SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549


__________




FORM
10-KSB




ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)


OF
THE SECURITIES EXCHANGE ACT OF 1934




For
the fiscal year ended December 31, 2007




Commission
File Number 000-51876




MUTUAL
FEDERAL BANCORP, INC.


(Exact
name of small business issuer 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


(Issuer’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




Check
whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act.   ̈




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




Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. 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
registrant’s revenues for its most recent fiscal year were
$4,254,000.




As of
March 19, 2008, the aggregate market value of the voting common equity held
by non-affiliates of the registrant was approximately $8,649,506,
based on the last reported trade price of $11.35
on March 19, 2008 on the OTC Bulletin Board.




There
were 3,528,179 shares of common stock of the registrant outstanding as of
March 19, 2008.




Documents
Incorporated by Reference:  Portions of the registrant’s definitive
proxy statement for its 2008 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 9-12 and Item 14.




Transitional
Small Business Disclosure Format (check one):  Yes  ̈   No
ý











MUTUAL
FEDERAL BANCORP, INC.




Form
10-KSB for Fiscal Year Ended




December 31,
2007




table of contents




Page









Part I
              1Item 1. Description of
    Business
              1Item 2. Description of Property
              24Item 3. Legal
Proceedings
              24Item 4. Submission of Matters to a Vote of
      Security Holders
              24Part II
              24Item 5. Market for Common Equity and Related
      Stockholder Matters
              24Item 6. Management’s Discussion and Analysis or
      Plan of Operation
              25Item 7. Financial Statements
              38Item 8. Changes in and Disagreements with
      Accountants on Accounting and Financial Disclosure
              38Item 8a. Controls and
Procedures
              38Item 8b. Other
    Information
              38Part III
              39Item 9. Directors, Executive Officers, Promoters,
      Control Persons and Corporate Governance; Compliance with
      Section 16(a) of the Exchange Act
              39Item 10. Executive
Compensation
              39Item 11. Security Ownership of Certain Beneficial
      Owners and Management and Related Stockholder Matters
              39Item 12. Certain Relationships and
      Related Transactions, and Director Independence
              40Item 13. Exhibits
              40Item 14. Principal Accountant Fees and
      Services
              40Mutual Federal Bancorp, Inc. Consolidated
      Financial Statements December 31, 2007 and 2006
              F-1Signatures
              S-1Exhibit Index






i




PART I




ITEM
1.                      DESCRIPTION
OF 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 subsidiary, EMEFES Service Corporation, as “the Bank”).  The
Board of Directors of Mutual Federal Bancorp, MHC (“MHC”), the former sole
stockholder of the Bank, adopted a Stock Issuance Plan pursuant to which
(i) MHC established the Company as a direct subsidiary holding company to
hold 100% of the stock of the Bank, and (ii) the Company offered and sold
shares of its common stock in a public offering representing 30% of its shares
outstanding after the offering.    The offering closed on
April 4, 2006.  A total of 1,091,062 shares (30%) were sold and
2,545,813 shares (70%) were retained by MHC.




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 gradually introduce additional
products and services, such as adjustable-rate mortgage loans, home equity lines
of credit, interest-bearing checking accounts, money market deposit accounts,
and on-line banking and bill payment.  There can be no assurances 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, 2007, $34.2 million, or 63.9%, of our total loan portfolio
consisted of fixed-rate one- to four-family residential mortgage
loans.  During the year ended December 31, 2007, we originated
$4.5 million of one- to four-family residential mortgage
loans.  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.  As of December 31, 2007, $19.2 million, or
35.9%, of our total loan portfolio consisted of multi-family residential
mortgage loans.  During the year ended December 31, 2007, we
originated $2.7 million of multi-family residential mortgage
loans.






1
 Table of Contents




·  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.  The capital raised in our stock offering will enable us to
identify and pursue potential acquisitions or, should suitable acquisition
opportunities not emerge, undertake de novo
branching.  Completing an acquisition or opening a new branch will
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 been able
to grow our business consistently over time.  While our business plan
provides for us to seek to grow by pursuing acquisition opportunities as well as
establishing 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.




·  Expanding and diversifying our
lending portfolio.  While fixed-rate residential loans will
continue to constitute a significant portion of our total loan portfolio, we
intend to expand our loan origination capabilities to include adjustable-rate
residential loans and home equity loans or lines of credit to our
customers.  We also intend to continue offering loans secured by
multi-family properties using our personalized service to attract larger
property owners.




·  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
interest-bearing checking accounts, money market deposit accounts, and on-line
banking and bill payment.  We expect to be able to begin offering
these new products and services beginning in 2008.  We believe that
these new products will increase our deposit base and our fee
income.




·  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.  Our non-performing
assets at December 31, 2007 and December 31, 2006 were $259,000 and
$443,000, respectively, or 0.35% and 0.59% of total assets.




·  Maintaining high levels of interest
earning assets.  We intend to maintain our high level of
interest earning assets.  At December 31, 2007, our interest
earning assets were 96.7% of total assets and our average interest earning
assets for 2007 were 162.9% of average interest-bearing
liabilities.  These ratios reflect our low level of fixed assets (as
we operate from only one banking office) and non-accruing loans, strong capital
position and the absence of real estate owned and goodwill on our balance
sheet.




·  Increasing our real estate lending
capacity.  The additional capital raised in the stock offering
increased our lending capacity by enabling us to originate more loans and loans
with larger balances.  This permitted us to serve borrowers with
larger lending needs and to originate larger loans than we have in the
past.




·  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






2
 Table of Contents




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, 2007, based on the FDIC’s annual Summary
of Deposits Report, our market share of deposits represented 7.67% 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.  At
December 31, 2007, 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 $34.2 million, or
63.9%, of our loan portfolio at December 31, 2007.  We also offer
multifamily real estate loans.  Multifamily real estate loans
represented $19.2 million, or 35.9% of our loan portfolio at December 31,
2007.  We also have a small number of loans secured by deposit
accounts as an accommodation to customers.




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.






3
 Table of Contents




At
      December 31,2007
            
            
            2006
            
            
            2005Amount
            
            
            Percent
            
            
            Amount
            
            
            Percent
            
            
            Amount
            
            
            Percent(dollars
      in thousands)One-
      to four-family residential mortgage
            
            $
            34,163
            
            
            
            63.90
            %
            
            $
            33,270
            
            
            
            63.62
            %
            
            $
            24,424
            
            
            
            63.70
            %Multi-family
            
            
            19,217
            
            
            
            35.94
            
            
            
            18,965
            
            
            
            36.27
            
            
            
            13,839
            
            
            
            36.10Total
      mortgage loans
            
            
            53,380
            
            
            
            99.84
            
            
            
            52,235
            
            
            
            99.89
            
            
            
            38,263
            
            
            
            99.80Consumer
      loans
            
            
            88
            
            
            
            0.16
            
            
            
            59
            
            
            
            .11
            
            
            
            77
            
            
            
            0.20Total
      loans
            
            
            53,468
            
            
            
            100.00
            %
            
            
            52,294
            
            
            
            100.00
            %
            
            
            38,340
            
            
            
            100.00
            %Less:Deferred
      loan origination fees, net
            
            
            122
            
            
            
            
            
            
            
            121
            
            
            
            
            
            
            
            89Undisbursed
      portion of loans
            
            
            9
            
            
            
            
            
            
            
            9
            
            
            
            
            
            
            
            51Allowance
      for loan losses
            
            
            290
            
            
            
            
            
            
            
            240
            
            
            
            
            
            
            
            170Total
      loans, net
            
            $
            53,047
            
            
            
            
            
            
            $
            51,924
            
            
            
            
            
            
            $
            38,030





Loan Portfolio
Maturities and Yields.  The following table summarizes the
remaining contractual maturity of our loans at December 31,
2007.  The table does not include the effect of possible
prepayments.  We had no adjustable-rate loans at December 31,
2007.




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, 2008
            
            $
            9
            
            
            
            6.41
            %
            
            $
            4
            
            
            
            11.50
            %
            
            $
            88
            
            
            
            3.97
            %
            
            $
            101
            
            
            
            4.49
            %2009
      to 2010
            
            
            50
            
            
            
            7.08
            
            
            
            58
            
            
            
            6.15
            
            
            
            —
            
            
            
            —
            
            
            
            108
            
            
            
            6.582011
      to 2012
            
            
            255
            
            
            
            6.65
            
            
            
            573
            
            
            
            6.97
            
            
            
            —
            
            
            
            —
            
            
            
            828
            
            
            
            6.872013
      to 2017
            
            
            3,229
            
            
            
            6.44
            
            
            
            1,633
            
            
            
            6.73
            
            
            
            —
            
            
            
            —
            
            
            
            4,862
            
            
            
            6.542018
      to 2027
            
            
            14,357
            
            
            
            6.13
            
            
            
            14,724
            
            
            
            6.68
            
            
            
            —
            
            
            
            —
            
            
            
            29,081
            
            
            
            6.412028
      and beyond
            
            
            16,263
            
            
            
            6.41
            
            
            
            2,225
            
            
            
            6.81
            
            
            
            —
            
            
            
            —
            
            
            
            18,488
            
            
            
            6.46Total
            
            $
            34,163
            
            
            
            6.30
            %
            
            $
            19,217
            
            
            
            6.70
            %
            
            $
            88
            
            
            
            3.97
            %
            
            $
            53,468
            
            
            
            6.44
            %





The
following table sets forth the remaining contractual maturity of fixed-rate
loans at December 31, 2007 that are contractually due after
December 31, 2008.  We had no adjustable-rate loans at
December 31, 2007.




Due
      After December 31, 2008Fixed
            
            
            Total(dollars
      in thousands)One-
      to four-family residential mortgage loans
            
            $
            34,154
            
            
            $
            34,154Multi-family
            
            
            19,213
            
            
            
            19,213Total
      mortgage loans
            
            
            53,367
            
            
            
            53,367Total
      loans
            
            $
            53,367
            
            
            $
            53,367





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 located in Cook County.  At
December 31, 2007, $34.2 million, or 63.9% of our loan portfolio, consisted
of one- to four-family residential mortgage loans.  Included within
these one- to four-family loans were $1.4 million in second mortgage loans at
December 31, 2007.  At December 31, 2007, we had 313 one-to
four-family loans with an average balance of $109,000.  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 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, 2007, our largest loan secured by






4
 Table of Contents




one- to
four-family real estate had a principal balance of $939,000.  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 $19.2 million, or 35.9%, of our total loan portfolio at
December 31, 2007.  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, 2007, we had 103 multi-family real estate loans with an
average principal balance of $187,000, 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 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






5
 Table of Contents




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 $88,000,
or 0.2%, of our total loan portfolio at December 31, 2007.




Origination and
Servicing of Loans.  Loan origination activities are primarily
concentrated in 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 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.




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).






6
 Table of Contents




At
      December 31,2007
            
            
            2006
            
            
            2005(dollars
      in thousands)Non-accrual
      loans:One-
      to four-family
            
            $
            259
            
            
            $
            226
            
            
            $
            184Multi-family
            
            
            —
            
            
            
            217
            
            
            
            —Consumer
            
            
            —
            
            
            
            —
            
            
            
            —Total
      non-accrual loans
            
            
            259
            
            
            
            443
            
            
            
            184Accruing
      loans delinquent 90 days or more:One-
      to four-family
            
            
            —
            
            
            
            —
            
            
            
            —Multi-family
            
            
            —
            
            
            
            —
            
            
            
            —Consumer
            
            
            —
            
            
            
            —
            
            
            
            —Total
      non-performing loans
            
            
            259
            
            
            
            443
            
            
            
            184Real
      estate owned:Total
      real estate owned
            
            
            —
            
            
            
            —
            
            
            
            —Total
      non-performing assets
            
            $
            259
            
            
            $
            443
            
            
            $
            184Allowance
      for loan losses attributable to non-performing loans
            
            
            —
            
            
            
            —
            
            
            
            —Ratios:Non-performing
      loans to total loans
            
            
            0.48
            %
            
            
            0.85
            %
            
            
            0.48
            %Non-performing
      assets to total assets
            
            
            0.35
            
            
            
            0.59
            
            
            
            0.29





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, 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
            
            
            $
            828At
      December 31, 2005One-
      to four-family
            
            
            4
            
            
            $
            301
            
            
            
            2
            
            
            $
            184
            
            
            
            6
            
            
            $
            485Multi-family
            
            
            1
            
            
            
            217
            
            
            
            —
            
            
            
            —
            
            
            
            1
            
            
            
            217Consumer
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Total
            
            
            5
            
            
            $
            518
            
            
            
            2
            
            
            $
            184
            
            
            
            7
            
            
            $
            702





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 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, 2007, we held no real estate
owned.






7
 Table of Contents




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 inherent
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, 2007, $259,000 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 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 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.






8
 Table of Contents


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.  Payments received on impaired loans are
applied first to accrued interest receivable and then to
principal.  The allowance for loan losses as of December 31, 2007
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 31,2007
            
            
            2006
            
            
            2005(dollars
      in thousands)Balance
      at beginning of year
            
            $
            240
            
            
            $
            170
            
            
            $
            150Charge-offs:One-
      to four-family
            
            
            —
            
            
            
            —
            
            
            
            —Multi-family
            
            
            —
            
            
            
            —
            
            
            
            —Consumer
            
            
            —
            
            
            
            —
            
            
            
            —Total
      charge-offs
            
            
            —
            
            
            
            —
            
            
            
            —Recoveries:One-
      to four-family
            
            
            —
            
            
            
            —
            
            
            
            —Multi-family
            
            
            —
            
            
            
            —
            
            
            
            —Consumer
            
            
            —
            
            
            
            —
            
            
            
            —Total
      recoveries
            
            
            —
            
            
            
            —
            
            
            
            —Net
      (charge-offs) recoveries
            
            
            —
            
            
            
            —
            
            
            
            —Provision
      for loan losses
            
            
            50
            
            
            
            70
            
            
            
            20Balance
      at end of year
            
            $
            290
            
            
            $
            240
            
            
            $
            170Ratios:Net
      charge-offs to average loans outstanding
            
            
            —
            
            
            
            —
            
            
            
            —Allowance
      for loan losses to non-performing loans
            
            
            1.12
            
            
            
            0.54
            
            
            
            0.92Allowance
      for loan losses to total loans
            
            
            0.54
            %
            
            
            0.46
            %
            
            
            0.44
            %





The Bank
has not charged-off a loan since 1996, when it charged-off a loan with an
outstanding principal amount of $19,000.  Our non-performing loans
decreased to $259,000 at December 31, 2007, from $443,000 at
December 31, 2006.  However, loans delinquent for 60-89 days
increased to $2.6 million at December 31, 2007, from $385,000 at
December 31, 2006.




During
2007 the Bank’s loan portfolio increased $1.1 million, or 2.2%, to $53.0 million
at December 31, 2007, from $51.9 million at December 31,
2006.  Based on the application of our allowance for loan losses
methodology, as discussed previously, management determined that a provision of
$50,000 for loan losses was necessary for the year ended December 31,
2007.  During 2006, using the same methodology, management determined
that a $70,000 provision for loan losses was necessary for the year ended
December 31, 2006.




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






9
 Table of Contents




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 31,2007
                
                
                2006Allowance
                    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
                
                $
                100
                
                
                $
                34,163
                
                
                
                63.90
                %
                
                $
                83
                
                
                $
                33,270
                
                
                
                63.62
                %Multi-family
                
                
                190
                
                
                
                19,217
                
                
                
                35.94
                
                
                
                157
                
                
                
                18,965
                
                
                
                36.27Consumer
                
                
                —
                
                
                
                88
                
                
                
                0.16
                
                
                
                —
                
                
                
                59
                
                
                
                0.11Total
      allowance
                
                $
                290
                
                
                $
                53,468
                
                
                
                100.00
                %
                
                $
                240
                
                
                $
                52,294
                
                
                
                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
inherent 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 this analysis.  All loans
for which a specific loss allowance has not been assigned 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, 2007, included $5.6 million in U.S. agency and
government-sponsored entity bonds which are all classified as
available-for-sale.  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, 2007, our mortgage-backed
securities portfolio totaled $7.6 million, or 10.5% of total
assets.  The portfolio consisted of $4.8 million in fixed-rate
mortgage-backed securities, and $2.9 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.






10
 Table of Contents


Our
equity investments consist of 8,000 shares of FHLMC common stock and 10,000
shares of FHLMC preferred stock, as well as shares of several mutual funds which
are invested in U.S. government and agency obligations and mortgage-backed
securities guaranteed by FHLMC, FNMA or GNMA.




We
initially acquired 1,263 shares of FHLMC Participating Preferred Stock, with a
cost basis of $59,361 ($47.00 per share), in 1984 as a dividend distribution
from the Federal Home Loan Bank of Chicago.  Subsequent stock splits
and conversions of the stock in 1988 to Senior Participating Preferred, and in
1992 to voting common stock, increased this investment to a total of 60,624
shares of common stock (with a split adjusted basis of $0.98 per
share).  We have consistently monitored the performance of the stock
and related market conditions, and have periodically sold shares since
1998.  During 2007 the market price of the common stock dropped as a
result of the turmoil in the secondary mortgage market.  During the
fourth quarter of 2007, FHLMC also announced  a 50% reduction in the
quarterly common stock dividend.   While we do not currently plan
to sell the FHLMC common stock, depending on liquidity requirements or market
conditions relating to the stock, we may decide that further sales are
prudent.




We
acquired 10,000 shares of FHLMC preferred stock in 1999 at a cost basis of
$500,000. The preferred stock pays a non-cumulative preferred dividend of
5.79%.  It is callable in June 2009.  The market price
of the preferred stock also fell during 2007, again due to the turmoil in the
secondary mortgage market.  At December 31, 2007, the Company reduced
its cost basis in the preferred stock to the market price, with a $98,000
pre-tax charge to earnings, because it was unable to forecast a recovery in
value in the foreseeable future. While we do not currently plan to sell the
FHLMC preferred stock, depending on liquidity requirements or market conditions
relating to the stock, we may decide that a sale of some or all of the stock is
prudent.




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 funds are invested in U.S. government and agency
obligations and mortgage-backed securities guaranteed by FHLMC, FNMA or
GNMA.  The funds are historically stable or, as rates decline, the
funds recover their value (that is, the degree of impairment reverses) through
increases in their net asset value.  At December 31, 2007, the Company
reduced its cost basis to the funds’ net asset value with a $54,000 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.  While we do not
currently plan to sell the funds, depending on liquidity requirements, or market
conditions relating to the funds, we may decide that a sale of some or all of
the funds is prudent.






11
 Table of Contents


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




At
      December 31,2007
            
            
            2006
            
            
            2005Amortized
      Cost
            
            
            Fair
      Value
            
            
            Amortized
      Cost
            
            
            Fair
      Value
            
            
            Amortized
      Cost
            
            
            Fair
      Value(in
      thousands)Investment
      Securities:U.S.
      agency and government-sponsored entity bonds
            
            $
            5,496
            
            
            $
            5,605
            
            
            $
            6,695
            
            
            $
            6,654
            
            
            $
            8,694
            
            
            $
            8,584Mutual
      funds
            
            
            2,423
            
            
            
            2,423
            
            
            
            2,357
            
            
            
            2,293
            
            
            
            2,250
            
            
            
            2,195FHLMC
      common stock
            
            
            8
            
            
            
            273
            
            
            
            8
            
            
            
            543
            
            
            
            8
            
            
            
            523FHLMC
      preferred stock
            
            
            402
            
            
            
            402
            
            
            
            500
            
            
            
            487
            
            
            
            500
            
            
            
            505Mortgage-backed
      Securities:GNMA
            
            
            1,049
            
            
            
            1,021
            
            
            
            1,555
            
            
            
            1,532
            
            
            
            2,162
            
            
            
            2,135FNMA
            
            
            3,596
            
            
            
            3,618
            
            
            
            4,582
            
            
            
            4,489
            
            
            
            5,757
            
            
            
            5,654FHLMC
            
            
            2,524
            
            
            
            2,531
            
            
            
            3,067
            
            
            
            3,000
            
            
            
            3,798
            
            
            
            3,721FNMA,
      FHLMC collateralized mortgage obligations
            
            
            486
            
            
            
            472
            
            
            
            578
            
            
            
            561
            
            
            
            722
            
            
            
            711Total
      securities available for sale
            
            $
            15,984
            
            
            $
            16,345
            
            
            $
            19,342
            
            
            $
            19,559
            
            
            $
            23,891
            
            
            $
            24,028





Portfolio
Maturities and Yields.  The composition and maturities of the
investment securities portfolio and the mortgage-backed securities portfolio at
December 31, 2007 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.  Mutual funds and FHLMC stock are not included because they do
not have contractual maturity dates.




One
      Year or Less
            
            
            More
      Than One Year Through Five Years
            
            
            More
      Than Five Years Through Ten YearsAmortized
      Cost
            
            
            Weighted
      AverageYield
            
            
            Amortized
      Cost
            
            
            Weighted
      Average Yield
            
            
            Amortized
      Cost
            
            
            Weighted
      AverageYield(dollars
      in thousands)Available-for-SaleInvestment
      Securities:U.S.
      agency and government-sponsored entity bonds
            
            $
            —
            
            
            
            —
            %
            
            $
            5,496
            
            
            
            5.04
            %
            
            $
            —
            
            
            
            —
            %Mortgage-backed
      Securities:GNMA
            
            
            1
            
            
            
            6.50
            
            
            
            11
            
            
            
            6.50
            
            
            
            52
            
            
            
            6.38FNMA
            
            
            25
            
            
            
            5.78
            
            
            
            367
            
            
            
            5.34
            
            
            
            1,500
            
            
            
            4.49FHLMC
            
            
            1
            
            
            
            9.41
            
            
            
            824
            
            
            
            4.80
            
            
            
            273
            
            
            
            4.96FNMA,
      FHLMC collateralized mortgage obligations
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Total
      securities available for sale
            
            $
            27
            
            
            
            5.92
            %
            
            $
            6,698
            
            
            
            5.03
            %
            
            $
            1,825
            
            
            
            4.61
            %






12
 Table of Contents




More
      Than Ten Years
            
            
            Total
      SecuritiesAmortized
      Cost
            
            
            Weighted
      AverageYield
            
            
            Amortized
      Cost
            
            
            Fair
      Value
            
            
            Weighted
      AverageYield(dollars
      in thousands)Available-for-SaleInvestment
      Securities:U.S.
      agency and government-sponsored entity bonds
            
            $
            —
            
            
            
            —
            %
            
            $
            5,496
            
            
            $
            5,605
            
            
            
            5.04
            %Mortgage-backed
      Securities:GNMA
            
            
            985
            
            
            
            5.31
            
            
            
            1,049
            
            
            
            1,021
            
            
            
            5.37FNMA
            
            
            1,704
            
            
            
            4.78
            
            
            
            3,596
            
            
            
            3,618
            
            
            
            4.72FHLMC
            
            
            1,426
            
            
            
            5.05
            
            
            
            2,524
            
            
            
            2,531
            
            
            
            4.96FNMA,
      FHLMC collateralized mortgage obligations
            
            
            486
            
            
            
            3.31
            
            
            
            486
            
            
            
            472
            
            
            
            3.31Total
      securities available for sale
            
            $
            4,601
            
            
            
            4.82
            %
            
            $
            13,151
            
            
            $
            13,247
            
            
            
            4.90
            %





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 be 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, 2007, $20.5 million, or 51.7% of our
deposit accounts were certificates of deposit, of which $18.3 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 31,2007
              
              
              2006
              
              
              2005Balance
              
              
              Percent
              
              
              WeightedAverage
      Rate
              
              
              Balance
              
              
              Percent
              
              
              WeightedAverageRate
              
              
              Balance
              
              
              Percent
              
              
              WeightedAverageRate(dollars
      in thousands)Savings
      deposits
              
              $
              18,854
              
              
              
              47.47
              %
              
              
              1.24
              %
              
              $
              20,334
              
              
              
              46.95
              %
              
              
              1.24
              %
              
              $
              21,827
              
              
              
              50.15
              %
              
              
              1.20
              %Certificates
      of deposit
              
              
              20,534
              
              
              
              51.70
              
              
              
              4.27
              
              
              
              22,246
              
              
              
              51.37
              
              
              
              4.16
              
              
              
              21,348
              
              
              
              49.05
              
              
              
              3.01Non-interest-bearing
      checking accounts
              
              
              331
              
              
              
              0.83
              
              
              
              —
              
              
              
              728
              
              
              
              1.68
              
              
              
              —
              
              
              
              350
              
              
              
              0.80
              
              
              
              —Total
      deposits
              
              $
              39,719
              
              
              
              100.00
              %
              
              
              2.80
              %
              
              $
              43,308
              
              
              
              100.00
              %
              
              
              2.72
              %
              
              $
              43,525
              
              
              
              100.00
              %
              
              
              2.08
              %





The
following table sets forth certificates of deposit by time remaining until
maturity as of December 31, 2007.




Maturity3
      Months or Less
            
            
            Over
      3 to6 Months
            
            
            Over
      6 to12 Months
            
            
            Over
      12Months
            
            
            Total(in
      thousands)Certificates
      of deposit less than $100,000
            
            $
            5,264
            
            
            $
            3,307
            
            
            $
            3,157
            
            
            $
            1,795
            
            
            $
            13,523Certificates
      of deposit of $100,000 or more(1)
            
            
            2,351
            
            
            
            3,224
            
            
            
            1,017
            
            
            
            419
            
            
            
            7,011Total
      of certificates of deposit
            
            $
            7,615
            
            
            $
            6,531
            
            
            $
            4,174
            
            
            $
            2,214
            
            
            $
            20,534


_____________


(1)
            The
      weighted average interest rates for these accounts, by maturity period,
      are:  4.04% for 3 months or less; 4.53% for 3 to 6 months; 4.22%
      for 6 to 12 months; and 4.82% for over 12 months.  The overall
      weighted average interest rate for accounts of $100,000 or more was
      4.34%.




The
following table sets forth, by interest rate range, information concerning
certificates of deposit as of December 31, 2007.




At
      December 31, 2007Period
      to MaturityLess
      ThanOne Year
            
            
            One
      toTwo Years
            
            
            Two
      toThree Years
            
            
            More
      Than
                Three
      Years
            
            
            Total
            
            
            Percent
      ofTotal(dollars
      in thousands)Interest
      Rate Range:3.00%
      to 3.49%
            
            $
            1,546
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            1,546
            
            
            
            7.53
            %3.50%
      to 3.99%
            
            
            4,775
            
            
            
            99
            
            
            
            98
            
            
            
            —
            
            
            
            4,972
            
            
            
            24.214.00%
      to 4.49%
            
            
            7,808
            
            
            
            768
            
            
            
            556
            
            
            
            149
            
            
            
            9,281
            
            
            
            45.204.50%
      to 4.99%
            
            
            2,314
            
            
            
            22
            
            
            
            51
            
            
            
            14
            
            
            
            2,401
            
            
            
            11.695.00%
      to 5.99%
            
            
            1,878
            
            
            
            82
            
            
            
            374
            
            
            
            —
            
            
            
            2,334
            
            
            
            11.37Total
            
            $
            18,321
            
            
            $
            971
            
            
            $
            1,079
            
            
            $
            163
            
            
            $
            20,534
            
            
            
            100.00
            %





Borrowings




The Bank
had $5.0 million in fixed-rate borrowings from the Federal Home Loan Bank at
December 31, 2007, with maturities from March 2008 through December 2009, and at
a weighted average interest rate of 4.74%.  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, 2007 and December 31, 2006:




Location
              Leased
      or Owned
              Year
      Acquired
              
              Net
      Book Value of
                  Real
      Property at
                  December 31,
      2007
              
              
              Net
      Book Value of
                  Real
      Property at
                  December 31,
      20062212
      West Cermak Road
                Chicago,
      Illinois 60608
              Owned
              1964
              
              $
              170,000
              
              
              $
              184,000





The net
book value of our premises, land and equipment was $250,000 at December 31,
2007 and $289,000 at December 31, 2006.




Subsidiary
Activities




The
Company’s only subsidiary is the Bank.  The Bank currently operates
one subsidiary, EMEFES Service Corporation, which provides insurance brokerage
services to our customers.  Brokerage commissions earned by EMEFES
totaled approximately $4,000 for the twelve months ended December 31,
2007.  Presently, there are no plans to expand the insurance brokerage
operations.




Legal
Proceedings




We are
not involved in any pending legal proceedings as a defendant other than routine
legal proceedings occurring in the ordinary course of business.  At
December 31, 2007, we were not involved in any legal proceedings, the
outcome of which would be material to our financial condition or results of
operations.




Personnel




As of
December 31, 2007, we had thirteen 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.




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.






15
 Table of Contents




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, 2007, 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, 2007, 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 supervisions 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.




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






16
 Table of Contents




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.  There are periodic
examinations by the OTS and, under certain circumstances, the FDIC 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
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to 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, a minimum of a greater than 2% tangible equity to total
assets ratio and a 4% Tier 1 (core) risk-based capital ratio.




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 to risk-based capital 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 the
type of asset.  Core capital is defined as common stockholders’ equity
(including retained earnings), certain noncumulative 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
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






17
 Table of Contents




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 the particular circumstances.  At
December 31, 2007, 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 the minimum capital ratios
discussed above, 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,” and 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.”  An institution
must file a capital restoration plan with the OTS within 45 days of the date it
receives notice that it is “undercapitalized,” “significantly undercapitalized,”
or “critically undercapitalized.”  Compliance with the plan must be
guaranteed by a 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, equal to 10% of unimpaired capital and surplus, if fully
secured by specified 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 any
distribution of capital 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 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






18
 Table of Contents




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 ever to fall below its
regulatory requirements or the OTS notified it that it was in need of 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 regulation 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” (primarily residential mortgages and related investments,
including certain mortgage-backed securities) in at least nine months out of
each twelve-month period.




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, 2007, the Bank maintained 98.8% 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, in general, savings institutions are
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 10%
stockholders (“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 certain board approval procedures be
followed.  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.  There are additional restrictions applicable to loans to
executive officers.




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






19
 Table of Contents




assessed
civil money penalties ranging, for example, from $100 per day to $1.25 million
per day in especially egregious cases.  Federal law also establishes
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 (the
“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
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.




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.




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, 2007, of
$610,000.




The
Federal Home Loan Banks are required to provide funds for the resolution of
insolvent thrifts in the late 1980s 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.  If dividends were reduced, or 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 its safe and sound operation 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 Community Reinvestment Act.  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






20
 Table of Contents




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 about
consumers.  Generally, the law requires an institution to provide
notice to consumer customers about its privacy policies and practices, requires
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 to “opt out”
of the institution’s disclosing 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 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






21
 Table of Contents




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 and 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
properties used or occupied by a savings association subsidiary of such holding
company; and (4) 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.






22
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Waivers of Dividends by
MHC.  OTS regulations require MHC to notify the OTS if it
proposes to waive receipt of dividends from the Company.  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;
(ii) 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; and (iii) 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.  We anticipate, but make no
representation, that, to the extent the law allows, MHC will waive 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.  Any company that so
acquires control would then be subject to regulation as a savings and loan
holding company.




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,
2007.  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.






23
 Table of Contents




ITEM
2.                      DESCRIPTION
OF PROPERTY




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.  The Company believes that the current facilities
are adequate to meet its present and immediately foreseeable needs.




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.






PART II




ITEM
5.                      MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS




The
Company’s common stock is traded on the OTC Bulletin Board under the symbol
“MFDB.OB.”  At March 19, 2008, the Company had 82record 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 2007 and 2006.  The Company completed its initial public offering
on April 4, 2006.




2007
            
            High
            
            
            Low
            
            
            Dividends
      DeclaredFirst
      quarter
            
            $
            14.41
            
            
            $
            12.40
            
            
            
            —Second
      quarter
            
            
            14.00
            
            
            
            12.70
            
            
            
            —Third
      quarter
            
            
            13.15
            
            
            
            10.05
            
            
            
            —Fourth
      quarter
            
            
            12.05
            
            
            
            10.35
            
            
            
            —2006First
      quarter
            
            
            —
            
            
            
            —
            
            
            
            —Second
      quarter
            
            $
            11.50
            
            
            $
            10.84
            
            
            
            —Third
      quarter
            
            
            11.50
            
            
            
            10.05
            
            
            
            —Fourth
      quarter
            
            
            14.50
            
            
            
            11.05
            
            
            
            —





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;
however, presently the Company does not pay cash dividends on its common
stock.  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.  The Bank has filed consolidated federal and state income
tax returns with the Company.  As a result, we anticipate that any







24
 Table of Contents




cash
distributions made by the Company to its stockholders would be treated as cash
dividends and not as a non-taxable return of capital for federal and state tax
purposes.




In the
future, if we determine that dividends should be paid, our dividends may depend,
in part, upon receipt of dividends from the Bank, because the Company initially
will have 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”.




If in the
future we decide to pay dividends to our stockholders, we also will be required
to pay dividends to MHC, unless MHC elects to waive the receipt of
dividends.  We anticipate that MHC will waive receipt of any such
dividends.  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”.




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)10/1/07–10/31/07
                      —
                      —
                      —
                      98,54411/1/07–11/30/07
                      —
                      —
                      —
                      98,54412/1/07–12/31/07
                      78,000
                      $11.28
                      78,000
                      20,544
 _____________
 (1)
              On
      May 21, 2007 the Company announced that its Board of Directors had
      approved a stock repurchase program that authorized the purchase of up to
      5%, or 181,844 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 181,844 shares authorized for
  repurchase.




ITEM
6.                      MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION




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.




Overview




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.




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;






25
 Table of Contents




·  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:




·  significantly
increased competition among depository and other financial
institutions;




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




·  our
ability to successfully implement our business plan;




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




·  general
economic conditions, either nationally or in our market area, that are worse
than expected;




·  adverse
changes in the securities markets;




·  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.




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






26
 Table of Contents




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 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.




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 31,2007
            
            
            2006(dollars
      in thousands)Selected
      Financial Condition Data:Total
      assets
            
            $
            73,011
            
            
            $
            75,063Loans,
      net
            
            
            53,047
            
            
            
            51,924Interest-bearing
      deposits
            
            
            1,172
            
            
            
            855Securities
      available-for-sale
            
            
            16,345
            
            
            
            19,559Federal
      Home Loan Bank stock, at cost
            
            
            610
            
            
            
            500Deposits
            
            
            39,719
            
            
            
            43,308Equity
            
            
            26,911
            
            
            
            28,233





Year
      Ended December 31,2007
            
            
            2006(dollars
      in thousands)Selected
      Operating Data:Total
      interest and dividend income
            
            $
            4,360
            
            
            $
            3,986Total
      interest expense
            
            
            1,297
            
            
            
            1,112Net
      interest income
            
            
            3,063
            
            
            
            2,874Provision
      for loan losses
            
            
            50
            
            
            
            70Net
      interest income after provision for loan losses
            
            
            3,013
            
            
            
            2,804Loss
      on impairment of securities
            
            
            (152
            )
            
            
            —Other
      non-interest income
            
            
            46
            
            
            
            56Total
      non-interest expense
            
            
            2,393
            
            
            
            2,026Income
      before income tax expense
            
            
            514
            
            
            
            834Income
      tax expense
            
            
            219
            
            
            
            304Net
      income
            
            $
            295
            
            
            $
            530






27
 Table of Contents




At
      or for the Years Ended
                December 31,2007
            
            
            2006Selected
      Financial Ratios and Other Data:Performance
      Ratios:Return
      on average assets
            
            
            0.40
            %
            
            
            0.73
            %Return
      on average equity
            
            
            1.06
            
            
            
            2.10Average
      interest rate spread(1)
            
            
            3.13
            
            
            
            3.20Net
      interest margin(2)
            
            
            4.26
            
            
            
            4.10Efficiency
      ratio(3)
            
            
            76.97
            
            
            
            69.15Non-interest
      expense to average total assets
            
            
            3.22
            
            
            
            2.79Average
      interest-earning assets to average interest-bearing
      liabilities
            
            
            162.89
            
            
            
            156.97Asset
      Quality Ratios:Non-performing
      assets to total assets
            
            
            0.35
            %
            
            
            0.59
            %Non-performing
      loans to total loans
            
            
            0.48
            
            
            
            0.85Allowance
      for loan losses to non-performing loans
            
            
            1.12
            x
            
            
            0.54
            xAllowance
      for loan losses to total loans
            
            
            0.54
            %
            
            
            0.46
            %Capital
      Ratios:Equity
      to total assets
            
            
            36.86
            %
            
            
            37.61
            %Tangible
      capital(4)
            
            
            32.85
            
            
            
            30.99Tier 1
      (core) capital(4)
            
            
            32.85
            
            
            
            30.99Tier 1
      risk-based ratio(4)
            
            
            58.14
            
            
            
            56.63


_____________


(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.


(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.






28
 Table of Contents




Comparison
of Financial Condition at December 31, 2007 and December 31,
2006




Our total
assets decreased by $2.1 million, or 2.7%, to $73.0 million at December 31,
2007, from $75.1 million at December 31, 2006.  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 increased $1.1 million, or 2.2%, to $53.0 million at
December 31, 2007, from $51.9 million at December 31, 2006, reflecting
an increase in multi-family residential mortgage loans of $252,000, or 1.3%, to
$19.2 million at December 31, 2007, from $19.0 million at December 31,
2006, and an increase in one-to-four family residential mortgage loans of
$893,000, or 2.7%, to $34.2 million at December 31, 2007, from $33.3 million at
December 31, 2006.  Securities available for sale decreased $3.2
million, or 16.4%, to $16.3 million at December 31, 2007, from $19.6
million at December 31, 2006.




Total
deposits decreased $3.6 million, or 8.3%, to $39.7 million at December 31,
2007, from $43.3 million at December 31, 2006.  The decrease in
deposits resulted, in management’s opinion, primarily from increased competition
for funds based on rate and increasing returns in other markets.  We
did not utilize any brokered deposits during 2007 or 2006.




Stockholders’
equity decreased $1.3 million, or 4.7%, to $26.9 million at December 31,
2007, from $28.2 million at December 31, 2006.  Stockholders’
equity increased by net income of $295,000 and an $89,000 increase in
accumulated unrealized gains in the fair value of securities
available-for-sale.  The vesting of Company stock grants resulted in a
$146,000 charge to earnings and corresponding increase in stockholders’ equity,
and the vesting of Company stock options resulted in a $100,000 charge to
earnings and corresponding increase in stockholders’
equity.   Stockholders’ equity decreased by $2.0 million as the
Company repurchased its stock as treasury stock, primarily to fund employee
stock benefit plans.




Comparison
of Operating Results for the Years Ended December 31, 2007 and
2006




General.  Net
income decreased $235,000, or 44.3%, to $295,000 for the year ended
December 31, 2007, from $530,000 for the year ended December 31,
2006.  The decrease in net income resulted primarily from a $152,000
write-down of equity securities available-for-sale to market value, and a
$367,000 increase in operating expenses, partially offset by a $209,000 increase
in net interest income.  Return on average assets was 0.40% for the
year ended December 31, 2007, compared to 0.73% for the year ended
December 31, 2006, and return on equity was 1.06% and 2.10% for these same
two periods.




Interest
Income.  Interest and dividend income increased $374,000, or
9.4%, to $4.4 million for the year ended December 31, 2007, from $4.0 million
for the year ended December 31, 2006, primarily due to an increase in the return
on interest-earning assets.  A 38 basis point increase in the average
yield on interest-earning assets, to 6.07% in 2007, from 5.69% in 2006, combined
with a $1.7 million increase in the average balance of interest-earning assets,
resulted in the increase.




Interest
income and fees from loans receivable increased $509,000, or 17.2%, to $3.5
million for the year ended December 31, 2007, from $3.0 million for the
year ended December 31, 2006.  The increase was due to an
increase in the average balance of loans of $7.0 million, or 15.2%, to $53.0
million in 2007, from $46.0 million in 2006, and to a 12 basis point increase in
the average yield on loans to 6.56% in 2007, from 6.44% in 2006.




Interest
and dividend income from securities and deposits decreased $132,000, or 13.1%,
to $876,000 for the year ended December 31, 2007 from $1.0 million for the
year ended December 31, 2006.  The decrease resulted from a
decrease in the average balance of these investments of $5.2 million, or






29
 Table of Contents




21.7%, to
$18.9 million in 2007, from $24.1 million in 2006, partially offset by an
increase in the average yield on securities and deposits to 4.70% in 2007, from
4.24% in 2006.




During
the last quarter of 2007, the Federal Home Loan Bank of Chicago suspended
dividends on its stock.  That resulted in a decrease of $3,000 in
dividend income, to $12,000 for the year ended December 31, 2007, compared to
$15,000 for the year ended December 31, 2006.  There has been no
indication from the FHLB as to when dividends will resume.




Also
during the last quarter of 2007, the Federal Home Loan Mortgage Corporation
announced a 50% reduction in the dividend on their common stock.  The
$4,000 quarterly dividend paid during the first three quarters of 2007 on the
8,000 shares we own was reduced to $2,000.  This resulted in dividend
income on this investment of $14,000 for 2007, compared to $15,000 for
2006.  There has been no indication from FHLMC as to what future
dividends will be paid.




Interest
Expense.  Total interest expense increased $185,000, or 16.6%,
to $1.3 million for the year ended December 31, 2007, from $1.1 million for the
year ended December 31, 2006.  The increase in interest expense
resulted from a 36 basis point increase in the average cost of deposits, to
2.79% in 2007, from 2.43% in 2006, partially offset by a $2.3 million decrease
in the average balance of interest-bearing deposits.  Interest expense
on certificates of deposit increased $119,000, or 15.1%, due to a 54 basis point
increase in the average rate paid on such deposits, to 4.23% for the year ended
December 31, 2007, from 3.69% for the year ended December 31,
2006.




During
2007 the Company used advances from the Federal Home Loan Bank to fund its loan
pipeline, deposit withdrawals, and the repurchase of Company
stock.  Interest on borrowings increased by $89,000, or 164.8%, to
$143,000 for the year ended December 31, 2007, compared to $54,000 for the year
ended December 31, 2006.  The average rate paid for advances increased
19 basis points, to 5.29% in 2007, from 5.10% in 2006.




Net Interest
Income.  Net interest income increased $189,000, or 6.6%, to
$3.1 million for the year ended December 31, 2007, from $2.9 million for
the year ended December 31, 2006.  Our net interest margin
increased to 4.26% during 2007, from 4.10% during 2006, and our interest rate
spread decreased to 3.13% in 2007, from 3.20% in 2006.  The average
yield on interest earning assets increased from 5.69% in 2006 to 6.07% in 2007,
complementing a $1.7 million increase in average interest earning assets, with
interest income increasing by $374,000.  At the same time the average
rate paid on interest bearing liabilities increased from 2.49% in 2006 to 2.94%
in 2007, causing interest expense to increase by $185,000 in 2007.




Provision for
Loan Losses.  We make provisions for loan losses, which are
charged to operations, 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.  While the Bank has not had a loan charge-off
since 1996, 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.






30
 Table of Contents




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
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.




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.  Since we do not have recent loss experience, 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.  Management believes multi-family loans present higher inherent
risks than one-to-four family residential mortgage loans because historically
multi-family loans have higher rates of default and because repayments may be
affected to a greater degree by general economic conditions and interest
rates.  However, our strict underwriting standards, including a 75%
maximum loan-to-value ratio on non-owner-occupied properties, and the fact that
our multifamily loans generally have ten units or less, partially mitigates this
risk.




Non-performing
loans decreased to $259,000 at December 31, 2007, from $443,000 at
December 31, 2006.  Loans delinquent for 60-89 days increased to
$2.6 million at December 31, 2007, from $385,000 at December 31,
2006.  Typically non-performing loans are assigned a higher percentage
of allowance allocation.  The allowance for loan losses was $290,000,
or 0.54% of gross loans outstanding at December 31, 2007, as compared with
$240,000, or 0.46% of loans outstanding at December 31, 2006.  In
reviewing the allowance during 2007 and at December 31, 2007, we considered
various subjective factors including the increasing delinquency trends in our
portfolio, our non-performing loans, and the overall current economic
conditions, and determined that a provision of $50,000 was necessary for the
year then ended.  In a similar evaluation of the allowance for loan
losses during 2006 and at December 31, 2006, management determined that a
provision of $70,000, driven primarily by the growth in the loan portfolio, was
necessary for the year then ended.




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 $162,000, to a loss of
$106,000 for the year ended December 31, 2007, from $56,000 income for year
ended December 31, 2006.  The decrease was due primarily to a
$152,000 write down of equity securities to market value at December 31,
2007.  Other non-interest income decreased $11,000, to $42,000 in
2007, from $53,000 in 2006. Late charges on delinquent loans, increased $18,000,
to $22,000 for the year ended December 31, 2007, compared to $4,000 for
2006.  Other non-interest income in 2006 included a $24,000 recovery
of legal fees previously expensed as professional fees.






31
 Table of Contents




At
December 31, 2007, we owned 10,000 shares of FHLMC preferred stock paying a
non-cumulative preferred dividend of 5.79%.  Primarily because of the
turmoil in the secondary mortgage market during 2007, the market price of this
investment declined.  While we do not currently plan to sell this
investment, we could not estimate when or if the security would fully recover in
value, and wrote the security down to its fair value with a $98,000 pre-tax
charge to earnings.




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 net asset value
of these funds have historically been stable, and generally increase when
interest rates decline.  However, at December 31, 2007, we wrote the
funds down to their net asset value with a $54,000 pre-tax charge to earnings
because we were unable to forecast a recovery in the net asset value of the
funds in the period we estimated we would hold the securities.




Non-Interest
Expense.  Non-interest expense increased $367,000, or 18.1%, to
$2.4 million for the year ended December 31, 2007, compared to $2.0 million
for the year ended December 31, 2006.




Compensation
and employee benefits increased $264,000, or 23.9%, to $1.4 million in 2007,
from $1.1 million in 2006, due to salary increases in the ordinary course of
business, higher health benefit costs, and newly established stock benefit
plans.  The Company’s ESOP expense increased by $23,000, to $75,000
for the year ended December 31, 2007, compared to $52,000 for 2006, primarily
because ESOP expense was incurred for only three quarters in
2006.  Grants of common stock and options made during 2007, under the
shareholder approved Management Recognition Plan and Stock Option Plan,
increased compensation and benefit costs by $146,000 and $100,000,
respectively.




Professional
fees, including legal, accounting and consulting fees, increased $108,000, or
31.7%, to $449,000 in 2007, from $341,000 in 2006, primarily due to increased
legal fees associated with the implementation of stock benefit plans, SEC
reporting compliance, and other costs associated with being a new public
company.




Occupancy
expense decreased $19,000, or 11.2%, to $151,000 in 2007, from $170,000 in 2006,
primarily due to decreased depreciation charges.  Data processing
costs increased $4,000, or 3.9%, to $108,000 in 2007, from $104,000 in
2006.  Miscellaneous other expenses increased $10,000, or 3.3%, to
$315,000 in 2007, from $305,000 in 2006.  The ratio of non-interest
expense to average assets was 3.22% for the year ended December 31, 2007,
compared to 2.79% for 2006.




Income Tax
Expense.  The provision for income taxes decreased $85,000, to
$219,000 for the year ended December 31, 2007 from $304,000 for the prior
year, due primarily to our reduced income before income taxes.  The
effective tax rates for the periods ended December 31, 2007 and 2006 were
42.61% and 36.45%, respectively.  The increase in the effective tax
rate was due to stock benefit plan expenses that were not fully deductible for
income tax purposes.




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.  The yields set forth below include the effect of deferred
fees, discounts and premiums that are amortized or accreted to interest income
or expense.






32
 Table of Contents






At
                      December 31,
                  
                  
                  For
      the Years Ended December 31,2007
                  
                  
                  2007
                  
                  
                  2006Yield/Rate
                  
                  
                  Average
                      Outstanding
                      Balance
                  
                  
                  Interest
                  
                  
                  Yield/Rate
                  
                  
                  Average
                      Outstanding
                      Balance
                  
                  
                  Interest
                  
                  
                  Yield/RateInterest-earning
      assets:
                  
                  
                  
                  
                  
                  
                  
                  (dollars
      in thousands)Loans
                  
                  
                  6.44
                  %
                  
                  $
                  52,954
                  
                  
                  $
                  3,472
                  
                  
                  
                  6.56
                  %
                  
                  $
                  45,977
                  
                  
                  $
                  2,963
                  
                  
                  
                  6.44
                  %Securities
      available for sale
                  
                  
                  4.90
                  
                  
                  
                  17,552
                  
                  
                  
                  839
                  
                  
                  
                  4.78
                  
                  
                  
                  22,377
                  
                  
                  
                  948
                  
                  
                  
                  4.24Federal
      Home Loan Bank Stock
                  
                  
                  —
                  
                  
                  
                  580
                  
                  
                  
                  12
                  
                  
                  
                  2.07
                  
                  
                  
                  500
                  
                  
                  
                  15
                  
                  
                  
                  3.00Interest-earning
      deposits
                  
                  
                  3.52
                  
                  
                  
                  763
                  
                  
                  
                  37
                  
                  
                  
                  4.85
                  
                  
                  
                  1,253
                  
                  
                  
                  60
                  
                  
                  
                  4.79Total
      interest-earning assets
                  
                  
                  6.00
                  %
                  
                  
                  71,849
                  
                  
                  
                  4,360
                  
                  
                  
                  6.07
                  %
                  
                  
                  70,107
                  
                  
                  
                  3,986
                  
                  
                  
                  5.69
                  %Non-interest-earning
      assets
                  
                  
                  
                  
                  
                  
                  2,353
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,470Total
      assets
                  
                  
                  
                  
                  
                  $
                  74,202
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  72,577Interest-Bearing Liabilities:(1)Savings
      deposits
                  
                  
                  1.24
                  %
                  
                  $
                  19,919
                  
                  
                  $
                  246
                  
                  
                  
                  1.24
                  %
                  
                  $
                  22,195
                  
                  
                  $
                  269
                  
                  
                  
                  1.21
                  %Certificates
      of deposit
                  
                  
                  4.27
                  
                  
                  
                  21,488
                  
                  
                  
                  908
                  
                  
                  
                  4.23
                  
                  
                  
                  21,409
                  
                  
                  
                  789
                  
                  
                  
                  3.69Total
      deposits
                  
                  
                  2.82
                  
                  
                  
                  41,407
                  
                  
                  
                  1,154
                  
                  
                  
                  2.79
                  
                  
                  
                  43,604
                  
                  
                  
                  1,058
                  
                  
                  
                  2.43Borrowings
                  
                  
                  4.74
                  
                  
                  
                  2,703
                  
                  
                  
                  143
                  
                  
                  
                  5.29
                  
                  
                  
                  1,059
                  
                  
                  
                  54
                  
                  
                  
                  5.10Total
      interest-bearing liabilities
                  
                  
                  3.04
                  %
                  
                  
                  44,110
                  
                  
                  
                  1,297
                  
                  
                  
                  2.94
                  %
                  
                  
                  44,663
                  
                  
                  
                  1,112
                  
                  
                  
                  2.49
                  %Non-interest-bearing
      liabilities
                  
                  
                  
                  
                  
                  
                  2,162
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,691Total
      liabilities
                  
                  
                  
                  
                  
                  
                  46,272
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  47,354Stockholders’
      equity
                  
                  
                  
                  
                  
                  
                  27,930
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  25,223Total
      liabilities and stockholders’ equity
                  
                  
                  
                  
                  
                  $
                  74,202
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  72,577Net
      interest income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  3,063
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  2,874Net
      interest rate spread(2)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3.13
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3.20
                  %Net
      interest-earning assets(3)
                  
                  
                  
                  
                  
                  $
                  27,739
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  25,444Net
      interest margin(4)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  4.26
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  4.10
                  %Ratio
      of interest-earning assets to interest-bearing liabilities
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  162.89
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  156.97
                  %


_____________


(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.






33
 Table of Contents




Years
      Ended December 31, 2007 vs. 2006Increase
      (Decrease) Due to
            
            
            Total
      IncreaseVolume
            
            
            Rate
            
            
            (Decrease)(in
      thousands)Interest-Earning
      Assets:Loans
            
            $
            457
            
            
            $
            52
            
            
            $
            509Securities
      available for sale
            
            
            (188
            )
            
            
            79
            
            
            
            (109
            )Federal
      Home Loan Bank Stock
            
            
            2
            
            
            
            (5
            )
            
            
            (3
            )Interest-earning
      deposits
            
            
            (23
            )
            
            
            —
            
            
            
            (23
            )Total
      interest-earning assets
            
            
            248
            
            
            
            126
            
            
            
            374Interest-Bearing
      Liabilities:Savings
      deposits
            
            
            (27
            )
            
            
            4
            
            
            
            (23
            )Certificates
      of deposit
            
            
            3
            
            
            
            116
            
            
            
            119Total
      deposits
            
            
            (24
            )
            
            
            120
            
            
            
            96Borrowings
            
            
            87
            
            
            
            2
            
            
            
            89Total
      interest-bearing liabilities
            
            
            63
            
            
            
            122
            
            
            
            185Change
      in net interest income
            
            $
            185
            
            
            $
            4
            
            
            $
            189





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






34
 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, 2007, 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.




NPV
            
            
            Net
      Portfolio Value as a Percentage of Present Value of
      AssetsChange
      InInterest Rates (Basis Points)
            
            
            Estimated
      NPV
            
            
            Amount
                of
      Change
            
            
            Percentage
                Change
            
            
            NPV
      Ratio
            
            
            Change
      in Basis Points(dollars
      in thousands)+300
            
            
            $
            20,793
            
            
            $
            (6,334
            )
            
            
            -23
            %
            
            
            29.90
            %
            
            
            -560
            bp+200
            
            
            
            23,010
            
            
            
            (4,117
            )
            
            
            -15
            
            
            
            31.99
            
            
            
            -351+100
            
            
            
            25,199
            
            
            
            (1,928
            )
            
            
            -7
            
            
            
            33.92
            
            
            
            -158+50
            
            
            
            26,215
            
            
            
            (912
            )
            
            
            -3
            
            
            
            34.77
            
            
            
            -73Unchanged
            
            
            
            27,127
            
            
            
            
            
            
            
            
            
            
            
            35.50-50
            
            
            
            27,939
            
            
            
            813
            
            
            
            3
            
            
            
            36.13
            
            
            
            63-100
            
            
            
            28,745
            
            
            
            1,618
            
            
            
            6
            
            
            
            36.74
            
            
            
            124-200
            
            
            
            30,250
            
            
            
            3,123
            
            
            
            12
            
            
            
            37.82
            
            
            
            232





The table
above indicates that at December 31, 2007, in the event of a 200 basis point
decrease in interest rates, we would experience a 12% increase in net portfolio
value.  In the event of a 200 basis point increase in interest rates,
we would experience a 15% 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






35
 Table of Contents




loans are
a relatively predictable source of funds, deposit flows and loan prepayments are
greatly 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, 2007, $2.3 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, 2007,
our loan originations, net of collected principal, totaled $1.4
million.  During the year ended December 31, 2006, there was a
net increase that totaled $14.0 million.  We did not sell any loans
during the years ended December 31, 2007 and 2006.  Cash received
from calls and maturities of securities totaled $3.3 million and $6.6 million
for the years ended December 31, 2007 and 2006, respectively.  We
purchased no securities in 2007 and $2.0 million in securities during the year
ended December 31, 2006. We sold no securities in 2007 or
2006.  We purchased $110,000 in FHLB stock in 2007 to meet our minimum
membership requirement.




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 $3.6 million
and $217,000 for the years ended December 31, 2007 and 2006,
respectively.  During 2006 depositors used $796,000 in deposits to
purchase the Company’s common stock during its public
offering.   Deposit growth has been difficult due to the very
competitive interest rate environment.




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, 2007, the Bank borrowed $7.5 million from the Federal Home
Loan Bank and repaid $4.5 million of those advances.   During the
year ended December 31, 2006, the Bank borrowed $6.0 million from the Federal
Home Loan Bank and repaid $4.0 million of those advances.  Our
available borrowing limit at December 31, 2007, was $12.2
million.




At
December 31, 2007, we had outstanding commitments to originate loans of
$205,000.  At December 31, 2007, certificates of deposit
scheduled to mature in less than one year totaled $18.3
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.




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






36
 Table of Contents




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, 2007 and December 31, 2006, the Bank had $205,000 and
$576,000, respectively, of commitments to grant mortgage loans.




Impact
of Recent Accounting Pronouncements




FASB
Statement 123(R), “Shares-Based Payment,” addresses the accounting for
share-based payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or
(b) liabilities that are based on the fair value of the enterprise’s equity
instruments or that may be settled by the issuance of such equity
instruments.  Statement 123(R) requires an entity to recognize the
grant-date fair-value of stock options and other equity-based compensation
issued to employees in the income statement.  The revised Statement
generally requires that an entity account for those transactions using the
fair-value-based method; and eliminates an entity’s ability to account for
share-based compensation transactions using the intrinsic value method of
accounting in APB Opinion No. 25, “Accounting for Stock Issued to
Employees,” which was permitted under Statement 123, as originally
issued.  The revised Statement requires entities to disclose
information about the nature of the share-based payment transactions and the
effects of those transactions on the financial statements.  Statement
123(R) is effective for the Bank for fiscal year 2006.




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”, and collectively with the Stock Option
Plan, the “Plans”).   A total of 178,026  and 71,282
shares of Company common stock have been reserved for issuance under the Stock
Option Plan and the MRP, respectively. As of December 31, 2006 no shares had
been awarded under either plan.  During January 2007 the Company
granted 131,871 stock options and 52,748 restricted stock awards, at fair market
value ($14.41 per share) on the grant date.  The plans have a term of
ten years.  Both the stock options and restricted stock awards will
vest equally over five years.  Compensation expense related to vesting
of the restricted stock awards granted was $146,000 for the year ended December
31, 2007, and will approximate $152,000 per year beginning in
2008.  The Company is also required to record compensation expense
related to the stock options in accordance with  Statement on
Financial Accounting Standard No. 123(R).  Compensation
expense related to vesting of stock options granted was $100,000 for the year
ended December 31, 2007, and will approximate $104,000 per year beginning in
2008.




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






37
 Table of Contents




ITEM
7.                      FINANCIAL
STATEMENTS




See Index
to Financial Statements on page F-1.




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




None.




ITEM
8A.                      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 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, 2007 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, 2007.




This
annual report is the first report of the Company in which management is required
to provide its assessment on the effectiveness of the Company’s internal
controls. 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
have been no changes in our internal control over financial reporting during the
period covered by this report that have materially affected or are reasonably
likely to materially affect our internal controls.




ITEM
8B.                      OTHER
INFORMATION




None.






38
 Table of Contents


PART III




ITEM
9.                      DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT




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 Securities
and Exchange Commission.  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
10.                      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
11.                      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, 2007, relating to
equity compensation plans of the Company pursuant to which equity securities are
authorized for issuance.






39
 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 forfuture issuance under
      equity compensation plans (excludingsecurities reflected
      in column (a))
                (c)Equity
      compensation plans approved by security holders
            
            
            184,619
            
            
            $
            14.41
            
            
            
            64,669Equity
      compensation plans not approved by security holders
            
            
            —
            
            
            
            —
            
            
            
            —Total
            
            
            184,619
            
            
            $
            14.41
            
            
            
            64,669







ITEM
12.                      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
13.                      EXHIBITS




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







40
 Table of Contents




MUTUAL
FEDERAL BANCORP, INC.CHICAGO,
ILLINOIS




Consolidated Financial Statements


December 31,
2007 and 2006




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






F-1


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 the
Mutual Federal Bancorp, Inc. (“the Company”) as of December 31, 2007 and 2006,
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, 2007 and 2006, 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 Chizek and
      Company LLC




Oak
      Brook, Illinois


March 18,
      2008






F-2
 Table of Contents 2




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


December 31,2007
            
            
            2006ASSETSCash
      and cash equivalents
            
            $
            2,264
            
            
            $
            2,268Securities
      available-for-sale
            
            
            16,345
            
            
            
            19,559Loans,
      net of allowance for loan losses of $290 at December 31, 2007 and $240 at
      December 31, 2006
            
            
            53,047
            
            
            
            51,924Federal
      Home Loan Bank stock, at cost
            
            
            610
            
            
            
            500Premises
      and equipment, net
            
            
            250
            
            
            
            289Accrued
      interest receivable
            
            
            360
            
            
            
            339Other
      assets
            
            
            135
            
            
            
            184Total
      assets
            
            $
            73,011
            
            
            $
            75,063LIABILITIES
      AND STOCKHOLDERS’ EQUITYLiabilities:Non-interest-bearing
      deposits
            
            $
            331
            
            
            $
            728Interest-bearing
      deposits
            
            
            39,388
            
            
            
            42,580Total
      deposits
            
            
            39,719
            
            
            
            43,308Advance
      payments by borrowers for taxes and insurance
            
            
            236
            
            
            
            401Advances
      from the Federal Home Loan Bank
            
            
            5,000
            
            
            
            2,000Accrued
      interest payable and other liabilities
            
            
            1,037
            
            
            
            1,055Common
      stock in ESOP subject to contingent repurchase obligation
            
            
            108
            
            
            
            66Total
      liabilities
            
            
            46,100
            
            
            
            46,830Commitments
      and contingenciesStockholders’
      equity:Preferred
      stock, $0.01 par value, 1,000,000 shares authorized at December 31, 2007
      and 2006
            
            
            —
            
            
            
            —Common
      stock, $0.01 par value, 12,000,000 shares authorized, 3,636,875 shares
      issued at December 31, 2007; $0.01 par value, 12,000,000 shares
      authorized, 3,636,875 shares issued and outstanding at December 31,
      2006
            
            
            36
            
            
            
            36Additional
      paid-in capital
            
            
            9,738
            
            
            
            10,175Treasury
      stock, at cost
            
            
            (1,286
            )
            
            
            —Retained
      earnings
            
            
            19,077
            
            
            
            18,782Reclassification
      of  ESOP shares
            
            
            (108
            )
            
            
            (66
            )Unearned
      ESOP shares
            
            
            (768
            )
            
            
            (827
            )Accumulated
      other comprehensive income
            
            
            222
            
            
            
            133Total
      stockholders’ equity
            
            
            26,911
            
            
            
            28,233Total
      liabilities and stockholders’ equity
            
            $
            73,011
            
            
            $
            75,063





See
accompanying notes to consolidated financial
statements.






F-3
 Table of Contents 2




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


December 31,2007
            
            
            2006Interest
      and dividend income:Loans,
      including fees
            
            $
            3,472
            
            
            $
            2,963Securities
            
            
            839
            
            
            
            948Interest
      earning deposits
            
            
            37
            
            
            
            60Federal
      Home Loan Bank stock dividends
            
            
            12
            
            
            
            15Total
      interest and dividend income
            
            
            4,360
            
            
            
            3,986Interest
      expense:Deposits
            
            
            1,154
            
            
            
            1,058Advances
      from the Federal Home Loan Bank
            
            
            143
            
            
            
            54Total
      interest expense
            
            
            1,297
            
            
            
            1,112Net
      interest income
            
            
            3,063
            
            
            
            2,874Provision
      for loan losses
            
            
            50
            
            
            
            70Net
      interest income after provision for loan losses
            
            
            3,013
            
            
            
            2,804Non-interest
      income:Insurance
      commissions and fees
            
            
            4
            
            
            
            3Loss
      on impairment of securities
            
            
            (152
            )
            
            
            —Other
      income
            
            
            42
            
            
            
            53Total
      non-interest income
            
            
            (106
            )
            
            
            56Non-interest
      expense:Compensation
      and benefits
            
            
            1,370
            
            
            
            1,106Occupancy
      and equipment
            
            
            151
            
            
            
            170Data
      processing
            
            
            108
            
            
            
            104Professional
      fees
            
            
            449
            
            
            
            341Other
      expense
            
            
            315
            
            
            
            305Total
      non-interest expense
            
            
            2,393
            
            
            
            2,026Income
      before income taxes
            
            
            514
            
            
            
            834Income
      tax expense
            
            
            219
            
            
            
            304Net
      income
            
            $
            295
            
            
            $
            530Earnings
      per share (basic and diluted)
            
            $
            0.08
            
            
            $
            0.12







See
accompanying notes to consolidated financial statements.






F-4
 Table of Contents 2


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, 2006
                
                $
                1
                
                
                $
                —
                
                
                $
                —
                
                
                $
                18,252
                
                
                $
                —
                
                
                $
                —
                
                
                $
                83
                
                
                
                18,336Comprehensive
      income:Net
      income
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                530
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                530Change
      in net unrealized gain (loss) on securities available-for-sale, net of
      taxes
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                50
                
                
                
                50Total
      comprehensive income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                580Proceeds
      from sale of 3,636,875 shares of common stock, net of issuance
      costs
                
                
                35
                
                
                
                10,169
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (873
                )
                
                
                —
                
                
                
                9,331Reclassification
      due to release and change in fair value of common stock in ESOP subject to
      contingent repurchase obligation of ESOP shares
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (66
                )
                
                
                —
                
                
                
                —
                
                
                
                (66
                )ESOP
      shares committed to be released (4,537)
                
                
                —
                
                
                
                6
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                46
                
                
                
                —
                
                
                
                52Balance
      at December 31, 2006
                
                
                36
                
                
                
                10,175
                
                
                
                —
                
                
                
                18,782
                
                
                
                (66
                )
                
                
                (827
                )
                
                
                133
                
                
                
                28,233Net
      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
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                146
   F-5
 Table of Contents 2
  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
                
                
                TotalStock
      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-6
 Table of Contents 2




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


December 31,2007
            
            
            2006Cash flows from operating activitiesNet income
            
            $
            295
            
            
            $
            530Adjustments to reconcile net income to
      net cash
              from operating
    activities:Provision for loan
    losses
            
            
            50
            
            
            
            70Depreciation
            
            
            58
            
            
            
            59Loss on impairment of
      securities
            
            
            152
            
            
            
            —Net amortization of
      securities
            
            
            26
            
            
            
            61Dividends reinvested on
      securities
            
            
            (119
            )
            
            
            (106
            )ESOP expense
            
            
            75
            
            
            
            52MRP expense
            
            
            146
            
            
            
            —Option expense
            
            
            100
            
            
            
            —Increase in accrued interest receivable
      and other assets
            
            
            (28
            )
            
            
            (147
            )Decrease in accrued interest payable
      and other liabilities
            
            
            (18
            )
            
            
            (1,242
            )Net cash provided by (used in)
      operating activities
            
            
            737
            
            
            
            (723
            )Cash flows from investing activitiesActivity in securities
      available-for-sale:Proceeds from maturities, calls, and
      principal repayments
            
            
            3,300
            
            
            
            6,594Purchases
            
            
            —
            
            
            
            (2,000
            )Purchase of FHLB stock
            
            
            (110
            )
            
            
            —Loan originations and payments,
      net
            
            
            (1,395
            )
            
            
            (13,964
            )Proceeds from sale of real estate
      owned, acquired through foreclosure
            
            
            222
            
            
            
            —Additions to premises and
      equipment
            
            
            (19
            )
            
            
            (43
            )Net cash provided by (used in)
      investing activities
            
            
            1,998
            
            
            
            (9,413
            )Cash flows from financing activitiesNet decrease in
deposits
            
            
            (3,589
            )
            
            
            (217
            )Net (decrease) increase in advance
      payments by
              borrowers for taxes and
      insurance
            
            
            (165
            )
            
            
            40Advances from the Federal Home Loan
      Bank
            
            
            7,500
            
            
            
            6,000Repayment of Federal Home Loan Bank
      advances
            
            
            (4,500
            )
            
            
            (4,000
            )Proceeds of common stock
      offering
            
            
            —
            
            
            
            9,331Treasury stock
purchases
            
            
            (1,985
            )
            
            
            —Net cash (used in) provided by
      financing activities
            
            
            (2,739
            )
            
            
            11,154Net (decrease) increase in cash and
      cash equivalents
            
            
            (4
            )
            
            
            1,018Cash and cash equivalents at beginning
      of period
            
            
            2,268
            
            
            
            1,250Cash and cash equivalents at end of period
            
            $
            2,264
            
            
            $
            2,268Supplemental disclosure of cash flow
      informationCash paid during the year
      for:Interest
            
            $
            1,252
            
            
            $
            1,086Income taxes
            
            
            259
            
            
            
            294Loans transferred to real
      estate owned
            
            $
            222
            
            
            $
            —





See
accompanying notes to consolidated financial statements.






F-7
 Table of Contents 2




MUTUAL
FEDERAL BANCORP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2007
AND 2006
 (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
subsidiary, EMEFES Service Corporation, together referred to as “the
Bank.”  Intercompany transactions and balances are eliminated in
consolidation.  As of December 31, 2007 and 2006, Mutual Federal
Bancorp, MHC, was the majority (70%) 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.  The information as of and for the year
ended December 31, 2006, includes the Company’s information beginning April 4,
2006.  The information presented in this report for periods up to and
including March 31, 2006, is for the Bank only.




The Board
of Directors of Mutual Federal Bancorp, MHC (the “MHC”), the former sole
stockholder of the Bank, adopted the Stock Issuance Plan pursuant to which
(i) the MHC established a subsidiary holding company, Mutual Federal
Bancorp, Inc., a federal corporation (the “Company”), as a direct subsidiary to
hold 100% of the stock of the Bank, and (ii) the Company offered and sold
shares of its common stock in a public offering representing 30% of its shares
outstanding after the offering.  The offering closed on April 4,
2006.  A total of 1,091,062 shares (30%) were sold and 2,545,813
shares (70%) were retained by MHC.




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. There are no significant concentrations of
loans to any one customer.  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.  Securities available-for-sale are
carried at fair value, with unrealized holding gains and losses reported in
other comprehensive income, net of income tax.




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 2




MUTUAL
FEDERAL BANCORP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2007 AND
2006
 (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 nonaccrual 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 2




MUTUAL
FEDERAL BANCORP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31,
2007 AND 2006
 (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.  Large multifamily residential real estate 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.  Large groups of smaller balance homogeneous loans, such
as one- to four-family and small multifamily residential real estate loans, are
collectively evaluated for impairment, and accordingly, they are not separately
identified for impairment disclosures.




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.  There were
no foreclosed assets at December 31, 2007 and 2006.




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 Association expenses all advertising costs as
they are incurred.  Total advertising costs for the years ended
December 31, 2007 and 2006 were $46 and $35, 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


MUTUAL
FEDERAL BANCORP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31,
2007 AND 2006
 (Dollar
amounts in thousands)






NOTE
1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)




The
Company adopted FASB Interpretation 48, Accounting for
Uncertainty in Income Taxes (“FIN 48”), as of January 1,
2007.  A tax position is recognized as a benefit only if it is "more
likely than not" that the tax position would be sustained in a tax examination,
with a tax examination being presumed to occur.  The amount recognized
is the largest amount of tax benefit that is greater than 50% likely of being
realized on examination.  For tax positions not meeting the "more
likely than not" test, no tax benefit is recorded.  The adoption had
noeffect
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 2005.





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 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 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 per share calculations until the shares are released
from collateral and allocated to participants.  Earnings per share for
2006 is calculated beginning with April 4, 2006, the date of
conversion.  Net income for the period from April 4, 2006 through
December 31, 2006 was $423.




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 chief
decision-makers monitor the revenue streams of the various products and
services, the identifiable segments are not material and 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 2




MUTUAL
FEDERAL BANCORP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31,
2007 AND 2006
 (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.  This Statement defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements.  This Statement establishes a fair value hierarchy about
the assumptions used to measure fair value and clarifies assumptions about risk
and the effect of a restriction on the sale or use of an asset.  The
standard is effective for fiscal years beginning after November 15,
2007.  The impact of adoption is not material.




In
February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities.  The standard provides
companies with an option to report selected financial assets and liabilities at
fair value and establishes presentation and disclosure requirements designed to
facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities.  The new
standard is effective for the Company on January 1, 2008. The Company has
elected the fair value option for various mutual funds included in securities
available-for-sale as of January 1, 2008.   The impact of
adoption is not material, as the Company wrote the investments down to fair
value as of December 31, 2007.






F-12
 Table of Contents 2




MUTUAL
FEDERAL BANCORP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31,
2007 AND 2006
 (Dollar
amounts in thousands)




NOTE
2 – SECURITIES




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, 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
            )
            
            $
            16,345December 31, 2006U.S.
      agency and government-sponsored
      entity bonds
            
            $
            6,695
            
            
            $
            6
            
            
            $
            (47
            )
            
            $
            6,654GNMA
      certificates
            
            
            1,555
            
            
            
            8
            
            
            
            (31
            )
            
            
            1,532FNMA
      certificates
            
            
            4,582
            
            
            
            9
            
            
            
            (102
            )
            
            
            4,489FHLMC
      certificates
            
            
            3,067
            
            
            
            7
            
            
            
            (74
            )
            
            
            3,000Collateralized
      mortgage obligations
            
            
            578
            
            
            
            —
            
            
            
            (17
            )
            
            
            561FHLMC
      common stock
            
            
            8
            
            
            
            535
            
            
            
            —
            
            
            
            543FHLMC
      preferred stock
            
            
            500
            
            
            
            —
            
            
            
            (13
            )
            
            
            487Mutual
      funds
            
            
            2,357
            
            
            
            —
            
            
            
            (64
            )
            
            
            2,293Total
      available-for-sale
            
            $
            19,342
            
            
            $
            565
            
            
            $
            (348
            )
            
            $
            19,559





At
December 31, 2007 and 2006, 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 and 2006 include $2,423 and $2,293 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, 2007 and 2006.




There
were no security sales in the year ended December 31, 2007 and
2006.






F-13
 Table of Contents 2




MUTUAL
FEDERAL BANCORP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31,
2007 AND 2006
 (Dollar
amounts in thousands)


NOTE
2 – SECURITIES (Continued)




The
amortized cost and fair values of debt securities available-for-sale at December
31, 2007 by contractual maturity were as follows.




Amortized
                Cost
            
            
            Fair
                ValueDue
      in one year or less
            
            $
            —
            
            
            $
            —Due
      from one to five years
            
            
            5,496
            
            
            
            5,605Due
      from five to ten years
            
            
            —
            
            
            
            —CMO’s
      and mortgage backed securities
            
            
            7,655
            
            
            
            7,642Total
            
            $
            13,151
            
            
            $
            13,247





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, 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
            )





December 31, 2006Less Than 12 Months
            
            
            12 Months or More
            
            
            TotalDescription of Securities
            
            Fair
                Value
            
            
            Unrealized
                Loss
            
            
            Fair
                Value
            
            
            Unrealized
                Loss
            
            
            Fair
                Value
            
            
            Unrealized
                LossU.S. agency and government-sponsored
      entity bonds
            
            $
            —
            
            
            $
            —
            
            
            $
            4,153
            
            
            $
            (47
            )
            
            $
            4,153
            
            
            $
            (47
            )GNMA certificates
            
            
            —
            
            
            
            —
            
            
            
            1,063
            
            
            
            (31
            )
            
            
            1,063
            
            
            
            (31
            )FNMA certificates
            
            
            —
            
            
            
            —
            
            
            
            3,791
            
            
            
            (102
            )
            
            
            3,791
            
            
            
            (102
            )FHLMC certificates
            
            
            —
            
            
            
            —
            
            
            
            2,684
            
            
            
            (74
            )
            
            
            2,684
            
            
            
            (74
            )Collateralized mortgage
      obligations
            
            
            —
            
            
            
            —
            
            
            
            557
            
            
            
            (17
            )
            
            
            557
            
            
            
            (17
            )FHLMC preferred stock
            
            
            487
            
            
            
            (13
            )
            
            
            —
            
            
            
            —
            
            
            
            487
            
            
            
            (13
            )Mutual funds
            
            
            —
            
            
            
            —
            
            
            
            2,293
            
            
            
            (64
            )
            
            
            2,293
            
            
            
            (64
            )Total temporarily
    impaired
            
            $
            487
            
            
            $
            (13
            )
            
            $
            14,541
            
            
            $
            (335
            )
            
            $
            15,028
            
            
            $
            (348
            )







F-14
 Table of Contents 2


MUTUAL
FEDERAL BANCORP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2007 AND
2006
 (Dollar
amounts in thousands)


NOTE
2 – SECURITIES (Continued)




At
December 31, 2007, there were 18 debt securities with unrealized losses
that have depreciated 2.2% from the Company’s amortized cost
basis.  At December 31, 2006, there were 43 debt securities with
unrealized losses that had depreciated 2.3% 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.  The funds are historically stable or, as
rates decline, the funds recover their value (that is, the degree of impairment
reverses) through increases in their net asset value.  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.




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.  At December 31, 2007, the Company recognized a $98 pre-tax
charge 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.







F-15
 Table of Contents 2




MUTUAL
FEDERAL BANCORP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31,
2007 AND 2006
 (Dollar
amounts in thousands)






NOTE
3 – LOANS




Loans are
as follows:




2007
            
            
            2006First
      mortgage loansPrincipal
      balancesSecured
      by one- to four-family residences
            
            $
            34,163
            
            
            $
            33,270Secured
      by multi-family properties
            
            
            19,217
            
            
            
            18,96553,380
            
            
            
            52,235Less:Loans
      in process
            
            
            9
            
            
            
            9Net
      deferred loan origination fees
            
            
            122
            
            
            
            121Total
      first mortgage loans
            
            
            53,249
            
            
            
            52,105Loans
      on savings accounts
            
            
            88
            
            
            
            5953,337
            
            
            
            52,164Less
      allowance for loan losses
            
            
            290
            
            
            
            240$
            53,047
            
            
            $
            51,924






F-16
 Table of Contents 2




MUTUAL
FEDERAL BANCORP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2007 AND
2006
 (Dollar
amounts in thousands)




NOTE
3 – LOANS  (Continued)




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




2007
            
            
            2006Balance
      at beginning of year
            
            $
            240
            
            
            $
            170Loans
      charged off
            
            
            —
            
            
            
            —Recoveries
            
            
            —
            
            
            
            —Provision
      charged to income
            
            
            50
            
            
            
            70Balance
      at end of year
            
            $
            290
            
            
            $
            240





Non-accrual
loans, which include all loans past due 90 days and over at December 31,
2007 and 2006 were $259 and $443, respectively.  There were no loans
with allocated allowances at December 31, 2007 and 2006.




Loans to
principal officers, directors, and their affiliates in 2007 were as
follows.




Balance
      at January 1, 2007
            
            $
            238New
      loans
            
            
            —Repayments
            
            
            16Balance
      at December 31, 2007
            
            $
            222





NOTE
4 – PREMISES AND EQUIPMENT




Year-end
premises and equipment were as follows.




2007
            
            
            2006Land
            
            $
            97
            
            
            $
            97Building
            
            
            355
            
            
            
            355Building
      improvements
            
            
            140
            
            
            
            152Parking
      lot improvements
            
            
            19
            
            
            
            44Furniture
      and equipment
            
            
            468
            
            
            
            645Total
      cost
            
            
            1,079
            
            
            
            1,293Accumulated
      depreciation
            
            
            (829
            )
            
            
            (1,004
            )$
            250
            
            
            $
            289





Depreciation
expense was $58 and $59 for the years ended December 31, 2007 and
2006.






F-17
 Table of Contents 2




MUTUAL
FEDERAL BANCORP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2007 AND
2006
 (Dollar
amounts in thousands)






NOTE
5 – ACCRUED INTEREST RECEIVABLE




Accrued
interest receivable is summarized as follows:




2007
            
            
            2006Securities
            
            $
            89
            
            
            $
            116Loans
            
            
            271
            
            
            
            223$
            360
            
            
            $
            339





NOTE
6 – DEPOSITS




Deposits,
by major category, are as follows:




2007
            
            
            2006Non-interest-bearing
      checking
            
            $
            331
            
            
            $
            728Savings
            
            
            18,854
            
            
            
            20,334Certificates
      of deposit
            
            
            20,534
            
            
            
            22,246$
            39,719
            
            
            $
            43,308





The
aggregate amount of certificates of deposit with a minimum denomination of $100
was approximately $7,011 and $7,498 at December 31, 2007 and 2006,
respectively.  Deposit balances over $100 are not federally
insured.




Scheduled
maturities of certificates of deposit for the year ended December 31, 2007
are as follows:




2008
            
            $
            18,3212009
            
            
            9712010
            
            
            1,0792011
            
            
            72012
            
            
            156$
            20,534





Deposits
of related parties totaled approximately $1,275 and $1,020 at December 31,
2007 and 2006, respectively.




Interest
expense on deposit accounts is summarized as follows:




2007
            
            
            2006Savings
            
            $
            246
            
            
            $
            269Certificates
      of deposit
            
            
            908
            
            
            
            789$
            1,154
            
            
            $
            1,058





F-18
 Table of Contents 2


MUTUAL
FEDERAL BANCORP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31,
2007 AND 2006
 (Dollar
amounts in thousands)


NOTE
7 – FEDERAL HOME LOAN BANK ADVANCES




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




2007
            
            
            2006Maturities
      in March 2008 through December 2009, fixed rate at rates from 3.99% to
      5.22%, averaging 4.74%
            
            $
            5,000
            
            
            $
            —Overnight
      advances, floating rate, at 5.50%
            
            
            —
            
            
            
            2,000Total
            
            $
            5,000
            
            
            $
            2,000Required
      payments over the next two years are:2008
            
            $
            3,0002009
            
            
            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 remaining available credit limit,
limited to twenty times its current investment in FHLB stock, at
December 31, 2007, was $7.2 million.




NOTE
8 – 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.  The ESOP will make annual fixed principal payments 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 year ended December
31, 2007 and 2006, the Company contributed $101 and $78 to the plan and reported
compensation expense of $75 and $52 and released 5,928 shares and 4,537 shares
of common stock.






F-19
 Table of Contents 2




MUTUAL
FEDERAL BANCORP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31,
2007 AND 2006
 (Dollar
amounts in thousands)






NOTE
8 – BENEFIT PLANS (Continued)




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 purchase 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 purchase the shares.  At
December 31, 2007 and 2006, there are 10,321 and 4,537 allocated ESOP
shares and a contingent repurchase obligation of $108 and $66.  In
addition, the fair value of unearned ESOP shares at December 31, 2007 and 2006,
was $807 and $1.2 million.




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 SOP and the MRP,
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 its
2006 Management Recognition and Retention 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 its 2006
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 year ended December 31, 2007, was $146 for the
Management Recognition Plan and $100 for the Stock Option Plan.  The
total income tax benefit was $66 for this period.




Stock Option
Plan




The
Company’s 2006 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.






F-20
 Table of Contents 2




MUTUAL
FEDERAL BANCORP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2007 AND
2006
 (Dollar
amounts in thousands)






NOTE
8 – BENEFIT PLANS (Continued)




The fair
value of options granted during 2007 was determined using the following
weighted-average assumptions as of grant date:




Risk-free
      interest rate
            
            
            4.50
            %Expected
      term
            
            
            6.50
            yearsExpected
      stock price volatility
            
            
            9.40
            %Dividend
      yield
            
            
            0.00
            %





A summary
of the activity in the stock option plan for 2007 follows:




Shares
            
            
            Weighted
      AverageExercise Price
            
            
            Weighted
      AverageRemaining Contractual Term
            
            
            AggregateIntrinsicValueOutstanding
      at January 1, 2007
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Granted
            
            
            131,871
            
            
            $
            14.41
            
            
            
            10.0
            
            
            
            —Exercised
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Forfeited
      or expired
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Outstanding
      at December 31, 2007
            
            
            131,871
            
            
            $
            14.41
            
            
            
            9.0
            
            
            
            —Exercisable
      at December 31, 2007
            
            
            —
            
            
            $
            —
            
            
            
            —
            
            
            
            —Expected
      to vest at December 31, 2007
            
            
            131,871
            
            
            $
            14.41
            
            
            
            —
            
            
            
            —





Information
related to the stock option plan during 2007 follows:




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





As of
December 31, 2007, there was $422 of total unrecognized compensation cost
related to non-vested stock options granted under the Plan.  The cost
is expected to be recognized over a weighted-average remaining period of 4.0
years.




Stock Award
Plan




A
Management Recognition and Retention Plan (“MRP”) provides for the issuance of
shares 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 issuable under the plan are 71,282 at
December 31, 2007.






F-21
 Table of Contents 2




MUTUAL
FEDERAL BANCORP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31,
2007 AND 2006
 (Dollar
amounts in thousands)




NOTE
8 – BENEFIT PLANS (Continued)




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




Shares
                  
                  
                  Weighted
      Average
                      Grant
      Price
                  
                  
                  Weighted
      Average
                      Grant-Date
      Fair
                      ValueNon-vested
      at January 1, 2007
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Granted
                  
                  
                  52,748
                  
                  
                  $
                  14.41
                  
                  
                  $
                  760Vested
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Forfeited
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Non-vested
      at December 31, 2007
                  
                  
                  52,748
                  
                  
                  $
                  14.41
                  
                  
                  $
                  760





As of
December 31, 2007, there was $614 of total unrecognized compensation cost
related to non-vested shares granted under the Plan.  The cost is
expected to be recognized over a weighted-average remaining period of 4.0
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 $23 and $25 for
the years ended December 31, 2007 and 2006.  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, 2007 and
2006.




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, 2007 and 2006 approximated $15 and $14.  In
addition, for the years ended December 31, 2007 and 2006, approximately $24 was
distributed each year.  The agreements were amended during 2005 to
terminate deferrals after 2004.  At December 31, 2007 and 2006,
$387 and $396 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, 2007 and 2006, a liability of $64
and $83 is included in accrued expenses and other liabilities in the statements
of financial condition.  The Company recorded expense of $5 and $8 for
the years ended December 31, 2007 and 2006.  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.  The other
related disclosures are not considered significant to the consolidated financial
statements.






F-22
 Table of Contents 2




MUTUAL
FEDERAL BANCORP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31,
2007 AND 2006
 (Dollar
amounts in thousands)




NOTE
9 – INCOME TAXES




Income
tax expense was as follows.




2007
            
            
            2006FederalCurrent
            
            $
            323
            
            
            $
            282Deferred
            
            
            (124
            )
            
            
            (9
            )199
            
            
            
            273StateCurrent
            
            
            45
            
            
            
            24Deferred
            
            
            (25
            )
            
            
            720
            
            
            
            31$
            219
            
            
            $
            304





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




2007
            
            
            2006Provision
      calculated at statutory federal rate
            
            $
            175
            
            
            $
            284Effect
      of:State
      taxes, net of federal benefit
            
            
            13
            
            
            
            24Stock
      based compensation
            
            
            25
            
            
            
            —Other,
      net
            
            
            6
            
            
            
            (4
            )Total
            
            $
            219
            
            
            $
            304Effective
      tax rate
            
            
            42.6
            %
            
            
            36.5
            %





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




2007
            
            
            2006Deferred
      tax assets:Allowance
      for loan losses
            
            $
            111
            
            
            $
            90Deferred
      compensation
            
            
            150
            
            
            
            154Accrued
      post retirement benefit
            
            
            25
            
            
            
            32Stock
      based compensation
            
            
            67
            
            
            
            —Write
      down of impaired securities
            
            
            59
            
            
            
            —412
            
            
            
            276Deferred
      tax liabilities:Federal
      Home Loan Bank stock dividends
            
            $
            (61
            )
            
            $
            (61
            )Depreciation
            
            
            (8
            )
            
            
            (12
            )Net
      unrealized gain on securities available-for-sale
            
            
            (141
            )
            
            
            (84
            )Other
            
            
            (3
            )
            
            
            (12
            )(213
            )
            
            
            (169
            )Net
      deferred tax asset
            
            $
            199
            
            
            $
            107






F-23
 Table of Contents 2




MUTUAL
FEDERAL BANCORP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31,
2007 AND 2006
 (Dollar
amounts in thousands)






NOTE
9 – 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
2007.  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
10 – 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
contractual amount of fixed rate loan commitments at December 31, 2007 and 2006
were $205 and $576.  Commitments to make loans are generally made for
periods of 60 days or less.  The fixed-rate loan commitments at
December 31, 2007 have interest rates ranging from 6.25% to 6.75% and maturities
ranging from 10 years to 15 years.




NOTE
11 – 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 2007 and 2006, the most recent regulatory
notifications categorized the Association 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 institution’s category.  Actual and required capital
amounts and ratios are presented below:






F-24
 Table of Contents 2




MUTUAL
FEDERAL BANCORP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31,
2007 AND 2006
 (Dollar
amounts in thousands)




NOTE
11 – 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, 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
            
            
            
            —
            
            
            
            —December
      31, 2006Total
      capital to risk-weighted
      assets
            
            $
            23,649
            
            
            
            57.79
            %
            
            $
            3,274
            
            
            
            8.0
            %
            
            $
            4,092
            
            
            
            10.0
            %Tier
      1 (core) capital to risk-weighted assets
            
            
            23,174
            
            
            
            56.63
            
            
            
            1,637
            
            
            
            4.0
            
            
            
            2,455
            
            
            
            6.0Tier
      1 (core) capital toadjusted
      total assets
            
            
            23,174
            
            
            
            30.99
            
            
            
            2,991
            
            
            
            4.0
            
            
            
            3,739
            
            
            
            5.0Tangible
      capital (to adjusted total assets)
            
            
            23,174
            
            
            
            30.99
            
            
            
            1,122
            
            
            
            1.5
            
            
            
            —
            
            
            
            —





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.




2007
            
            
            2006GAAP equity
            
            $
            24,131
            
            
            $
            23,307Unrealized gain on securities
      available-for-sale
            
            
            (222
            )
            
            
            (133
            )Tier 1 capital
            
            
            23,909
            
            
            
            23,174General allowance for loan
      losses
            
            
            290
            
            
            
            240Allowable portion (45%) of unrealized
      gains on equity securities available-for-sale
            
            
            119
            
            
            
            235Total regulatory
capital
            
            $
            24,318
            
            
            $
            23,649











F-25
 Table of Contents 2




MUTUAL
FEDERAL BANCORP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31,
2007 AND 2006
 (Dollar
amounts in thousands)






NOTE
11 – 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.  At
January 1, 2008, the Bank could, without prior approval, declare dividends of
approximately $1.1 million.




NOTE
12 – OTHER COMPREHENSIVE INCOME




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




2007
            
            
            2006Unrealized
      holding gains (losses) on securities available-for-sale
            
            $
            297
            
            
            $
            80Reclassification
      adjustment for gains (losses) realized in income
            
            
            (152
            )
            
            
            —Net
      unrealized gains (losses)
            
            
            145
            
            
            
            80Tax
      effect
            
            
            (56
            )
            
            
            (30
            )Other
      comprehensive income
            
            $
            89
            
            
            $
            50





NOTE
13 – FAIR VALUES OF FINANCIAL INSTRUMENTS




Carrying
amount and estimated fair values of financial instruments were as
follows:




December 31,
      2007
            
            
            December 31,
      2006Carrying
      Amount
            
            
            Fair
                Value
            
            
            Carrying
                Amount
            
            
            Fair
                ValueFinancial
      assets:Cash
      and cash equivalents
            
            $
            2,264
            
            
            $
            2,264
            
            
            $
            2,268
            
            
            $
            2,268Securities
      available-for-sale
            
            
            16,345
            
            
            
            16,345
            
            
            
            19,559
            
            
            
            19,559Loans,
      net
            
            
            53,047
            
            
            
            53,966
            
            
            
            51,924
            
            
            
            52,209Federal
      Home Loan Bank stock
            
            
            610
            
            
            
            610
            
            
            
            500
            
            
            
            500Accrued
      interest receivable
            
            
            360
            
            
            
            360
            
            
            
            339
            
            
            
            339Financial
      liabilities:Deposits
            
            
            39,719
            
            
            
            39,805
            
            
            
            43,308
            
            
            
            43,227Advances
      from Federal Home Loan Bank
            
            
            5,000
            
            
            
            5,012
            
            
            
            2,000
            
            
            
            2,000Advance
      payments by borrowers for taxes and insurance
            
            
            236
            
            
            
            236
            
            
            
            401
            
            
            
            401Accrued
      interest payable
            
            
            115
            
            
            
            115
            
            
            
            70
            
            
            
            70





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






F-26
 Table of Contents 2




MUTUAL
FEDERAL BANCORP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31,
2007 AND 2006
 (Dollar
amounts in thousands)




NOTE
13 – FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)




Carrying
amount is the estimated fair value for cash and cash equivalents, Federal Home
Loan Bank stock, accrued interest receivable and payable, advance payments by
borrowers for taxes and insurance, demand deposits, and variable-rate loans,
deposits and advances that reprice frequently and fully.  Security
fair values are based on market prices or dealer quotes and, if no such
information is available, on the rate and term of the security and information
about the issuer.  For fixed-rate loans or deposits and for
variable-rate loans or deposits with infrequent repricing or repricing limits,
fair value is based on discounted cash flows using current market rates applied
to the estimated life and credit risk.  The fair value of
off-balance-sheet items is not material.




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, 2007 and 2006




2007
            
            
            2006ASSETSCash
      and cash equivalents
            
            $
            1,838
            
            
            $
            4,088Investment
      in banking subsidiary
            
            
            24,131
            
            
            
            23,307ESOP
      note receivable
            
            
            796
            
            
            
            840Other
      assets
            
            
            256
            
            
            
            72Total
      assets
            
            $
            27,021
            
            
            $
            28,307LIABILITIES
      AND EQUITYAccrued
      expenses and other liabilities
            
            $
            2
            
            
            $
            8Common
      stock in ESOP subject to contingent repurchase obligation
            
            
            108
            
            
            
            66Stockholders’
      equity
            
            
            26,911
            
            
            
            28,233Total
      liabilities and stockholders’ equity
            
            $
            27,021
            
            
            $
            28,307





CONDENSED
STATEMENTS OF INCOME


For the
year ended December 31, 2007 and the period April 4, 2006 through December
31, 2006




Interest
      income
            
            $
            97
            
            
            $
            59Other
      expense
            
            
            (360
            )
            
            
            (246
            )Income
      (loss)before income tax and undistributed subsidiary
    income
            
            
            (263
            )
            
            
            (187
            )Income
      tax benefit
            
            
            95
            
            
            
            73Equity
      in undistributed subsidiary income
            
            
            463
            
            
            
            537Net
      income
            
            $
            295
            
            
            $
            423






F-27
 Table of Contents 2




MUTUAL
FEDERAL BANCORP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31,
2007 AND 2006
 (Dollar
amounts in thousands)


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




CONDENSED
STATEMENTS OF CASH FLOWS


For the
year ended December 31, 2007 and the period April 4, 2006 through December
31, 2006




2007
            
            
            2006Cash flows from operating
      activitiesNet income
            
            $
            295
            
            
            $
            423Adjustments:Equity in undistributed subsidiary
      income
            
            
            (463
            )
            
            
            (537
            )Stock based
compensation
            
            
            49
            
            
            
            —Change in other assets
            
            
            (184
            )
            
            
            (72
            )Change in other
    liabilities
            
            
            (6
            )
            
            
            7Net cash from operating
      activities
            
            
            (309
            )
            
            
            (179
            )Cash flows from investing
      activitiesInvestments in
    subsidiary
            
            
            —
            
            
            
            (4,224
            )ESOP loan made
            
            
            —
            
            
            
            (873
            )ESOP loan payments
    received
            
            
            44
            
            
            
            33Net cash from investing
      activities
            
            
            44
            
            
            
            (5,064
            )Cash flows from financing
      activitiesProceeds from stock
    issue
            
            
            —
            
            
            
            9,331Purchase of treasury
    stock
            
            
            (1,985
            )
            
            
            —Net cash from financing
      activities
            
            
            (1,985
            )
            
            
            9,331Net change in cash and cash
      equivalents
            
            
            (2,250
            )
            
            
            4,088Beginning cash and cash
      equivalents
            
            
            4,088
            
            
            
            —Ending cash and cash
      equivalents
            
            $
            1,838
            
            
            $
            4,088




NOTE 15 – EARNINGS PER SHARE




Basic
earnings 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 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, 2007, are 3,535,838.  During the year ended December 31, 2007, the
average fair value of the Company’s common stock was less than $14.41 and the
stock option and stock grant awards had no dilutive effect on earnings per
share.Earnings per
share prior to the minority stock issuance on April 4, 2006, is no longer
meaningful.  Earnings per share for the year ended December 31, 2006,
includes net income for the period from April 4, 2006 through December 31,
2006.






F-28
 Table of Contents 2




MUTUAL
FEDERAL BANCORP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2007 AND
2006
 (Dollar
amounts in thousands)






The
factors used in the earnings per share computation for the years ended December
31, 2007, and 2006 follow:




2007
            
            
            2006BasicNet income
            
            $
            295
            
            
            $
            423Weighted average common shares
      outstanding
            
            
            3,615,622
            
            
            
            3,636,875Less: average unallocated ESOP
      shares
            
            
            (79,784
            )
            
            
            (84,989
            )Average shares
            
            
            3,535,838
            
            
            
            3,551,886Basic earnings per common
      share
            
            $
            0.08
            
            
            $
            0.12DilutedNet Income
            
            $
            295
            
            
            $
            423Weighted average common shares
      outstanding for basic earnings per common share
            
            
            3,535,838
            
            
            
            3,551,886Add: dilutive effects of assumed
      exercises of stock options
            
            
            —
            
            
            
            —Average shares and dilutive potential
      common shares
            
            
            3,535,838
            
            
            
            3,551,886Diluted earnings per common
      share
            
            $
            0.08
            
            
            $
            0.12






F-29




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 21st day of
March, 2008.




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-KSB, 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
                
                Chairman,
      President, Chief Executive Officer andDirector
                    (Principal
      Executive Officer)
                
                March21,
      2008Stephen M.
      Oksas/s/John
      L. Garlanger
                
                Executive
      Vice President and Chief Financial Officer
                    (Principal
      Financial and Accounting Officer)
                
                March 21,
      2008John
      L. Garlanger/s/Stanley
      Balzekas III
                
                Director
                
                March 21,
      2008Stanley
      Balzekas III


/s/Robert P.
      Kazan
            
            Director
            
            March 21,
      2008Robert P.
      Kazan


/s/Leonard F.
      Kosacz
            
            Director
            
            March 21,
      2008Leonard F.
      Kosacz /s/Julie
      H. Oksas
            
            Executive
      Vice President and Director
            
            March 21,
      2008Julie
      H. Oksas






S-1


Name
            
            Title
            
            Date/s/Stephanie
      Simonaitis
            
            Director
            
            March 21,
      2008Stephanie
      Simonaitis /s/Amy
      P. Keane
            
            Director
            
            March 21,
      2008Amy
      P. Keane





S-2




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 3.2 to Registrant’s Form 10-QSB filed with the
      Commission on May 11, 2007).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 and Trust
      Agreement (incorporated by reference to Appendix B 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).10.8
            Form
      of Employee Stock Ownership Plan (incorporated by reference to Exhibit
      10.1 to the Company’s Amendment No. 1 to Form SB-2 filed with the
      Commission on February 4, 2006).14.1
            Code
      of Ethics (incorporated by reference to Exhibit 14.1 to the Company’s
      Form 10-K 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 Chizek and Company LLC











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