22% for 2007.




Income Tax
Expense.  The provision for income taxes decreased $741,000, to
an income tax benefit of $522,000 for the year ended December 31, 2008 from
an income tax provision of $219,000 for the prior year, due primarily to our
operating loss.  The effective tax rates for the periods ended
December 31, 2008 and 2007 were 36.6% and 42.61%,
respectively.  The decrease in the effective tax rate was due to stock
benefit plan expenses that were not fully deductible for income tax
purposes.







38
 Table of Contents





Average
Balance Sheet




The
following tables set forth average balance sheets, average yields and costs, and
certain other information for the periods indicated.  No
tax-equivalent yield adjustments were made, as their effects were not
material.  All average balances are based on an average of daily
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.  During the year ended December 31, 2008, the reserve for
uncollected interest on non-accrual loans increased $168,000.  The
yields set forth below include the effect of deferred fees, discounts and
premiums that are amortized or accreted to interest income or
expense.




At
                                                                                            December 31,
                                                                                          
                                                                                          
                                                                                          For
      the Years Ended December 31,2008
                                                                                          
                                                                                          
                                                                                          2008
                                                                                          
                                                                                          
                                                                                          2007Yield/Rate
                                                                                          
                                                                                          
                                                                                          Average
      Outstanding Balance
                                                                                          
                                                                                          
                                                                                          Interest
                                                                                          
                                                                                          
                                                                                          Yield/Rate
                                                                                          
                                                                                          
                                                                                          Average
      Outstanding Balance
                                                                                          
                                                                                          
                                                                                          Interest
                                                                                          
                                                                                          
                                                                                          Yield/Rate(dollars
      in thousands)Interest-earning
                                                                                            assets:Loans
                                                                                          
                                                                                          
                                                                                          6.43
                                                                                          %
                                                                                          
                                                                                          $
                                                                                          53,026
                                                                                          
                                                                                          
                                                                                          $
                                                                                          3,276
                                                                                          
                                                                                          
                                                                                          
                                                                                          6.18
                                                                                          %
                                                                                          
                                                                                          $
                                                                                          52,954
                                                                                          
                                                                                          
                                                                                          $
                                                                                          3,472
                                                                                          
                                                                                          
                                                                                          
                                                                                          6.56
                                                                                          %Securities
                                                                                          
                                                                                          
                                                                                          4.78
                                                                                          
                                                                                          
                                                                                          
                                                                                          14,268
                                                                                          
                                                                                          
                                                                                          
                                                                                          669
                                                                                          
                                                                                          
                                                                                          
                                                                                          4.69
                                                                                          
                                                                                          
                                                                                          
                                                                                          17,552
                                                                                          
                                                                                          
                                                                                          
                                                                                          839
                                                                                          
                                                                                          
                                                                                          
                                                                                          4.78Federal
      Home Loan Bank Stock
                                                                                          
                                                                                          
                                                                                          —
                                                                                          
                                                                                          
                                                                                          
                                                                                          610
                                                                                          
                                                                                          
                                                                                          
                                                                                          —
                                                                                          
                                                                                          
                                                                                          
                                                                                          —
                                                                                          
                                                                                          
                                                                                          
                                                                                          580
                                                                                          
                                                                                          
                                                                                          
                                                                                          12
                                                                                          
                                                                                          
                                                                                          
                                                                                          2.07Interest-earning
      deposits
                                                                                          
                                                                                          
                                                                                          0.08
                                                                                          
                                                                                          
                                                                                          
                                                                                          2,515
                                                                                          
                                                                                          
                                                                                          
                                                                                          45
                                                                                          
                                                                                          
                                                                                          
                                                                                          1.79
                                                                                          
                                                                                          
                                                                                          
                                                                                          763
                                                                                          
                                                                                          
                                                                                          
                                                                                          37
                                                                                          
                                                                                          
                                                                                          
                                                                                          4.85Total
      interest-earning assets
                                                                                          
                                                                                          
                                                                                          5.90
                                                                                          %
                                                                                          
                                                                                          
                                                                                          70,419
                                                                                          
                                                                                          
                                                                                          
                                                                                          3,990
                                                                                          
                                                                                          
                                                                                          
                                                                                          5.67
                                                                                          %
                                                                                          
                                                                                          
                                                                                          71,849
                                                                                          
                                                                                          
                                                                                          
                                                                                          4,360
                                                                                          
                                                                                          
                                                                                          
                                                                                          6.07
                                                                                          %Non-interest-earning
      assets
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          2,866
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          2,353Total
      assets
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          $
                                                                                          73,285
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          $
                                                                                          74,202Interest-Bearing Liabilities:(1)Savings
      deposits
                                                                                          
                                                                                          
                                                                                          1.24
                                                                                          %
                                                                                          
                                                                                          $
                                                                                          18,904
                                                                                          
                                                                                          
                                                                                          $
                                                                                          233
                                                                                          
                                                                                          
                                                                                          
                                                                                          1.23
                                                                                          %
                                                                                          
                                                                                          $
                                                                                          19,919
                                                                                          
                                                                                          
                                                                                          $
                                                                                          246
                                                                                          
                                                                                          
                                                                                          
                                                                                          1.24
                                                                                          %Certificates
      of deposit
                                                                                          
                                                                                          
                                                                                          3.11
                                                                                          
                                                                                          
                                                                                          
                                                                                          20,369
                                                                                          
                                                                                          
                                                                                          
                                                                                          732
                                                                                          
                                                                                          
                                                                                          
                                                                                          3.59
                                                                                          
                                                                                          
                                                                                          
                                                                                          21,488
                                                                                          
                                                                                          
                                                                                          
                                                                                          908
                                                                                          
                                                                                          
                                                                                          
                                                                                          4.23Total
      deposits
                                                                                          
                                                                                          
                                                                                          2.20
                                                                                          
                                                                                          
                                                                                          
                                                                                          39,273
                                                                                          
                                                                                          
                                                                                          
                                                                                          965
                                                                                          
                                                                                          
                                                                                          
                                                                                          2.46
                                                                                          
                                                                                          
                                                                                          
                                                                                          41,407
                                                                                          
                                                                                          
                                                                                          
                                                                                          1,154
                                                                                          
                                                                                          
                                                                                          
                                                                                          2.79Borrowings
                                                                                          
                                                                                          
                                                                                          3.59
                                                                                          
                                                                                          
                                                                                          
                                                                                          5,874
                                                                                          
                                                                                          
                                                                                          
                                                                                          231
                                                                                          
                                                                                          
                                                                                          
                                                                                          3.93
                                                                                          
                                                                                          
                                                                                          
                                                                                          2,703
                                                                                          
                                                                                          
                                                                                          
                                                                                          143
                                                                                          
                                                                                          
                                                                                          
                                                                                          5.29Total
      interest-bearing liabilities
                                                                                          
                                                                                          
                                                                                          2.39
                                                                                          %
                                                                                          
                                                                                          
                                                                                          45,147
                                                                                          
                                                                                          
                                                                                          
                                                                                          1,196
                                                                                          
                                                                                          
                                                                                          
                                                                                          2.65
                                                                                          %
                                                                                          
                                                                                          
                                                                                          44,110
                                                                                          
                                                                                          
                                                                                          
                                                                                          1,297
                                                                                          
                                                                                          
                                                                                          
                                                                                          2.94
                                                                                          %Non-interest-bearing
      liabilities.
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          1,830
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          2,162Total
      liabilities
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          46,977
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          46,272Stockholders’
      equity
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          26,308
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          27,930Total
      liabilities and stockholders’ equity
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          $
                                                                                          73,285
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          $
                                                                                          74,202Net
      interest income
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          $
                                                                                          2,794
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          $
                                                                                          3,063Net
      interest rate spread(2)
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          3.02
                                                                                          %
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          3.13
                                                                                          %Net
      interest-earning assets(3)
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          $
                                                                                          25,272
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          $
                                                                                          27,739Net
      interest margin(4)
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          3.97
                                                                                          %
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          4.26
                                                                                          %Ratio
      of interest-earning assets to interest-bearing liabilities
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          155.98
                                                                                          %
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          162.89
                                                                                          %




(1)
            Non
      interest-bearing checking deposits are included in non-interest-bearing
      liabilities.


(2)
            Net
      interest rate spread represents the difference between the yield on
      average interest-earning assets and the cost of average interest-bearing
      liabilities.


(3)
            Net
      interest-earning assets represents total interest-earning assets less
      total interest-bearing liabilities.


(4)
            Net
      interest margin represents net interest income divided by average total
      interest-earning assets.




Rate/Volume
Analysis




The
following table presents the dollar amount of changes in interest income and
interest expense for the major categories of our 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.






39
 Table of Contents




Years
      Ended December 31, 2008 vs. 2007Increase
      (Decrease) Due to
              
              
              Total
      IncreaseVolume
              
              
              Rate
              
              
              (Decrease)(in
      thousands)Interest-Earning
      Assets:Loans
              
              $
              5
              
              
              $
              (201
              )
              
              $
              (196
              )Securities
      available for sale
              
              
              (160
              )
              
              
              (10
              )
              
              
              (170
              )Federal
      Home Loan Bank Stock
              
              
              1
              
              
              
              (13
              )
              
              
              (12
              )Interest-earning
      deposits
              
              
              43
              
              
              
              (35
              )
              
              
              8Total
      interest-earning assets
              
              
              (111
              )
              
              
              (259
              )
              
              
              (370
              )Interest-Bearing
      Liabilities:Savings
      deposits
              
              
              (13
              )
              
              
              -
              
              
              
              (13
              )Certificates
      of deposit
              
              
              (49
              )
              
              
              (127
              )
              
              
              (176
              )Total
      deposits
              
              
              (62
              )
              
              
              (127
              )
              
              
              (189
              )Borrowings
              
              
              132
              
              
              
              (44
              )
              
              
              88Total
      interest-bearing liabilities
              
              
              70
              
              
              
              (171
              )
              
              
              (101
              )Change
      in net interest income
              
              $
              (181
              )
              
              $
              (88
              )
              
              $
              (269
              )





Management
of Market Risk




General.  The
majority of our assets and liabilities are monetary in
nature.  Consequently, our most significant form of market risk is
interest rate risk.  Our assets, consisting primarily of mortgage
loans, have longer maturities than our liabilities, which consist primarily of
deposits.  As a result, a principal part of our business strategy is
to manage interest rate risk and reduce the exposure of our net interest income
to changes in market interest rates.  Our board of directors has
approved a series of policies for evaluating interest rate risk inherent in our
assets and liabilities; for determining the level of risk that is appropriate
given our business strategy, operating environment, capital, liquidity and
performance objectives; and for managing this risk consistent with these
policies.  Senior management regularly monitors the level of interest
rate risk and reports to the board of directors on our compliance with our
asset/liability policies and on our interest rate risk position.




We have
sought to manage our interest rate risk in order to control the exposure of our
earnings and capital to changes in interest rates.  During the low
interest rate environment that has existed in recent years, we have managed our
interest rate risk by maintaining a high equity-to-assets ratio and building and
maintaining portfolios of shorter-term fixed rate residential loans and second
mortgage loans.  By maintaining a high equity-to-assets ratio, we
believe that we are better positioned to absorb more interest rate risk in order
to improve our net interest margin.  However, maintaining high equity
balances reduces our return on equity ratio, and investments in shorter-term
assets generally bear lower yields than longer-term investments.




Net Portfolio
Value.  In past years, many savings institutions have measured
interest rate sensitivity by computing the “gap” between the assets and
liabilities that are expected to mature or reprice within certain time periods,
based on assumptions regarding loan prepayment and deposit decay rates formerly
provided by the OTS.  However, the OTS now requires the computation of
amounts by which the net present value of an institution’s cash flow from
assets, liabilities and off balance sheet items (the institution’s net portfolio
value or “NPV”) would change in the event of a range of assumed changes in
market interest rates.  The OTS provides all institutions that file a
Consolidated Maturity/Rate Schedule as a part of their quarterly Thrift
Financial Report with an interest rate sensitivity report of net portfolio
value.  The OTS simulation model uses a discounted cash flow analysis
and an option-based pricing approach to measuring the interest rate sensitivity
of net portfolio value.  Historically, the OTS model estimated the
economic value of each type of asset, liability and off-balance sheet contract
under the assumption that the United States Treasury yield curve increases or
decreases instantaneously by 100







40
 Table of Contents





to 300
basis points in 100 basis point increments.  A basis point equals
one-hundredth of one percent, and 100 basis points equals one
percent.  An increase in interest rates from 3% to 4% would mean, for
example, a 100 basis point increase in the “Change in Interest Rates” column
below.  The OTS provides us the results of the interest rate
sensitivity model, which is based on information we provide to the OTS to
estimate the sensitivity of our net portfolio value.




The table
below sets forth, as of December 31, 2008, the estimated changes in our NPV and
our net interest income that would result from the designated instantaneous
changes in the U.S. Treasury yield curve.  Computations of prospective
effects of hypothetical interest rate changes are based on numerous assumptions
including relative levels of market interest rates, loan prepayments and deposit
decay, and should not be relied upon as indicative of actual
results.




Change
      In
                
                
                NPV
                
                
                Net
      Portfolio Value as a Percentage of Present Value of
      AssetsInterest
      Rates (Basis Points)
                
                
                Estimated
      NPV
                
                
                Amount
                    of
      Change
                
                
                Percentage
                    Change
                
                
                NPV
      Ratio
                
                
                Change
      in Basis Points(dollars
      in thousands)+300
                
                
                $
                20,470
                
                
                $
                (4,954
                )
                
                
                -19
                %
                
                
                29.72
                %
                
                
                -436
                bp+200
                
                
                
                22,330
                
                
                
                (3,094
                )
                
                
                -12
                
                
                
                31.46
                
                
                
                -262+100
                
                
                
                24,000
                
                
                
                (1,423
                )
                
                
                -6
                
                
                
                32.92
                
                
                
                -116+50
                
                
                
                24,727
                
                
                
                (697
                )
                
                
                -3
                
                
                
                33.52
                
                
                
                -56Unchanged
                
                
                
                25,423
                
                
                
                -
                
                
                
                -
                
                
                
                34.08
                
                
                
                --50
                
                
                
                26,055
                
                
                
                631
                
                
                
                2
                
                
                
                34.57
                
                
                
                49-100
                
                
                
                26,630
                
                
                
                1,207
                
                
                
                5
                
                
                
                35.01
                
                
                
                93





The table
above indicates that at December 31, 2008, in the event of a 100 basis point
decrease in interest rates, we would experience a 5% increase in net portfolio
value.  In the event of a 200 basis point increase in interest rates,
we would experience a 12% decrease in net portfolio value.




Certain
shortcomings are inherent in the methodology used in the above interest rate
risk measurement.  Modeling changes in net portfolio value requires
making certain assumptions that may or may not reflect the manner in which
actual yields and costs respond to changes in market interest
rates.  In this regard, the net portfolio value table presented
assumes that the composition of our interest-sensitive assets and liabilities
existing at the beginning of a period remains constant over the period being
measured and assumes that a particular change in interest rates is reflected
uniformly across the yield curve regardless of the duration or repricing of
specific assets and liabilities.  Accordingly, although the net
portfolio value table provides an indication of our interest rate risk exposure
at a particular point in time, such measurements do not provide a precise
forecast of the effect of changes in market interest rates on net interest
income and will differ from actual results.




Liquidity
and Capital Resources




We
maintain liquid assets at levels we consider adequate to meet our liquidity
needs.  We adjust our liquidity levels to fund deposit outflows, pay
real estate taxes on mortgage loans, repay our borrowings and to fund loan
commitments.  We also adjust liquidity as appropriate to meet asset
and liability management objectives.




Our
primary sources of liquidity are deposits, advances from the Federal Home Loan
Bank, amortization and prepayment of loans, maturities of investment securities
and other short-term investments, and earnings and funds provided from
operations.  While scheduled principal repayments on loans are a
relatively predictable source of funds, deposit flows and loan prepayments are
greatly







41
 Table of Contents





influenced
by market interest rates, economic conditions, and rates offered by our
competition.  We set the interest rates on our deposits to maintain a
desired level of total deposits.  In addition, we invest excess funds
in short-term interest-earning assets, which provide liquidity to meet lending
requirements.




A portion
of our liquidity consists of cash and cash equivalents, which are a product of
our operating, investing and financing activities.  At
December 31, 2008, $3.5 million of our assets were invested in cash and
cash equivalents.  Our primary sources of cash are principal
repayments on loans, proceeds from the calls and maturities of investment
securities, increases in deposit accounts, and advances from the Federal Home
Loan Bank.




Our cash
flows are derived from operating activities, investing activities and financing
activities as reported in our consolidated statements of cash flows included
with our consolidated financial statements elsewhere in this
report.




Our
primary investing activities are the origination of loans and the purchase of
investment securities.  During the year ended December 31, 2008,
our loan originations were $6.2 million, compared to $7.3 million for the year
ended December 31, 2007.  For the year ended December 31, 2008,
principal reductions exceeded originations by $182,000.  During the
year ended December 31, 2007, there were net loan originations of $1.4
million.  Cash received from calls and maturities of securities
totaled $3.2 million and $3.3 million for the years ended December 31, 2008
and 2007, respectively.  We purchased $641,000 in securities in 2008
and no securities during 2007. We sold FHLMC common stock for proceeds of
$160,000 during 2008.  We did not sell securities in
2007.  During 2007 we purchased $110,000 in FHLB common stock to meet
our membership requirements.




Deposit
flows are generally affected by the level of interest rates, the interest rates
and products offered by us and by local competitors, and other
factors.  There was a net decrease in total deposits of $1.2 million
and $3.6 million for the years ended December 31, 2008 and 2007,
respectively.




Liquidity
management is both a daily and long-term function of business
management.  If we require funds beyond our ability to generate them
internally, borrowing agreements exist with the Federal Home Loan Bank of
Chicago, which provide an additional source of funds.  During the year
ended December 31, 2008, the Bank borrowed $4.0 million from the Federal Home
Loan Bank and repaid $3.0 million of those advances.   During the
year ended December 31, 2007, the Bank borrowed $7.5 million from the Federal
Home Loan Bank and repaid $4.5 million of those advances.  Our
available borrowing limit at December 31, 2008, was $12.2
million.




At
December 31, 2008, we had no outstanding commitments to originate
loans.  At December 31, 2008, certificates of deposit scheduled
to mature in less than one year totaled $17.2 million.  Based on
prior experience, management believes that a significant portion of such
deposits will remain with us, although there can be no assurance that this will
be the case.  In the event we do not retain a significant portion of
our maturing certificates of deposit, we will have to utilize other funding
sources, such as Federal Home Loan Bank advances, in order to maintain our level
of assets.  Alternatively, we would reduce our level of liquid assets,
such as our cash and cash equivalents.  In addition, the cost of such
deposits may be significantly higher if market interest rates are higher at the
time of renewal.




Under the
U.S. Treasury’s Capital Purchase Program (“CPP”), which was implemented in
October 2008, qualified financial institutions could apply for a direct equity
investment from the U.S. Department of Treasury.  The program was
voluntary and required an institution to comply with a number of restrictions
and provisions, including limits on executive compensation, stock redemptions
and declaration of dividends, and subjects participating institutions to the
possibility of additional regulation in the future for so long as the Treasury
remains invested in the institution.  See “Supervision
and







42
 Table of Contents





Regulation—2008
Emergency Economic Stabilization Act.”  After giving consideration to,
among other things, the Company’s continued firm capital position, with high
tangible and Tier 1 core capital ratios, the Company determined in November 2008
not to participate in the CPP.




Off-Balance
Sheet Arrangements




In the
ordinary course of business, the Bank is a party to credit-related financial
instruments with off-balance-sheet risk to meet the financing needs of its
customers.  These financial instruments include commitments to extend
credit.  The Bank follows the same credit policies in making
commitments as it does for on-balance-sheet instruments.




Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract.  Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee.  Therefore, the total commitment amounts do
not necessarily represent future cash requirements.




At
December 31, 2008 the Bank had no commitments to grant mortgage
loans.   At December 31, 2007, the Bank had $205,000 of
commitments to grant mortgage loans.




Impact
of Recent Accounting Pronouncements




In
September 2006, the FASB issued Statement No. 157, Fair Value Measurements(“SFAS 157”).  This Statement defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements.  SFAS 157 establishes a fair value hierarchy about
the assumptions used to measure fair value and clarifies assumptions about risk
and the effect of a restriction on the sale or use of an asset.  The
standard was effective for fiscal years beginning after November 15,
2007.  The impact of adoption on the Company was not
material.  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.  The impact of adoption on the Company was
not material.




In
February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS 159”).  The standard
provides companies with an option to report selected financial assets and
liabilities at fair value and establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that choose
different measurement attributes for similar types of assets and
liabilities.  The new standard was effective for the Company on
January 1, 2008.  The Company elected the fair value option for
various mutual funds included in trading securities as of January 1,
2008.  The impact of adoption on the Company was not material, as the
Company recognized an impairment charge at December 31, 2007, resulting in the
mutual funds being carried at fair value.




Impact
of Inflation and Changing Prices




Our
financial statements and related notes have been prepared in accordance with
U.S. generally accepted accounting principles (“GAAP”).  GAAP
generally requires the measurement of financial position and operating results
in terms of historical dollars without consideration for changes in the relative
purchasing power of money over time due to inflation.  The impact of
inflation is reflected in the increased cost of our
operations.  Unlike industrial companies, our assets and liabilities
are primarily







43
 Table of Contents





monetary
in nature.  As a result, changes in market interest rates have a
greater impact on performance than the effects of inflation.




ITEM
8.                      FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA




See Index
to Financial Statements on page F-1.




ITEM
9.                      CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE




Not
applicable.




ITEM
9A(T).              CONTROLS
AND PROCEDURES




Evaluation
of Disclosure Controls and Procedures




As of the
end of the period covered by this report, we carried out an evaluation, under
the supervision, and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures as contemplated
by Exchange Act Rule 13a-15.  Based upon, and as of the date of
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that, as of the end of the period covered by this report, the
Company’s disclosure controls and procedures are effective, in all material
respects, in timely alerting them to material information relating to the
Company (and its consolidated subsidiaries) required to be included in the
periodic reports the Company is required to file and submit to the Securities
and Exchange Commission (“SEC”) under the Exchange Act.




Report
on Management’s Assessment of Internal Control Over Financial
Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f) and 15d-15(f). Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
we conducted an evaluation of the effectiveness of our internal control over
financial reporting as of December 31, 2008 based on the framework in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).  Based on that evaluation, our
management concluded that our internal control over financial reporting was
effective as of December 31, 2008.




This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by the
Company’s independent registered public accounting firm pursuant to temporary
rules of the SEC that permit the Company to provide only management’s report in
this annual report.




Changes
in Internal Control over Financial Reporting




There
were no changes in our internal control over financial reporting during the
fourth quarter of 2008 that have materially affected or are reasonably likely to
materially affect our internal control over financial reporting.




ITEM
9B.                      OTHER
INFORMATION




None.







44
 Table of Contents





PART III




ITEM
10.                      DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE




The
information required in response to this item regarding the Company’s directors
and executive officers will be contained in the Company’s definitive Proxy
Statement (the “Proxy Statement”) for its Annual Meeting of Stockholders to be
held on May 14, 2008 under the captions and subcaptions “Proposal 1.—Election of
Directors,” “Corporate Governance—Board Meetings,” “Corporate Governance—Board
Committees,” “Executive Officers Who Are Not Directors,” “Beneficial Ownership,”
and “Section 16(a) Beneficial Ownership Reporting Compliance,” and the
information included therein is incorporated herein by reference.




The
information regarding material changes to the procedures by which security
holders may recommend nominees to the registrant’s board of directors, if any,
will be contained in the Proxy Statement under the heading “Corporate
Governance—Director Nomination Procedures,” and the information included therein
is incorporated herein by reference.




The
information regarding the audit committee of the Company’s board of directors
and its audit committee financial expert, if any, will be contained in the Proxy
Statement under the heading “Corporate Governance—Board Committees—Audit
Committee,” and the information included therein is incorporated herein by
reference.




The
Company has adopted a code of ethics as required by the rules of the
SEC.  The code of ethics applies to all of the Company’s directors,
officers, including the Company’s Chief Executive Officer and Chief Financial
Officer, as well as to the Company’s other employees.  A copy of our
code of ethics will be provided to any person, without charge, upon request made
to Julie H. Oksas, Corporate Secretary, Mutual Federal Bancorp, Inc., 2212 W.
Cermak Road, Chicago, IL 60608.




ITEM
11.                      EXECUTIVE
COMPENSATION




The
information required in response to this item will be contained in the Proxy
Statement under the captions “Executive Compensation” and “Director
Compensation,” and the information included therein is incorporated herein by
reference.




ITEM
12.                      SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS




The
information required in response to this item concerning the security ownership
of certain beneficial owners and management, and information, if any, regarding
any change in control arrangements, will be contained in the Proxy Statement
under the subcaption “Beneficial Ownership,” and the information included
therein is incorporated herein by reference.




Equity
Compensation Plan Information




The
following table provides information, as of December 31, 2008, relating to
equity compensation plans of the Company pursuant to which equity securities are
authorized for issuance.






45
 Table of Contents




Plan
      category
              
              Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights (a)
              
              
              Weighted-average
      exercise price of outstanding options, warrants and rights
      (b)
              
              
              Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a))
                  (c)Equity
      compensation plans approved by security holders
              
              
              192,103
              
              
              $
              14.29
              
              
              
              57,205Equity
      compensation plans not approved by security holders
              
              
              —
              
              
              
              —
              
              
              
              —Total
              
              
              192,103
              
              
              $
              14.29
              
              
              
              57,205





ITEM
13.                      CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE




The
information required in response to this item regarding certain relationship and
related party transactions will be contained in the Proxy Statement under the
caption “Transactions with Related Persons,” and the information included
therein is incorporated herein by reference.  The information
regarding the independence of the Company’s directors will be contained in the
Proxy Statement under the heading “Corporate Governance—Director Independence,”
and the information included therein is incorporated herein by
reference.




ITEM
14.                      PRINCIPAL
ACCOUNTANT FEES AND SERVICES




The
information required in response to this item will be contained in the Proxy
Statement under the captions “Audit Fees,” “Audit-Related Fees,” “Tax Fees” and
“All Other Fees” and the information included therein is incorporated herein by
reference.






PART IV




ITEM
15.                      EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES




Financial
Statements and Financial Statement Schedules




See Index
on page F-1 for a list of the consolidated financial statements of the Company
filed with this report.




Exhibits




The
exhibits filed or incorporated by reference as a part of this Form 10-K are
listed in the Exhibit Index, which is incorporated herein by
reference.







46
 Table of Contents





MUTUAL FEDERAL BANCORP, INC.


CHICAGO,
ILLINOIS




Consolidated
Financial Statements


December 31,
2008 and 2007




Page




Report
      of Independent Registered Public Accounting Firm
                      F-2Consolidated
      Statements of Financial Condition
                      F-3Consolidated
      Statements of Income (Loss)
                      F-4Consolidated
      Statements of Stockholders’ Equity
                      F-5Consolidated
      Statements of Cash Flows
                      F-7Notes
      to Consolidated Financial Statements
                      F-8








F-1
 Table of Contents





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To the
Board of Directors and Stockholders of


Mutual
Federal Bancorp, Inc.




We have
audited the accompanying consolidated statements of financial condition of
Mutual Federal Bancorp, Inc. (“the Company”) as of December 31, 2008 and 2007,
and the related statements of income, stockholders’ equity, and cash flows for
the years then ended.  These financial statements are the
responsibility of the Company’s management.  Our responsibility is to
express an opinion on these financial statements based on our
audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting.  Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting.  Accordingly, we express no
such opinion.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements.  An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.  We believe
that our audits provide a reasonable basis for our opinion.




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2008 and 2007, and the results of its operations and its cash flows for the
years then ended, in conformity with U.S. generally accepted accounting
principles.




/s/Crowe Horwath
      LLPOak
      Brook, Illinois
              March
      24, 2009





F-2
 Table of Contents





MUTUAL
FEDERAL BANCORP, INC.
 CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION
 (Dollar
amounts in thousands)


December 31,2008
              
              
              2007ASSETSCash
      and cash equivalents
              
              $
              3,454
              
              
              $
              2,264Trading
      securities
              
              
              2,100
              
              
              
              —Securities
      available-for-sale
              
              
              10,812
              
              
              
              16,345Loans,
      net of allowance for loan losses of $1,287 at December 31, 2008 and $290
      at December 31, 2007
              
              
              51,464
              
              
              
              53,047Real
      estate owned, acquired through foreclosure
              
              
              235
              
              
              
              —Federal
      Home Loan Bank stock, at cost
              
              
              610
              
              
              
              610Premises
      and equipment, net
              
              
              918
              
              
              
              250Accrued
      interest receivable
              
              
              343
              
              
              
              360Other
      assets
              
              
              1,272
              
              
              
              135Total
      assets
              
              $
              71,208
              
              
              $
              73,011LIABILITIES
      AND STOCKHOLDERS’ EQUITYLiabilities:Non-interest-bearing
      deposits
              
              $
              199
              
              
              $
              331Interest-bearing
      deposits
              
              
              38,293
              
              
              
              39,388Total
      deposits
              
              
              38,492
              
              
              
              39,719Advance
      payments by borrowers for taxes and insurance
              
              
              364
              
              
              
              236Advances
      from the Federal Home Loan Bank
              
              
              6,000
              
              
              
              5,000Accrued
      interest payable and other liabilities
              
              
              1,443
              
              
              
              1,037Common
      stock in ESOP subject to contingent repurchase obligation
              
              
              138
              
              
              
              108Total
      liabilities
              
              
              46,437
              
              
              
              46,100Commitments
      and contingenciesStockholders’
      equity:Preferred
      stock, $0.01 par value, 1,000,000 shares authorized at December 31, 2008
      and 2007
              
              
              —
              
              
              
              —Common
      stock, $0.01 par value, 12,000,000 shares authorized, 3,636,875 shares
      issued at December 31, 2008 and 2007
              
              
              36
              
              
              
              36Additional
      paid-in capital
              
              
              9,981
              
              
              
              9,738Treasury
      stock, at cost
              
              
              (2,558
              )
              
              
              (1,286
              )Retained
      earnings
              
              
              18,015
              
              
              
              19,077Reclassification
      of  ESOP shares
              
              
              (138
              )
              
              
              (108
              )Unearned
      ESOP shares
              
              
              (711
              )
              
              
              (768
              )Accumulated
      other comprehensive income
              
              
              146
              
              
              
              222Total
      stockholders’ equity
              
              
              24,771
              
              
              
              26,911Total
      liabilities and stockholders’ equity
              
              $
              71,208
              
              
              $
              73,011









See
accompanying notes to consolidated financial statements.






F-3
 Table of Contents


MUTUAL
FEDERAL BANCORP, INC.
 CONSOLIDATED STATEMENTS OF INCOME
(LOSS)
 (Dollar
amounts in thousands except share data)


For
      the years ended December 31,2008
              
              
              2007Interest
      and dividend income:Loans,
      including fees
              
              $
              3,276
              
              
              $
              3,472Securities
              
              
              669
              
              
              
              839Interest
      earning deposits
              
              
              45
              
              
              
              37Federal
      Home Loan Bank stock dividends
              
              
              -
              
              
              
              12Total
      interest and dividend income
              
              
              3,990
              
              
              
              4,360Interest
      expense:Deposits
              
              
              965
              
              
              
              1,154Advances
      from the Federal Home Loan Bank
              
              
              231
              
              
              
              143Total
      interest expense
              
              
              1,196
              
              
              
              1,297Net
      interest income
              
              
              2,794
              
              
              
              3,063Provision
      for loan losses
              
              
              1,166
              
              
              
              50Net
      interest income after provision for loan losses
              
              
              1,628
              
              
              
              3,013Non-interest
      income:Insurance
      commissions and fees
              
              
              4
              
              
              
              4Gain
      on sale of securities
              
              
              152
              
              
              
              —Loss
      on impairment of securities
              
              
              (394
              )
              
              
              (152
              )Changes
      in fair value of trading securities
              
              
              (368
              )
              
              
              —Other
      income
              
              
              44
              
              
              
              42Total
      non-interest income
              
              
              (562
              )
              
              
              (106
              )Non-interest
      expense:Compensation
      and benefits
              
              
              1,479
              
              
              
              1,370Occupancy
      and equipment
              
              
              164
              
              
              
              151Data
      processing
              
              
              114
              
              
              
              108Professional
      fees
              
              
              405
              
              
              
              449Other
      expense
              
              
              332
              
              
              
              315Total
      non-interest expense
              
              
              2,494
              
              
              
              2,393Income
      (loss) before income taxes
              
              
              (1,428
              )
              
              
              514Income
      tax (benefit) expense
              
              
              (522
              )
              
              
              219Net
      income (loss)
              
              $
              (906
              )
              
              $
              295Earnings
      (loss) per share (basic and diluted)
              
              $
              (0.27
              )
              
              $
              0.08





See
accompanying notes to consolidated financial statements.







F-4
 Table of Contents





MUTUAL
FEDERAL BANCORP, INC.
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
 (Dollar
amounts in thousands)


Common
                  Stock
              
              
              Additional
                  Paid-in
                  Capital
              
              
              Treasury
                  Stock
              
              
              Retained
                  Earnings
              
              
              Amount
                  Reclassified
                  On
                  ESOP
                  Shares
              
              
              Unearned
                  ESOP
                  Shares
              
              
              Accumulated
                  Other
                  Comprehensive
                  Income
              
              
              TotalBalance
      at January 1, 2007
              
              $
              36
              
              
              $
              10,175
              
              
              $
              —
              
              
              $
              18,782
              
              
              $
              (66
              )
              
              $
              (827
              )
              
              $
              133
              
              
              
              28,233Comprehensive
      income:Net
      income
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              295
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              295Change
      in net unrealized gain (loss) on securities available-for-sale, net of
      taxes
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              89
              
              
              
              89Total
      comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              384Treasury
      stock purchases, 161,444 shares at cost
              
              
              —
              
              
              
              —
              
              
              
              (1,985
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (1,985
              )MRP
      share grants, 52,748 shares at cost
              
              
              —
              
              
              
              (699
              )
              
              
              699
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —MRP
      shares earned
              
              
              —
              
              
              
              146
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              146Stock
      option shares earned
              
              
              —
              
              
              
              100
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              100Reclassification
      due to release and change in fair value of common stock in ESOP subject to
      contingent repurchase obligation of ESOP shares
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (42
              )
              
              
              —
              
              
              
              —
              
              
              
              (42
              )ESOP
      shares committed to be released (5,928 shares)
              
              
              —
              
              
              
              16
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              59
              
              
              
              —
              
              
              
              75Balance
      at December 31, 2007
              
              
              36
              
              
              
              9,738
              
              
              
              (1,286
              )
              
              
              19,077
              
              
              
              (108
              )
              
              
              (768
              )
              
              
              222
              
              
              
              26,911


See
accompanying notes to consolidated financial statements.
  F-5
 Table of Contents
  MUTUAL
FEDERAL BANCORP, INC.
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
 (Dollar
amounts in thousands)
 Common
                      Stock
                  
                  
                  Additional
                      Paid-in
                      Capital
                  
                  
                  Treasury
                      Stock
                  
                  
                  Retained
                      Earnings
                  
                  
                  Amount
                      Reclassified
                      On
                      ESOP
                      Shares
                  
                  
                  Unearned
                      ESOP
                      Shares
                  
                  
                  Accumulated
                      Other
                      Comprehensive
                      Income
                  
                  
                  TotalBalance
      at January 1, 2008
                  
                  
                  36
                  
                  
                  
                  9,738
                  
                  
                  
                  (1,286
                  )
                  
                  
                  19,077
                  
                  
                  
                  (108
                  )
                  
                  
                  (768
                  )
                  
                  
                  222
                  
                  
                  
                  26,911Comprehensive
      income:Net
      income (loss)
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (906
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (906
                  )Change
      in net unrealized gain (loss) on securities available-for-sale, net of
      taxes
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (76
                  )
                  
                  
                  (76
                  )Total
      comprehensive income (loss)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (982
                  )Dividends
      paid ($0.18 per share)
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (170
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (170
                  )Treasury
      stock purchases, 129,000 shares at cost
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (1,297
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (1,297
                  )MRP
      share grants, 2,138 shares at cost
                  
                  
                  —
                  
                  
                  
                  (25
                  )
                  
                  
                  25
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —MRP
      shares earned
                  
                  
                  —
                  
                  
                  
                  156
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  156Income
      tax benefit of dividends on non-vested MRP shares
                  
                  
                  —
                  
                  
                  
                  3
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  3Stock
      option shares earned
                  
                  
                  —
                  
                  
                  
                  107
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  107
 Reclassification
      due to release and change in fair value of common stock in ESOP subject to
      contingent repurchase obligation of ESOP shares
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              (30
                              )
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              (30
                              )ESOP
      shares committed to be released (5,759 shares)
                              
                              
                              —
                              
                              
                              
                              2
                              
                              
                              
                              —
                              
                              
                              
                              14
                              
                              
                              
                              —
                              
                              
                              
                              57
                              
                              
                              
                              —
                              
                              
                              
                              73Balance
      at December 31, 2008
                              
                              $
                              36
                              
                              
                              $
                              9,981
                              
                              
                              $
                              (2,558
                              )
                              
                              $
                              18,015
                              
                              
                              $
                              (138
                              )
                              
                              $
                              (711
                              )
                              
                              $
                              146
                              
                              
                              $
                              24,771
 See
accompanying notes to consolidated financial statements.
  F-6
 Table of Contents


MUTUAL
FEDERAL BANCORP, INC.
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (Dollar
amounts in thousands)


For
      the years ended December 31,2008
              
              
              2007Cash
      flows from operating activitiesNet
      income (loss)
              
              $
              (906
              )
              
              $
              295Adjustments
      to reconcile net income to net cash
                from operating activities:Provision
      for loan losses
              
              
              1,166
              
              
              
              50Depreciation
              
              
              50
              
              
              
              58Gain
      on sale of available-for-sale securities
              
              
              (152
              )
              
              
              —Loss
      on impairment of available-for-sale securities
              
              
              394
              
              
              
              152Changes
      in fair value of trading securities
              
              
              368
              
              
              
              —Net
      amortization of securities
              
              
              12
              
              
              
              26Dividends
      reinvested on trading securities
              
              
              (46
              )
              
              
              (119
              )ESOP
      expense
              
              
              73
              
              
              
              75MRP
      expense
              
              
              156
              
              
              
              146Option
      expense
              
              
              107
              
              
              
              100Increase
      in accrued interest receivable and other assets
              
              
              (1,116
              )
              
              
              (28
              )Increase
      (decrease) in accrued interest payable and other
    liabilities
              
              
              434
              
              
              
              (18
              )Net
      cash provided by operating activities
              
              
              540
              
              
              
              737Cash
      flows from investing activitiesActivity
      in securities available-for-sale:Proceeds
      from maturities, calls, and principal repayments
              
              
              3,233
              
              
              
              3,300Proceeds
      from sales
              
              
              160
              
              
              
              —Purchases
              
              
              (641
              )
              
              
              —Purchase
      of FHLB stock
              
              
              —
              
              
              
              (110
              )Loan
      originations and payments, net
              
              
              182
              
              
              
              (1,395
              )Proceeds
      from sale of real estate owned, acquired through
    foreclosure
              
              
              —
              
              
              
              222Additions
      to premises and equipment
              
              
              (718
              )
              
              
              (19
              )Net
      cash provided by investing activities
              
              
              2,216
              
              
              
              1,998Cash
      flows from financing activitiesNet
      decrease in deposits
              
              
              (1,227
              )
              
              
              (3,589
              )Net
      increase (decrease) in advance payments by
                borrowers for taxes and insurance
              
              
              128
              
              
              
              (165
              )Advances
      from the Federal Home Loan Bank
              
              
              4,000
              
              
              
              7,500Repayment
      of Federal Home Loan Bank advances
              
              
              (3,000
              )
              
              
              (4,500
              )Dividends
      paid
              
              
              (170
              )
              
              
              —Treasury
      stock purchases
              
              
              (1,297
              )
              
              
              (1,985
              )Net
      cash used by financing activities
              
              
              (1,566
              )
              
              
              (2,739
              )Net
      increase (decrease) in cash and cash equivalents
              
              
              1,190
              
              
              
              (4
              )Cash
      and cash equivalents at beginning of period
              
              
              2,264
              
              
              
              2,268Cash
      and cash equivalents at end of period
              
              $
              3,454
              
              
              $
              2,264Supplemental
      disclosure of cash flow informationCash
      paid during the year for:Interest
              
              $
              1,237
              
              
              $
              1,252


Income
      taxes
              
              
              309
              
              
              
              259Loans
      transferred to real estate owned
              
              
              235
              
              
              
              222Transfers
      to trading securities upon adoption of FAS 159
              
              
              2,423
              
              
              
              —





See
accompanying notes to consolidated financial statements.




F-7
 Table of Contents





MUTUAL
FEDERAL BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007


(Dollar
amounts in thousands)




NOTE
1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




Nature of Operations and
Principles of Consolidation:  The consolidated financial
statements include Mutual Federal Bancorp, Inc., and its wholly owned subsidiary
Mutual Federal Savings and Loan Association of Chicago and its wholly owned
subsidiaries, EMEFES Service Corporation and 2212 Holdings, LLC, together
referred to as “the Bank.”  Intercompany transactions and balances are
eliminated in consolidation.  As of December 31, 2008, Mutual Federal
Bancorp, MHC, was the majority (74.85%) stockholder of the
Company.  The MHC is owned by the depositors of the
Bank.  The financial statements do not include the transactions and
balances of the MHC.  EMEFES Service Corporation is an insurance
agency that sells insurance products to the Bank’s customers.  The
insurance products are underwritten and provided by a third
party.  2212 Holdings, LLC was established in 2008 to hold and manage
real estate acquired through foreclosure.




The Bank
provides financial services through its office in Chicago.  Its
primary deposit products are checking, savings, and term certificate accounts,
and its primary lending products are residential mortgage loans and loans on
deposit accounts.  Substantially all loans are secured by specific
items of collateral, including one- to four-family and multifamily residential
real estate, and deposit accounts.  However, the customers’ ability to
repay their loans is dependent on the real estate and general economic
conditions in the Chicago area.




Use of
Estimates:  To prepare financial statements in conformity with
U.S. generally accepted accounting principles, management makes estimates and
assumptions based on available information.  These estimates and
assumptions affect the amounts reported in the financial statements and the
disclosures provided, and actual results could differ.  The allowance
for loan losses is particularly subject to change.




Cash
Flows:  Cash and cash equivalents include cash and deposits
with other financial institutions available in less than 90 days.  Net
cash flows are reported for customer loan and deposit transactions, and advance
payments by borrowers for taxes and insurance.




Securities:  Debt
securities are classified as available-for-sale when they might be sold before
maturity.  Equity securities with readily determinable fair values are
classified as available-for-sale or as trading securities.  Securities
available-for-sale are carried at fair value, with unrealized holding gains and
losses reported in other comprehensive income, net of income
tax.  Trading securities are carried at fair value, with unrealized
gains and losses reported through income.




Interest
income includes amortization of purchase premium or discount.  Gains
and losses on sales are recorded on the trade date and determined using the
specific identification method.







F-8
 Table of Contents





MUTUAL
FEDERAL BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007


(Dollar
amounts in thousands)




NOTE
1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)




Management
evaluates securities for other-than-temporary impairment at least on a quarterly
basis and more frequently when economic or market concerns warrant such
evaluation.  Consideration is given to (1) the length of time and
the extent to which the fair value has been less than cost, (2) the
financial condition and near-term prospects of the issuer, and (3) the
intent and ability of the Company to retain its investment in the issuer for a
period of time sufficient to allow for any anticipated recovery in fair
value.




Federal Home Loan Bank
(FHLB) Stock:  The Bank is a member of the FHLB
system.  Members are required to own a certain amount of stock based
on the level of borrowings and other factors, and may invest in additional
amounts.  FHLB stock is carried at cost, classified as a restricted
security, and periodically evaluated for impairment based on ultimate recovery
of par value.  Both cash and stock dividends are reported as
income.




Loans:  Loans
that management has the intent and ability to hold until maturity or payoff are
reported at the principal balance outstanding, net of undisbursed loan proceeds,
deferred loan fees and costs, and an allowance for loan
losses.  Interest income is accrued on the unpaid principal
balance.  Loan origination fees, net of certain direct origination
costs, are deferred and recognized in interest income using the level-yield
method.




Interest
income on mortgage loans is discontinued at the time the loan becomes 90 days
delinquent.  Past-due status is based on the contractual terms of the
loan.  In all cases, loans are placed on non-accrual or charged-off at
an earlier date if collection of principal or interest is considered
doubtful.




All
interest accrued but not received for loans placed on nonaccrual is reversed
against interest income.  Interest received on such loans is accounted
for on the cash-basis or cost-recovery method, until qualifying for return to
accrual.  Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current and future payments
are reasonably assured.




Allowance for Loan
Losses:  The allowance for loan losses is a valuation allowance
for probable incurred credit losses.  Loan losses are charged against
the allowance when management believes that the uncollectibility of a loan
balance is confirmed.  Subsequent recoveries, if any, are credited to
the allowance.  Management estimates the allowance balance required
using past loan loss experience, the nature and volume of the portfolio,
information about specific borrower situations and estimated collateral values,
economic conditions, and other factors.  Allocations of the allowance
may be made for specific loans, but the entire allowance is available for any
loan that, in management’s judgment, should be charged off.







F-9
 Table of Contents





MUTUAL
FEDERAL BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007


(Dollar
amounts in thousands)




NOTE
1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)




The
allowance consists of specific and general components.  The specific
component relates to loans that are individually classified as impaired or loans
otherwise classified as substandard or doubtful.  The general
component covers non-classified loans and is based on historical loss experience
adjusted for current factors.




A loan is
impaired when full payment under the loan terms is not
expected.  Loans are individually evaluated for
impairment.  If a loan is impaired, a portion of the allowance is
allocated so that the loan is reported, net, at the present value of estimated
future cash flows using the loan’s existing rate or at the fair value of
collateral if repayment is expected solely from the collateral.  All
loans past due 90 days are evaluated individually for impairment.




Premises and
Equipment:  Land is carried at cost.  Premises and
equipment are stated at cost less accumulated depreciation.  Buildings
and related components are depreciated using the straight-line method, with
useful lives ranging from 5 to 33 years.  Furniture, fixtures, and
equipment are depreciated using the straight-line method with useful lives
ranging from 3 to 7 years.




Foreclosed
Assets:  Assets acquired through or instead of loan
foreclosures are initially recorded at fair value, less estimated costs to sell,
when acquired, establishing a new cost basis.  If fair value declines
subsequent to foreclosure, a valuation allowance is recorded through
expense.  Costs after acquisition are expensed.




Long-Term
Assets:Premises and equipment
and other long-term assets are reviewed for impairment when events indicate that
their carrying amount may not be recoverable from future undiscounted cash
flows.  If impaired, the assets are recorded at fair
value.




Loan Commitments and Related
Financial Instruments:  Financial instruments include
off-balance-sheet credit instruments, such as commitments to make loans issued
to meet customer financing needs.  The face amount for these items
represents the exposure to loss, before considering customer collateral or
ability to repay.  Such financial instruments are recorded when they
are funded.




Advertising
Expense:  The Company expenses all advertising costs as they
are incurred.  Total advertising costs for the years ended December
31, 2008 and 2007 were $34 and $46, respectively.




Income
Taxes:  Income tax expense is the total of the current-year
income tax due or refundable and the change in deferred tax assets and
liabilities.  Deferred tax assets and liabilities are the expected
future tax amounts for the temporary differences between carrying amounts and
tax bases of assets and liabilities, computed using enacted tax
rates.  A valuation allowance, if needed, reduces deferred tax assets
to the amount expected to be realized.







F-10
 Table of Contents





MUTUAL
FEDERAL BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007


(Dollar
amounts in thousands)




NOTE
1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)




A tax
position is recognized as a benefit only if it is "more likely than not" that
the tax position would be sustained in a tax examination, with a tax examination
being presumed to occur.  The amount recognized is the largest amount
of tax benefit that is greater than 50% likely of being realized on
examination.  For tax positions not meeting the "more likely than not"
test, no tax benefit is recorded.  The adoption had no effect on the
Company’s financial statements.




The
Company recognizes interest and penalties related to income tax matters as
income tax expense.  The Company does not have any amounts accrued for
interest and penalties.  The Company is no longer subject to
examination by taxing authorities for years before 2006.




Comprehensive
Income:  Comprehensive income consists of net income and other
comprehensive income.  Other comprehensive income includes unrealized
gains and losses on securities available-for-sale that are also recognized as a
separate component of equity.




Loss
Contingencies:  Loss contingencies, including claims and legal
actions arising in the ordinary course of business, are recorded as liabilities
when the likelihood of loss is probable and an amount or range of loss can be
reasonably estimated.  Management does not believe that there now are
such matters that will have a material effect on the consolidated financial
statements.




Earnings Per Common
Share:  Basic earnings (loss) per share are computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding for the period.  Diluted earnings (loss)
per share reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the Company.  Shares of common stock held in the Company’s
ESOP are pledged as collateral for the Company’s loan to the ESOP and are not
considered outstanding for earnings (loss) per share calculations until the
shares are released from collateral and allocated to participants.




Fair Value of Financial
Instruments:  Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note.  Fair value estimates involve
uncertainties and matters of significant judgment regarding interest rates,
credit risk, prepayments, and other factors, especially in the absence of broad
markets for particular items.  Changes in assumptions or in market
conditions could significantly affect the estimates.




Operating
Segments:  Internal financial information is primarily reported
and aggregated in one line of business, banking.  While the Company’s
executive officers monitor the revenue streams of the Bank’s various products
and services, operations are managed and financial performance is evaluated on a
company-wide basis.  Accordingly, all of the financial service
operations are considered by management to be aggregated in one reportable
operating segment.







F-11
 Table of Contents





MUTUAL
FEDERAL BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007


(Dollar
amounts in thousands)




NOTE
1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)




Employee Stock Ownership
Plan:  The cost of shares issued to the employee stock
ownership plan (“ESOP”) but not yet allocated to participants is presented in
the consolidated balance sheet as a reduction of stockholders’
equity.  Compensation expense is recorded based on the market price of
the shares as they are committed to be released for allocation to participant
accounts.  Because participants may require the Company to purchase
their ESOP shares upon termination of their employment, the market value of all
earned and allocated ESOP shares is reclassified from stockholders’
equity.  Unearned ESOP shares are reported as a reduction of
stockholders’ equity.




Effect of Newly Issued
Accounting Standards:   In September 2006, the FASB issued
Statement No. 157, Fair Value
Measurements(“SFAS 157”).  This Statement defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements.  This Statement establishes a fair value
hierarchy about the assumptions used to measure fair value and clarifies
assumptions about risk and the effect of a restriction on the sale or use of an
asset.  The standard was effective for fiscal years beginning after
November 15, 2007.  The impact of  adoption to the Company
was not material.  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.  The impact of adoption was not
material to the results of operation or financial condition of the
Company.




In
February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities(“SFAS 159”).  The standard
provides companies with an option to report selected financial assets and
liabilities at fair value and establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that choose
different measurement attributes for similar types of assets and
liabilities.  The new standard was effective for the Company on
January 1, 2008.  The Company elected the fair value option for
various mutual funds included in trading securities as of January 1,
2008.  The impact of adoption was not material to the results of
operation or financial condition of the Company, as the Company recognized an
impairment charge at December 31, 2007, resulting in the mutual funds being
carried at fair value.







F-12
 Table of Contents





MUTUAL
FEDERAL BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007


(Dollar
amounts in thousands)




NOTE 2 – FAIR VALUE
MEASUREMENT




SFAS 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. SFAS 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) of identical assets or liabilities in active markets
that the entity has the ability to access as of the measurement
date.




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




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




The
Company determines the fair values of trading securities and securities
available-for-sale by obtaining quoted prices on nationally recognized
securities exchanges (Level 1 inputs) or 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).  The Company determines the fair values of impaired loans by
obtaining current appraisals of the collateral real estate properties (Level 2
inputs) or adjusting estimated fair values of appraisals using management
judgment (Level 3 inputs).




Assets Measured on a
Recurring Basis:




Fair
      Value Measurements at December 31, 2008 UsingDecember
      31, 2008
              
              
              Quoted
      Prices in Active Markets for Identical Assets
              
              
              Significant
      Other Observable Inputs
              
              
              Significant
      Unobservable InputsLevel
      1
              
              
              Level
      2
              
              
              Level
      3Trading
      securities
              
              $
              2,100
              
              
              $
              2,100
              
              
              $
              —
              
              
              $
              —Securities
      available-for-sale
              
              
              10,812
              
              
              
              7
              
              
              
              10,805
              
              
              
              —$
              12,912
              
              
              $
              2,107
              
              
              $
              10,805
              
              
              $
              —





Dividend
income earned on trading securities was reinvested and used to purchase
additional shares through May 31, 2008.  The Company discontinued
reinvesting dividends in these securities as of June 1, 2008.  Changes
in share price are recorded through the income statement as changes in fair
value of trading securities.  During the year ended December 31, 2008,
the Company recognized an unrealized loss of $368 on changes in fair value of
trading securities.  Restrictions on redemption of these securities
has been imposed by the manager of these funds, limiting cash redemptions
to $250 per fund (there are three funds) per quarter.  Depending on
liquidity requirements, or market conditions relating to the funds, the Company
may decide that redemption of some or all of the funds is prudent.







F-13
 Table of Contents





MUTUAL
FEDERAL BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007


(Dollar
amounts in thousands)




NOTE 2 – FAIR VALUE
MEASUREMENT (continued)




For the
year ended December 31, 2008, the Company also recognized a $394 loss for
other-than-temporary impairment of FHLMC preferred stock held as
available-for-sale, because the fair value of the preferred stock has declined
substantially due to the announcement on September 7, 2008, that its regulatory
agency, the Federal Housing Finance Agency (“FHFA”), was appointed as
conservator, and because dividends on previously issued preferred shares have
been suspended.  We are uncertain as to what impact these actions will
have on the future value of this security.  At December 31, 2008, we
held 10,000 preferred shares valued at $0.74 per share.




Assets Measured on a
Non-Recurring Basis:




Fair
      Value Measurements at December 31, 2008 UsingDecember
      31, 2008
              
              
              Quoted
      Prices in Active Markets for Identical Assets
              
              
              Significant
      Other Observable Inputs
              
              
              Significant
      Unobservable InputsLevel
      1
              
              
              Level
      2
              
              
              Level
      3Impaired
      loans
              
              $
              1,756
              
              
              $
              —
              
              
              $
              —
              
              
              $
              1,756





Impaired
loans, which are measured for impairment using the fair value of the collateral
for collateral dependent loans, had a carrying amount of $2,606, with specific
loan loss allowances of $850, resulting in an additional provision for loan
losses of $850 for the year.




NOTE
3 – SECURITIES




Trading
Securities:




Upon
adoption of SFAS 159 on January 1, 2008, the Company reclassified mutual funds
with a carrying value of $2,423 from available-for-sale securities to trading
securities.  For the year ended December 31, 2008, the Company
recorded changes in fair value of trading securities of $368 as a charge against
income.  As an equity security, the mutual funds do not have a
designated maturity date.







F-14
 Table of Contents





MUTUAL
FEDERAL BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007


(Dollar
amounts in thousands)




NOTE
3 – SECURITIES (continued)




Securities
available-for-sale:




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




Amortized
                  Cost
              
              
              Gross
                  Unrealized
                  Gains
              
              
              Gross
                  Unrealized
                  Losses
              
              
              Fair
                  ValueDecember 31, 2008U.S.
      agency and government-sponsored entity bonds
              
              $
              3,998
              
              
              $
              197
              
              
              $
              —
              
              
              $
              4,195GNMA
      certificates
              
              
              791
              
              
              
              3
              
              
              
              (40
              )
              
              
              754FNMA
      certificates
              
              
              2,763
              
              
              
              61
              
              
              
              (4
              )
              
              
              2,820FHLMC
      certificates
              
              
              2,607
              
              
              
              55
              
              
              
              (7
              )
              
              
              2,655Collateralized
      mortgage obligations
              
              
              408
              
              
              
              —
              
              
              
              (27
              )
              
              
              381FHLMC
      preferred stock
              
              
              7
              
              
              
              —
              
              
              
              —
              
              
              
              7Total
      available-for-sale
              
              $
              10,574
              
              
              $
              316
              
              
              $
              (78
              )
              
              $
              10,812December 31, 2007U.S.
      agency and government-sponsored
      entity bonds
              
              $
              5,496
              
              
              $
              109
              
              
              $
              —
              
              
              $
              5,605GNMA
      certificates
              
              
              1,049
              
              
              
              4
              
              
              
              (32
              )
              
              
              1,021FNMA
      certificates
              
              
              3,596
              
              
              
              32
              
              
              
              (10
              )
              
              
              3,618FHLMC
      certificates
              
              
              2,524
              
              
              
              16
              
              
              
              (9
              )
              
              
              2,531Collateralized
      mortgage obligations
              
              
              486
              
              
              
              —
              
              
              
              (14
              )
              
              
              472FHLMC
      common stock
              
              
              8
              
              
              
              265
              
              
              
              —
              
              
              
              273FHLMC
      preferred stock
              
              
              402
              
              
              
              —
              
              
              
              —
              
              
              
              402Mutual
      funds
              
              
              2,423
              
              
              
              —
              
              
              
              —
              
              
              
              2,423Total
      available-for-sale
              
              $
              15,984
              
              
              $
              426
              
              
              $
              (65
              )
              
              $
              16,345





At
December 31, 2008 and 2007, there were no holdings of securities of any one
issuer, other than U.S. agency and U.S. government-sponsored entities, in an
amount greater than 10% of equity.  Mutual fund securities at December
31, 2007 include $2,423 in mutual funds managed by a single issuer and invested
primarily in short-term government obligations and pools of adjustable rate
mortgage loans.




There
were no securities pledged at December 31, 2008 and 2007.




The
Company sold 8,000 shares of FHLMC common stock for $160, resulting in a gain of
$152 for the year ended December 31, 2008.  There were no investment
securities sales in the year ended December 31, 2007.







F-15
 Table of Contents





MUTUAL
FEDERAL BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007


(Dollar
amounts in thousands)




NOTE
3 – SECURITIES (Continued)




The
amortized cost and fair values of debt securities available-for-sale at December
31, 2008 by contractual maturity were as follows:




Amortized
                  Cost
              
              
              Fair
                  ValueDue
      in one year or less
              
              $
              500
              
              
              $
              515Due
      from one to five years
              
              
              3,498
              
              
              
              3,680Due
      from five to ten years
              
              
              —
              
              
              
              —CMO’s
      and mortgage backed securities
              
              
              6,569
              
              
              
              6,610Total
              
              $
              10,567
              
              
              $
              10,805





Securities
with unrealized losses aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position are as
follows:




December
      31, 2008Less
      Than 12 Months
                  
                  
                  12
      Months or More
                  
                  
                  TotalDescription
      of Securities
                  
                  Fair
                      Value
                  
                  
                  Unrealized
                      Loss
                  
                  
                  Fair
                      Value
                  
                  
                  Unrealized
                      Loss
                  
                  
                  Fair
                      Value
                  
                  
                  Unrealized
                      LossGNMA
      certificates
                  
                  $
                  108
                  
                  
                  $
                  (1
                  )
                  
                  $
                  570
                  
                  
                  $
                  (39
                  )
                  
                  $
                  678
                  
                  
                  $
                  (40
                  )FNMA
      certificates
                  
                  
                  256
                  
                  
                  
                  (3
                  )
                  
                  
                  239
                  
                  
                  
                  (1
                  )
                  
                  
                  495
                  
                  
                  
                  (4
                  )FHLMC
      certificates
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  144
                  
                  
                  
                  (7
                  )
                  
                  
                  144
                  
                  
                  
                  (7
                  )Collateralized
      mortgage obligations
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  378
                  
                  
                  
                  (27
                  )
                  
                  
                  378
                  
                  
                  
                  (27
                  )Total
      temporarily impaired
                  
                  $
                  364
                  
                  
                  $
                  (4
                  )
                  
                  $
                  1,331
                  
                  
                  $
                  (74
                  )
                  
                  $
                  1,695
                  
                  
                  $
                  (78
                  )





December
      31, 2007Less
      Than 12 Months
              
              
              12
      Months or More
              
              
              TotalDescription
      of Securities
              
              Fair
                  Value
              
              
              Unrealized
                  Loss
              
              
              Fair
                  Value
              
              
              Unrealized
                  Loss
              
              
              Fair
                  Value
              
              
              Unrealized
                  LossGNMA
      certificates
              
              $
              94
              
              
              $
              (1
              )
              
              $
              713
              
              
              $
              (31
              )
              
              $
              807
              
              
              $
              (32
              )FNMA
      certificates
              
              
              —
              
              
              
              —
              
              
              
              1,124
              
              
              
              (10
              )
              
              
              1,124
              
              
              
              (10
              )FHLMC
      certificates
              
              
              —
              
              
              
              —
              
              
              
              642
              
              
              
              (9
              )
              
              
              642
              
              
              
              (9
              )Collateralized
      mortgage obligations
              
              
              —
              
              
              
              —
              
              
              
              469
              
              
              
              (14
              )
              
              
              469
              
              
              
              (14
              )Total
      temporarily impaired
              
              $
              94
              
              
              $
              (1
              )
              
              $
              2,948
              
              
              $
              (64
              )
              
              $
              3,042
              
              
              $
              (65
              )








F-16
 Table of Contents





MUTUAL
FEDERAL BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007


(Dollar
amounts in thousands)




NOTE
3 – SECURITIES (Continued)




At
December 31, 2008, there were 15 debt securities with unrealized losses
that have depreciated 4.4% from the Company’s amortized cost
basis.  At December 31, 2007, there were 18 debt securities with
unrealized losses that had depreciated 2.2% from the Company’s amortized cost
basis.  These unrealized losses related principally to current
interest rates for similar types of securities.  In analyzing an
issuer’s financial condition, management considers whether the securities are
issued by the federal government or its agencies, whether downgrades by bond
rating agencies have occurred, and what the results are of reviews of the
issuer’s financial condition.  The fair value is expected to recover
as securities approach their maturity date.  As management has the
ability to hold debt securities until forecasted recovery, which may be
maturity, no declines are deemed to be other than temporary.




The
Company has investments in various mutual funds including an adjustable rate
mortgage fund, a U.S. government mortgage fund, and a short-term government
fund.  The underlying securities are U.S. government and government
agency securities and government agency insured fixed-rate and adjustable-rate
mortgage-backed securities.  At December 31, 2007, the Company
recognized a $54 pre-tax charge for an other-than-temporary decline in fair
value, because it was unable to forecast a recovery in the net asset value of
these funds in the period the Company estimated it would hold the
securities.  As of January 1, 2008, the Company has adopted fair value
accounting for these mutual funds which are now held as trading
securities.




The
Company owns 10,000 shares of Federal Home Loan Mortgage Corporation (“FHLMC”)
5.79% non-cumulative preferred stock with an original cost basis of
$500.  As previously disclosed, for the year ended December 31, 2008,
the Company has recognized $394 in pre-tax charges for an other-than-temporary
decline in fair value, because it was unable to forecast a recovery in the fair
value of this security in the foreseeable future.  The Company also
recognized $98 in pre-tax charges for the same reason during 2007.







F-17
 Table of Contents




MUTUAL
FEDERAL BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007


(Dollar
amounts in thousands)




NOTE
4 – LOANS




Loans are
as follows:




2008
              
              
              2007First
      mortgage loansPrincipal
      balancesSecured
      by one- to four-family residences
              
              $
              32,568
              
              
              $
              34,163Secured
      by multi-family properties
              
              
              20,202
              
              
              
              19,21752,770
              
              
              
              53,380Less:Loans
      in process
              
              
              -
              
              
              
              9Net
      deferred loan origination fees
              
              
              120
              
              
              
              122Total
      first mortgage loans
              
              
              52,650
              
              
              
              53,249Loans
      on savings accounts
              
              
              101
              
              
              
              8852,751
              
              
              
              53,337Less
      allowance for loan losses
              
              
              1,287
              
              
              
              290$
              51,464
              
              
              $
              53,047





Activity
in the allowance for loan losses is summarized as follows:





2008
              
              
              2007Balance
      at beginning of year
              
              $
              290
              
              
              $
              240Loans
      charged off
              
              
              (169
              )
              
              
              —Recoveries
              
              
              —
              
              
              
              —Provision
      charged to income
              
              
              1,166
              
              
              
              50Balance
      at end of year
              
              $
              1,287
              
              
              $
              290





Non-accrual
loans, which include all loans past due 90 days and over at December 31, 2008
and 2007, were $2,953 and $259, respectively.  Impaired loans were
$3,763 at December 31, 2008, and $0 at December 31, 2007.  Impaired
loans with balances of $2,606 at December 31, 2008, had specific loan loss
allowances of $850. There were no loans with specific loan loss allowances at
December 31, 2007.  For the year ended December 31, 2008, the Company
recognized interest income of $100 on impaired loans, substantially all on the
cash basis.




Loans to
principal officers, directors, and their affiliates in 2008 were as
follows:




Balance
      at January 1, 2008
                
                $
                222New
      loans
                
                
                -Repayments
                
                
                82Balance
      at December 31, 2008
                
                $
                140








F-18
 Table of Contents





MUTUAL
FEDERAL BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007


(Dollar
amounts in thousands)




NOTE
5 – PREMISES AND EQUIPMENT




Year-end
premises and equipment were as follows:




2008
                
                
                2007Land
                
                $
                768
                
                
                $
                97Building
                
                
                355
                
                
                
                355Building
      improvements
                
                
                145
                
                
                
                140Drive-up
      addition (in progress)
                
                
                18
                
                
                
                —Parking
      lot improvements
                
                
                19
                
                
                
                19Furniture
      and equipment
                
                
                489
                
                
                
                468Total
      cost
                
                
                1,794
                
                
                
                1,079Accumulated
      depreciation
                
                
                (876
                )
                
                
                (829
                )$
                918
                
                
                $
                250




Depreciation
expense was $50 and $58 for the years ended December 31, 2008 and
2007.  The projected cost of the drive-up addition, to be completed in
2009, is currently estimated at $925.




NOTE
6 – ACCRUED INTEREST RECEIVABLE




Accrued
interest receivable is summarized as follows:




2008
              
              
              2007Securities
              
              $
              74
              
              
              $
              89Loans
              
              
              269
              
              
              
              271$
              343
              
              
              $
              360





NOTE
7 – DEPOSITS




Deposits,
by major category, are as follows:




2008
              
              
              2007Non-interest-bearing
      checking
              
              $
              199
              
              
              $
              331Savings
              
              
              18,666
              
              
              
              18,854Certificates
      of deposit
              
              
              19,627
              
              
              
              20,534$
              38,492
              
              
              $
              39,719





The
aggregate amount of certificates of deposit with a minimum denomination of $100
was approximately $6,899 and $7,011 at December 31, 2008 and 2007,
respectively.






F-19
 Table of Contents




MUTUAL
FEDERAL BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007


(Dollar
amounts in thousands)




NOTE
7 – DEPOSITS (Continued)




Scheduled
maturities of certificates of deposit for the year ended December 31, 2008
are as follows:




2009
                
                $
                17,2442010
                
                
                2,0312011
                
                
                252012
                
                
                1202013
                
                
                207$
                19,627





Deposits
of related parties totaled approximately $1,274 and $1,275 at December 31,
2008 and 2007, respectively.




Interest
expense on deposit accounts is summarized as follows:




2008
              
              
              2007Savings
              
              $
              233
              
              
              $
              246Certificates
      of deposit
              
              
              732
              
              
              
              908$
              965
              
              
              $
              1,154





NOTE
8 – FEDERAL HOME LOAN BANK ADVANCES




At year
end, advances from the Federal Home Loan Bank were as follows:




2008
              
              
              2007Maturities
      in June 2009 through February 2011, at fixed rates from 3.22% to 4.09%,
      averaging 3.59%
              
              $
              6,000
              
              
              $
              5,000Required
      payments over the next three years are:2008
              
              $
              —
              
              
              $
              3,0002009
              
              
              2,000
              
              
              
              2,0002010
              
              
              2,000
              
              
              
              —2011
              
              
              2,000
              
              
              
              —





Each
advance is payable at its maturity date, with a prepayment penalty for fixed
rate advances.   A blanket lien on all one- to four-family first
mortgages was pledged as collateral in the event that the Company requests
future advances.  The Company’s available credit limit, limited to
twenty times its current investment in FHLB stock, at December 31, 2008,
was $12.2 million.







F-20
 Table of Contents





MUTUAL
FEDERAL BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007


(Dollar
amounts in thousands)




NOTE
9 – BENEFIT PLANS




As of
January 1, 2006, the Company adopted an employee stock ownership plan
(“ESOP”) for the benefit of substantially all employees.  The ESOP
borrowed $873 from the Company and used those funds to acquire 87,285 shares of
the Company’s common stock on April 4, 2006, in connection with the
Company’s minority stock offering, at a price of $10.00 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 contributions to the ESOP and earnings on ESOP
assets.  Under the loan agreement, the ESOP will make annual fixed
principal payments to the Company of $44, plus interest at 7.0% on the unpaid
loan balance.




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 (“EPS”) computations.  For the years ended December
31, 2008 and 2007, the Company contributed $98 and $101 to the plan, reported
compensation expense of $59 and $75, and released 5,759 shares and 5,928 shares
of common stock.   Dividends paid on shares held in the suspense
account of $14 were reported as compensation expense during 2008 because they
were allocated to participant accounts.




Upon
termination of their employment, participants in the ESOP who elect to receive
their benefit distributions in the form of Company common stock may require the
Company to repurchase the common stock distributed at fair
value.  This contingent repurchase obligation is reflected in the
Company’s financial statements as “common stock in ESOP subject to contingent
repurchase obligation” and reduces stockholders’ equity by an amount that
represents the market value of all the Company’s common stock held by the ESOP
and allocated to participants, without regard to whether it is likely that the
shares would be distributed or that the recipients of the shares would be likely
to exercise their right to require the Company to repurchase the
shares.  At December 31, 2008 and 2007, there are 15,386 and
10,321 allocated ESOP shares and a contingent repurchase obligation of $138 and
$108, respectively.  In addition, the fair value of unearned ESOP
shares at December 31, 2008 and 2007, was $640 and $807,
respectively.




On
November 29, 2006, the Registrant’s stockholders approved the Mutual Federal
Bancorp, Inc. 2006 Stock Option Plan (the “Stock Option Plan”),
and  the Mutual Federal Bancorp, Inc. 2006 Recognition and Retention
Plan and Trust Agreement (the “MRP Plan”, and collectively with the Stock Option
Plan, the “Plans”).   A total of 178,206 and 71,282 shares of
Company common stock have been reserved for issuance under the Stock Option Plan
and the MRP Plan, respectively.




On
January 16, 2007, the Company awarded 52,748 shares of common stock, with a fair
value of $14.41 per share, to the Company’s officers and directors under the MRP
Plan.  The Company also awarded 131,871 options to purchase the
Company’s common stock at a strike price of $14.41 per share, to the Company’s
officers and directors under the Stock Option Plan.







F-21
 Table of Contents





MUTUAL
FEDERAL BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007


(Dollar
amounts in thousands)




NOTE
9 – BENEFIT PLANS (Continued)




On March
18, 2008, the Company awarded 2,138 shares of common stock, with a fair value of
$11.35 per share, to a director of the Company under the MRP
Plan.  The Company also awarded the director options to purchase 5,346
shares of the Company’s common stock at a strike price of $11.35 per share under
the Stock Option Plan.




The
awards vest over a five year period.  Total compensation cost that has
been charged against income for those plans for the years ended December 31,
2008 and 2007, was $156 and $146 for the MRP Plan and $107 and $100 for the
Stock Option Plan.  The total income tax benefit was $72 and $66 for
these same periods.




Stock Option
Plan




The Stock
Option Plan, which is shareholder-approved, permits the grant of stock options
to its officers, directors and employees for up to 178,206 shares of common
stock.  The Company believes that such awards better align the
interests of its employees with those of its shareholders.  Option
awards are granted with an exercise price that is no less than the market price
of the Company’s common stock at the date of grant; have vesting periods of five
years and have 10-year contractual terms.  The Company anticipates
purchasing shares to satisfy share option exercises.




The fair
value of each option award is estimated on the date of grant using a closed form
option valuation (Black-Scholes) model that uses the assumptions noted in the
table below.  Since the Company stock has only been trading since
April 6, 2006, the Company has used the price volatility of similar entities to
estimate volatility.  The Company has no historical data on which to
base forfeiture estimates, and has assumed no forfeitures.  The
expected term of options granted is based on the calculation for “plain vanilla
options” permitted by SAB 107, and 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 options granted during 2008 and 2007 was determined using the following
weighted-average assumptions as of grant date:




2008
              
              
              2007Risk-free
      interest rate
              
              
              3.47
              %
              
              
              4.50
              %Expected
      term
              
              6.50
      years
              
              
              6.50
      yearsExpected
      stock price volatility
              
              
              13.51
              %
              
              
              9.40
              %Dividend
      yield
              
              
              0.00
              %
              
              
              0.00
              %








F-22
 Table of Contents





MUTUAL
FEDERAL BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007


(Dollar
amounts in thousands)




NOTE
9 – BENEFIT PLANS (Continued)




A summary
of the activity in the Stock Option Plan for 2008 follows:




Shares
              
              
              Weighted
      Average Exercise Price
              
              
              Weighted
      Average Remaining Contractual Term
              
              
              Aggregate
      Intrinsic ValueOutstanding
      at January 1, 2008
              
              
              131,871
              
              
              $
              14.41
              
              
              
              9.0
              
              
              
              —Granted
              
              
              5,346
              
              
              $
              11.35
              
              
              
              10.0
              
              
              
              —Exercised
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Forfeited
      or expired
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Outstanding
      at December 31, 2008
              
              
              137,217
              
              
              $
              14.29
              
              
              
              8.0
              
              
              
              —Exercisable
      at December 31, 2008
              
              
              26,374
              
              
              $
              14.41Expected
      to vest at December 31, 2008
              
              
              137,217
              
              
              $
              14.29





Information
related to the Stock Option Plan during 2008 and 2007 follows:




2008
              
              
              2007Intrinsic
      value of options exercised
              
              
              —
              
              
              
              —Cash
      received from option exercises
              
              
              —
              
              
              
              —Tax
      benefit realized from option exercises
              
              
              —
              
              
              
              —Weighted
      average fair value of options granted
              
              $
              2.83
              
              
              $
              3.96





As of
December 31, 2008, there was $330 of total unrecognized compensation cost
related to non-vested stock options granted under the Stock Option
Plan.  The cost is expected to be recognized over a weighted-average
remaining period of 3.0 years.




Stock Award
Plan




The MRP
Plan provides for the issuance of shares of restricted stock to directors and
officers.  Compensation expense is recognized over the vesting period
of the shares based on the market value of the shares at issue
date.  Total shares that remain issuable under the MRP Plan are 71,282
at December 31, 2008.







F-23
 Table of Contents





MUTUAL
FEDERAL BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007


(Dollar
amounts in thousands)




NOTE
9 – BENEFIT PLANS (Continued)




A summary
of changes in the Company’s non-vested shares for 2008 and 2007
follows:




Shares
                
                
                Weighted
      Average Grant Price
                
                
                Weighted
      Average Grant-Date Fair ValueNon-vested
      at January 1, 2008
                
                
                52,748
                
                
                $
                14.41
                
                
                $
                760,000Granted
                
                
                2,138
                
                
                
                11.35
                
                
                
                24,000Vested
                
                
                (10,553
                )
                
                
                14.41
                
                
                
                (152,000
                )Forfeited
                
                
                —
                
                
                
                —
                
                
                
                —Non-vested
      at December 31, 2008
                
                
                44,333
                
                
                $
                14.26
                
                
                $
                632,000


As of
December 31, 2008, there was $482 of total unrecognized compensation cost
related to non-vested shares granted under the MRP Plan.  The cost is
expected to be recognized over a weighted-average remaining period of 3.0
years.




The
Company has a 401(k) profit sharing plan covering substantially all employees
who have attained the age of 21 and have completed three months of
service.  Employee contributions are matched at 100% up to 3% of
compensation and 50% of contributions over 3%, but do not exceed 5% of
compensation.  The matching contribution expense was $24 and $23 for
the years ended December 31, 2008 and 2007.  The 401(k) profit sharing
plan also provides for a discretionary profit sharing contribution determined
annually by the Board of Directors.  The Board approved no
discretionary contributions for the years ended December 31, 2008 and
2007.




The
Company has nonqualified deferred compensation agreements with officers and
directors.  Under the terms of these agreements, the officers and
directors may defer compensation and directors’ fees and earn interest on the
balance.  Interest is computed at the Company’s interest rate for
one-year certificates of deposit.  Interest expense for the years
ended December 31, 2008 and 2007 approximated $15.  In addition, for
the years ended December 31, 2008 and 2007, approximately $38 and $24 was
distributed.  The agreements were amended during 2005 to terminate
deferrals after 2004.  At December 31, 2008 and 2007, $364 and
$387 of deferred compensation was included in accrued interest payable and other
liabilities on the statements of financial condition.




The
Company provides supplemental health care benefits to cover the Medicare costs
for employees who reach the age of 65 and have at least 10 years of service with
the Company.  At December 31, 2008 and 2007, a liability of $53
and $64 is included in accrued expenses and other liabilities in the statements
of financial condition.  The Company recorded expense of $10 and $5
for the years ended December 31, 2008 and 2007.  During 2005 the
Bank amended the Plan to cap the maximum amount of premium that it would pay per
qualified individual per month, and provided that new entrants after
September 30, 2006, would pay the entire premium.







F-24
 Table of Contents





MUTUAL
FEDERAL BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007


(Dollar
amounts in thousands)




NOTE
10 – INCOME TAXES




Income
tax expense was as follows:




2008
              
              
              2007FederalCurrent
              
              $
              152
              
              
              $
              323Deferred
              
              
              (562
              )
              
              
              (124
              )(410
              )
              
              
              199StateCurrent
              
              
              15
              
              
              
              45Deferred
              
              
              (127
              )
              
              
              (25
              )(112
              )
              
              
              20$
              (522
              )
              
              $
              219





Effective
tax rates differ from the federal statutory rate of 34% applied to income before
income taxes due to the following:




2008
              
              
              2007Provision
      calculated at statutory federal rate
              
              $
              (485
              )
              
              $
              175Effect
      of:State
      taxes, net of federal benefit
              
              
              (74
              )
              
              
              13Stock
      based compensation
              
              
              36
              
              
              
              25Other,
      net
              
              
              1
              
              
              
              6Total
              
              $
              (522
              )
              
              $
              219Effective
      tax rate
              
              
              36.6
              %
              
              
              42.6
              %





Year-end
deferred tax assets and liabilities were due to the following:




2008
              
              
              2007Deferred
      tax assets:Allowance
      for loan losses
              
              $
              500
              
              
              $
              111Deferred
      compensation
              
              
              141
              
              
              
              150Accrued
      post retirement benefit
              
              
              21
              
              
              
              25Stock
      based compensation
              
              
              81
              
              
              
              67Change
      in fair value of trading securities
              
              
              153
              
              
              
              -Impairment
      of securities
              
              
              202
              
              
              
              591,098
              
              
              
              412Deferred
      tax liabilities:Federal
      Home Loan Bank stock dividends
              
              
              (61
              )
              
              
              (61
              )Depreciation
              
              
              (3
              )
              
              
              (8
              )Net
      unrealized gain on securities available-for-sale
              
              
              (92
              )
              
              
              (141
              )Other
              
              
              (5
              )
              
              
              (3
              )(161
              )
              
              
              (213
              )Net
      deferred tax asset
              
              $
              937
              
              
              $
              199






F-25
 Table of Contents




MUTUAL
FEDERAL BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007


(Dollar
amounts in thousands)




NOTE
10 – INCOME TAXES (Continued)




Federal
income tax laws provided additional bad debt deductions through 1987, totaling
$2,552.  Accounting standards do not require a deferred tax liability
to be recorded on this amount, which otherwise would total $991 at year end
2008.  If the Bank were liquidated or otherwise ceases to be a bank or
if tax laws were to change, this liability of $991 would be expensed and
paid.  Management has not recorded a valuation allowance based on
taxes paid in prior years.




NOTE
11 – LOAN COMMITMENTS AND OTHER RELATED ACTIVITIES




Some
financial instruments, such as loan commitments, are issued to meet customer
financing needs.  These are agreements to provide credit or to support
the credit of others, as long as conditions established in the contract are met,
and usually have expiration dates.  Commitments may expire without
being used.  Off-balance-sheet risk to credit loss exists up to the
face amount of these instruments, although material losses are not
anticipated.  The same credit policies are used to make such
commitments as are used for loans, including obtaining collateral at exercise of
the commitment.




The
Company had no fixed rate loan commitments at December 31, 2008.  The
contractual amount of fixed rate loan commitments at December 31, 2007 was
$205.  Commitments to make loans are generally made for periods of 60
days or less.




NOTE
12 – CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS




The Bank
is subject to regulatory capital requirements administered by federal banking
agencies.  Capital adequacy guidelines and prompt corrective action
regulations involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items calculated under regulatory accounting
practices.  Capital amounts and classifications are also subject to
qualitative judgments by regulators.  Failure to meet capital
requirements can initiate regulatory action.




Prompt
corrective action regulations provide five classifications:  well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition.  If adequately
capitalized, regulatory approval is required to accept brokered
deposits.  If undercapitalized, capital distributions are limited, as
is asset growth and expansion, and capital restoration plans are
required.  At year-end 2008 and 2007, the most recent regulatory
notifications categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action.




There are
no conditions or events since that notification that management believes have
changed the Bank’s category.  Actual and required capital amounts and
ratios are presented below:







F-26
 Table of Contents





MUTUAL
FEDERAL BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007


(Dollar
amounts in thousands)




NOTE
12 – CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS
(Continued)




Actual
              
              
              For
      Capital
                  Adequacy
      Purposes
              
              
              To
      Be Well
                  Capitalized
      Under
                  Prompt
      Corrective
                  Action
      ProvisionsAmount
              
              
              Ratio
              
              
              Amount
              
              
              Ratio
              
              
              Amount
              
              
              RatioDecember
      31, 2008Total
      capital to risk-weighted assets
              
              $
              22,862
              
              
              
              51.42
              %
              
              $
              3,557
              
              
              
              8.00
              %
              
              $
              4,447
              
              
              
              10.00
              %Tier
      1 (core) capital to risk-weighted assets
              
              
              22,425
              
              
              
              50.43
              
              
              
              1,779
              
              
              
              4.00
              
              
              
              2,668
              
              
              
              6.00Tier
      1 (core) capital toadjusted total assets
              
              
              22,425
              
              
              
              31.72
              
              
              
              2,828
              
              
              
              4.00
              
              
              
              3,535
              
              
              
              5.00Tangible
      capital (to adjusted total assets)
              
              
              22,425
              
              
              
              31.72
              
              
              
              1,060
              
              
              
              1.50
              
              
              
              —
              
              
              
              —December
      31, 2007Total
      capital to risk-weighted
      assets
              
              $
              24,318
              
              
              
              59.14
              %
              
              $
              3,290
              
              
              
              8.00
              %
              
              $
              4,112
              
              
              
              10.00
              %Tier
      1 (core) capital to risk-weighted assets
              
              
              23,909
              
              
              
              58.14
              
              
              
              1,645
              
              
              
              4.00
              
              
              
              2,467
              
              
              
              6.00Tier
      1 (core) capital toadjusted
      total assets
              
              
              23,909
              
              
              
              32.85
              
              
              
              2,911
              
              
              
              4.00
              
              
              
              3,639
              
              
              
              5.00Tangible
      capital (to adjusted total assets)
              
              
              23,909
              
              
              
              32.85
              
              
              
              1,092
              
              
              
              1.50
              
              
              
              —
              
              
              
              —





The
following is a reconciliation of the Bank’s equity under accounting principles
generally accepted in the United States of America (“GAAP”) to regulatory
capital.




2008
              
              
              2007GAAP
      equity
              
              $
              22,571
              
              
              $
              24,131Unrealized
      gain on securities available-for-sale
              
              
              (146
              )
              
              
              (222
              )Tier
      1 capital
              
              
              22,425
              
              
              
              23,909General
      allowance for loan losses
              
              
              437
              
              
              
              290Allowable
      portion (45%) of unrealized gains on equity securities
      available-for-sale
              
              
              —
              
              
              
              119Total
      regulatory capital
              
              $
              22,862
              
              
              $
              24,318





Federal
regulations require the Bank to comply with a Qualified Thrift Lender (“QTL”)
test, which requires that 65% of assets be maintained in housing-related finance
and other specified assets.  If the QTL test is not met, limits are
placed on growth, branching, new investment, FHLB advances, and dividends or the
institution must convert to a commercial bank charter.  Management
considers the QTL test to have been met.







F-27
 Table of Contents





MUTUAL
FEDERAL BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007


(Dollar
amounts in thousands)




NOTE
12 – CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS
(Continued)




Banking
regulations limit the amount of dividends that may be paid without prior
approval of regulatory agencies.  Under these regulations, the amount
of dividends that may be paid in any calendar year is limited to the current
year’s net profits, combined with the retained net profits of the preceding two
years, subject to the capital requirements described above.  During
the year ended December 31, 2008, the Bank paid a $1.0 million dividend to the
Company.  At January 1, 2009, the Bank could not pay a dividend
without prior regulatory approval.




NOTE
13 – OTHER COMPREHENSIVE INCOME




Other
comprehensive income (loss) components and related tax effects were as
follows:




2008
              
              
              2007Unrealized
      holding gains on securities available-for-sale
              
              $
              104
              
              
              $
              297Reclassification
      adjustment for gains (losses) realized in income
              
              
              (228
              )
              
              
              (152
              )Net
      unrealized gains (losses)
              
              
              (124
              )
              
              
              145Tax
      effect
              
              
              48
              
              
              
              (56
              )Other
      comprehensive income (loss)
              
              $
              (76
              )
              
              $
              89





NOTE
14 – PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION




Condensed
financial information for the parent company only, Mutual Federal Bancorp, Inc.,
follows:




CONDENSED
BALANCE SHEETS


December
31, 2008 and 2007




2008
              
              
              2007ASSETSCash
      and cash equivalents
              
              $
              1,494
              
              
              $
              1,838Investment
      in banking subsidiary
              
              
              22,571
              
              
              
              24,131ESOP
      note receivable
              
              
              753
              
              
              
              796Other
      assets
              
              
              337
              
              
              
              256Total
      assets
              
              $
              25,155
              
              
              $
              27,021LIABILITIES
      AND EQUITYAccrued
      expenses and other liabilities
              
              $
              246
              
              
              $
              2Common
      stock in ESOP subject to contingent repurchase obligation
              
              
              138
              
              
              
              108Stockholders’
      equity
              
              
              24,771
              
              
              
              26,911Total
      liabilities and stockholders’ equity
              
              $
              25,155
              
              
              $
              27,021








F-28
 Table of Contents





MUTUAL
FEDERAL BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007


(Dollar
amounts in thousands)




NOTE
14 – PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
(Continued)




CONDENSED
STATEMENTS OF INCOME (LOSS)


For the
years ended December 31, 2008 and 2007




2008
              
              
              2007Interest
      income
              
              $
              79
              
              
              $
              97Dividend
      income
              
              
              1,000
              
              
              
              —Other
      expense
              
              
              (292
              )
              
              
              (360
              )Income
      (loss) before income tax and undistributed subsidiary income (excess
      distribution)
              
              
              787
              
              
              
              (263
              )Income
      tax benefit
              
              
              74
              
              
              
              95Equity
      in undistributed subsidiary income (excess distribution)
              
              
              (1,767
              )
              
              
              463Net
      income (loss)
              
              $
              (906
              )
              
              $
              295







CONDENSED
STATEMENTS OF CASH FLOWS


For the
years ended December 31, 2008 and 2007




2008
              
              
              2007Cash
      flows from operating activitiesNet
      income (loss)
              
              $
              (906
              )
              
              $
              295Adjustments:Equity
      in undistributed subsidiary loss (income)
              
              
              767
              
              
              
              (463
              )Stock
      based compensation
              
              
              56
              
              
              
              49Change
      in other assets
              
              
              (81
              )
              
              
              (184
              )Change
      in other liabilities
              
              
              244
              
              
              
              (6
              )Net
      cash from (used in) operating activities
              
              
              80
              
              
              
              (309
              )Cash
      flows from investing activitiesDividend
      payment received
              
              
              1,000
              
              
              
              —ESOP
      loan payments received
              
              
              43
              
              
              
              44Net
      cash from investing activities
              
              
              1,043
              
              
              
              44Cash
      flows from financing activitiesDividends
      paid
              
              
              (170
              )
              
              
              —Purchase
      of treasury stock
              
              
              (1,297
              )
              
              
              (1,985
              )Net
      cash from financing activities
              
              
              (1,467
              )
              
              
              (1,985
              )Net
      change in cash and cash equivalents
              
              
              (344
              )
              
              
              (2,250
              )Beginning
      cash and cash equivalents
              
              
              1,838
              
              
              
              4,088Ending
      cash and cash equivalents
              
              $
              1,494
              
              
              $
              1,838








F-29
 Table of Contents





MUTUAL
FEDERAL BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007


(Dollar
amounts in thousands)




NOTE
15 – EARNINGS (LOSS) PER SHARE




Basic
earnings (loss) per share are computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period.  Diluted earnings (loss) per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the Company.  Basic
and fully diluted weighted average shares outstanding for the year ended
December 31, 2008, are 3,417,701.  During the year ended December 31,
2008, the average fair value of the Company’s common stock was less than $14.29
and the stock option and stock grant awards had no dilutive effect on earnings
per share.




The
factors used in the earnings (loss) per share computation for the years ended
December 31, 2008, and 2007 follow:




2008
              
              
              2007BasicNet
      income (loss)
              
              $
              (906
              )
              
              $
              295Weighted
      average common shares outstanding
              
              
              3,491,633
              
              
              
              3,615,622Less:
      average unallocated ESOP shares
              
              
              (73,932
              )
              
              
              (79,784
              )Average
      shares
              
              
              3,417,701
              
              
              
              3,535,838Basic
      earnings (loss) per common share
              
              $
              (0.27
              )
              
              $
              0.08DilutedNet
      Income (loss)
              
              $
              (906
              )
              
              $
              295Weighted
      average common shares outstanding for basic earnings per common
      share
              
              
              3,417,701
              
              
              
              3,535,838Add:
      dilutive effects of assumed exercises of stock options and stock
      awards
              
              
              —
              
              
              
              —Average
      shares and dilutive potential common shares
              
              
              3,417,701
              
              
              
              3,535,838Diluted
      earnings (loss) per common share
              
              $
              (0.27
              )
              
              $
              0.08








F-30
 Table of Contents





Signatures




Pursuant
to the requirements of Section 13 or 15(d) 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 on the 27th day of
March, 2009.




MUTUAL
      FEDERAL BANCORP, INC.By:
              /s/ Stephen
      M. OksasStephen
      M. OksasPresident
      and Chief Executive Officer




KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby
constitutes and appoints Stephen M. Oksas, John L. Garlanger and
Julie H. Oksas, and each of them, the true and lawful attorney-in-fact and
agents of the undersigned, with full power of substitution and resubstitution,
for and in the name, place and stead of the undersigned, to sign any and all
amendments to this Annual Report on Form 10-K, and to file the same, with
all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, and hereby grants to such attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done, as fully as to all
intents and purposes as each of the undersigned might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
any of them, or their or his substitutes, may lawfully do or cause to be done by
virtue hereof.




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.




Name
            Title
            Date/s/ Stephen M.
      Oksas
              Stephen M.
      Oksas
            Chairman,
      President, Chief Executive Officer and Director
              (Principal
      Executive Officer)
            March 27,
      2009/s/ John L.
      Garlanger
              John
      L. Garlanger
            Executive
      Vice President and Chief Financial Officer
              (Principal
      Financial and Accounting Officer)
            March 27,
      2009/s/
      Stanley
      Balzekas III
              Stanley
      Balzekas III
            Director
            March 27,
      2009/s/ Robert P.
      Kazan
              Robert P.
      Kazan
            Director
            March 27,
      2009/s/ Leonard F.
      Kosacz
              Leonard F.
      Kosacz
            Director
            March 27,
      2009/s/ Julie H.
      Oksas
              Julie H.
      Oksas
            Executive
      Vice President and Director
            March 27,
      2009








S-1
 Table of Contents








/s/ Stephanie
      Simonaitis
                  Stephanie
      Simonaitis
                Director
                March 27,
      2009/s/ Amy P. Keane
                  Amy
      P. Keane
                Director
                March 27,
      2009








S-2
 Table of Contents





EXHIBIT INDEX




Exhibit No.
            Description
      of Exhibit3.1
            Charter
      of Mutual Federal Bancorp, Inc. (incorporated by reference to
      Exhibit 3.1 to Registrant’s Form SB-2 filed with the Commission
      on November 18, 2005).3.2
            Bylaws
      of Mutual Federal Bancorp, Inc., as amended (incorporated by reference to
      Exhibit 3.1 to Registrant’s Form 10-QSB filed with the
      Commission on August 13, 2008).4.1
            Specimen
      Common Stock Certificate of Mutual Federal Bancorp, Inc. (incorporated by
      reference to Exhibit 4.1 to Registrant’s Form SB-2 filed with
      the Commission on November 18, 2005).10.1
            Form
      of Employee Stock Ownership Plan (incorporated by reference to
      Exhibit 10.1 to Registrant’s Amendment No. 1 to Form SB-2
      filed with the Commission on February 4, 2006).10.2
            Executive
      Employment Agreement dated as of April 4, 2006 among Mutual Federal
      Bancorp, Inc., Mutual Federal Savings and Loan Association of Chicago and
      Stephen M. Oksas (incorporated by reference to Exhibit 10.1 to the
      Company’s Form 10-QSB for the quarterly period ended March 31, 2006 filed
      with the Commission on May 8, 2006).*10.3
            Executive
      Employment Agreement dated as of April 4, 2006 among Mutual Federal
      Bancorp, Inc., Mutual Federal Savings and Loan Association of Chicago and
      Julie H. Oksas (incorporated by reference to Exhibit 10.2 to the Company’s
      Form 10-QSB for the quarterly period ended March 31, 2006 filed with the
      Commission on May 8, 2006).*10.4
            Executive
      Employment Agreement dated as of April 4, 2006 among Mutual Federal
      Bancorp, Inc., Mutual Federal Savings and Loan Association of Chicago and
      John L. Garlanger (incorporated by reference to Exhibit 10.3 to the
      Company’s Form 10-QSB for the quarterly period ended March 31, 2006 filed
      with the Commission on May 8, 2006).*10.5
            ESOP
      Loan Agreement dated as of April 4, 2006 between Mutual Federal Bancorp,
      Inc. and First Bankers Trust Services, Inc., as trustee of the Mutual
      Federal Bancorp, Inc. Employee Stock Ownership Trust (incorporated by
      reference to Exhibit 10.4 to the Company’s Form 10-QSB for the quarterly
      period ended March 31, 2006 filed with the Commission on May 8,
      2006).10.6
            Mutual
      Federal Bancorp, Inc. 2006 Stock Option Plan (incorporated by reference to
      Appendix A to the Company’s proxy statement for its Special Meeting of
      Stockholders held on November 29, 2006 filed with the Commission on
      October 16, 2006).*10.7
            Mutual
      Federal Bancorp, Inc. 2006 Recognition and Retention Plan as amended and
      restated effective January 1, 2007 (incorporated by reference to
      Exhibit 10.1 to the Company’s Form 10-QSB for the quarterly
      period ended March 31, 2008 filed with the Commission on May 14,
      2008).*14.1
            Code
      of Ethics (incorporated by reference to Exhibit 14.1 to the Company’s
      Form 10-KSB for the year ended December 31, 2006 filed with the
      Commission on March 29, 2007).21.1
            Subsidiaries
      of the Company23.1
            Consent
      of Crowe Horwath LLP












24.1
                  Power
      of Attorney (set forth on signature page)31.1
                  Certification
      of Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2
                  Certification
      of Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.1
                  Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to
      Section 906 of the Sarbanes-Oxley Act of
  2002








2