**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, 2006**




**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 incorporationor
              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
      $4,042,000.




As
      of
      March 27, 2007, the aggregate market value of the voting common equity held
      by non-affiliates of the registrant was approximately $12,904,878, based on
      the
      last reported trade price of $14.00 on March 22, 2007 on the OTC Bulletin
      Board.




There
      were 3,636,875
      shares of common stock of the registrant outstanding as of March 27,
      2007.




Documents
      Incorporated by Reference: Portions of the registrant’s definitive proxy
      statement for its 2007 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




*Table
          of Contents*




**MUTUAL
      FEDERAL BANCORP, INC.**




**Form
      10-KSB for Fiscal Year Ended**




**December 31,
      2006**




Table
      of
      Contents




**Page**PART
                  I
              1Item
                  1. Description of Business
              1Item
                  2. Description of Property
              23Item
                  3. Legal Proceedings
              23Item
                  4. Submission of Matters to a Vote of Security
                  Holders
              23PART 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
              37Item
                  8. Changes in and Disagreements with Accountants on
                  Accounting and Financial Disclosure
              38Item
                  8A. Controls and Procedures
              38Item
                  8B. Other Information
              38PART III
              38Item
                  9. Directors, Executive Officers, Promoters, Control
                  Persons and Corporate Governance; Compliance with Section 16(a) of
                  the Exchange Act
              38Item
                  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
              39Item
                  13. Exhibits
              39Item
                  14. Principal Accountant Fees and
                  Services
              40MUTUAL
                  FEDERAL BANCORP, INC. CONSOLIDATED FINANCIAL STATEMENTS
                  DECEMBER 31,
                  2006AND2005
              F-1SIGNATURES
              S-1EXHIBIT INDEX




i
 *Table
          of Contents*




**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 common stock was offered on a priority basis to eligible
      depositors, qualified tax-exempt employee plans, other depositors and other
      voting members of the Bank, with any remaining shares to be offered to the
      public. The offering period opened on February 13, 2006 and closed on
      March 16, 2006. The offering was oversubscribed in the first tier (eligible
      depositors as of June 30, 2004) and closed at the adjusted maximum offering
      amount 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 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 and money
      market deposit accounts. 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, 2006,
                  $33.3 million, or 63.6%, of our total loan portfolio consisted
                  of
                  fixed-rate one- to four-family residential mortgage loans. During
                  the year
                  ended December 31, 2006, we originated $14.1 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, 2006,
                  $19.0 million, or 36.3%, of
  1
 *Table
            of Contents*


our
                  total loan portfolio consisted of multi-family residential mortgage
                  loans.
                  During the year ended December 31, 2006, we originated
                  $7.0 million of multi-family residential mortgage
                  loans.
  ·
                *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 adjustable-rate
                    mortgage
                    loans, home equity lines of credit and money market deposit accounts.
                    We
                    expect to be able to begin offering these new products and services
                    beginning in 2007. 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, 2006 and December 31, 2005 were $443,000 and
                    $184,000, respectively, or 0.59% and 0.29% of total
                    assets.
  ·
                *Maintaining
                    high levels of interest earning assets*.
                    We intend to maintain our high level of interest earning assets.
                    At
                    December 31, 2006, our interest earning assets were 96.0% of total
                    assets and our average interest earning assets for 2006 were
                    157.0% 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.




2
 *Table
          of Contents*




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


**Competition**




We
      face
      intense competition within our market area both in making loans and attracting
      deposits. Cook County, Illinois, and specifically the Chicago metropolitan
      area
      have a high concentration of financial institutions including money centers
      and
      other large commercial banks, community banks and credit unions. Some of our
      competitors offer products and services that we currently do not offer, such
      as
      trust services, private banking and Internet banking. As of June 30, 2006,
      based on the FDIC’s annual Summary of Deposits Report, our market share of
      deposits represented 8.84% of the deposits in our zip code and 0.03% 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, 2006, 95% 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 $33.3 million,
      or
      63.6%, of our loan portfolio at December 31, 2006. We also offer
      multifamily real estate loans. Multifamily real estate loans represented $19.0
      million, or 36.3% of our loan portfolio at December 31, 2006. 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,****2006**
            
            **2005**
            
            **2004****Amount**
            
            **Percent**
            
            **Amount**
            
            **Percent**
            
            **Amount**
            
            **Percent****(dollars
                in thousands)**One-
                to four-family residential mortgage
            
            $
            33,270
            
            
            63.62
            %
            $
            24,424
            
            
            63.70
            %
            $
            19,772
            
            
            69.21
            %Multi-family
            
            
            18,965
            
            
            36.27
            
            
            13,839
            
            
            36.10
            
            
            8,772
            
            
            30.71Total
                mortgage loans
            
            
            52,235
            
            
            99.89
            
            
            38,263
            
            
            99.80
            
            
            28,544
            
            
            99.92Consumer
                loans
            
            
            59
            
            
            .11
            
            
            77
            
            
            0.20
            
            
            24
            
            
            0.08Total
                loans
            
            
            52,294
            
            
            100.00
            %
            
            38,340
            
            
            100.00
            %
            
            28,568
            
            
            100.00
            %Less:Deferred
                loan origination fees, net
            
            
            121
            
            
            
            
            
            89
            
            
            
            
            
            89Undisbursed
                portion of loans
            
            
            9
            
            
            
            
            
            51
            
            
            
            
            
            3Allowance
                for loan losses
            
            
            240
            
            
            
            
            
            170
            
            
            
            
            
            150Total
                loans, net
            
            $
            51,924
            
            
            
            
            $
            38,030
            
            
            
            
            $
            28,326





***Loan
      Portfolio Maturities and Yields*** .
      The
      following table summarizes the remaining contractual maturity of our loans
      at
      December 31, 2006. The table does not include the effect of possible
      prepayments. We had no adjustable-rate loans at December 31,
      2006.




**One-
                to Four-Family**
            
            **Multi
                Family**
            
            **Consumer**
            
            **Total****Amount**
            
            
            **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, 2007
            
            $
            2
            
            
            6.85
            %
            $
            -
            
            
            -
            %
            $
            59
            
            
            3.35
            %
            $
            61
            
            
            3.49
            %2007
                to 2008
            
            
            80
            
            
            7.47
            
            
            10
            
            
            11.50
            
            
            -
            
            
            -
            
            
            90
            
            
            7.892009
                to 2010
            
            
            152
            
            
            7.24
            
            
            167
            
            
            6.56
            
            
            -
            
            
            -
            
            
            319
            
            
            6.882011
                to 2015
            
            
            1,694
            
            
            6.77
            
            
            1,444
            
            
            6.72
            
            
            -
            
            
            -
            
            
            3,138
            
            
            6.742016
                to 2025
            
            
            2,649
            
            
            6.31
            
            
            15,381
            
            
            6.63
            
            
            -
            
            
            -
            
            
            18,030
            
            
            6.582026
                and beyond
            
            
            28,693
            
            
            6.18
            
            
            1,963
            
            
            6.55
            
            
            -
            
            
            -
            
            
            30,656
            
            
            6.20Total
            
            $
            33,270
            
            
            6.22
            %
            $
            18,965
            
            
            6.63
            %
            $
            59
            
            
            3.35
            %
            $
            52,294
            
            
            6.37
            %





The
      following table sets forth the remaining contractual maturity of fixed-rate
      loans at December 31, 2006 that are contractually due after
      December 31, 2007. We had no adjustable-rate loans at December 31,
      2006.




**Due
                After December 31, 2007****Fixed**
            
            **Total****(dollars
                in thousands)**One-
                to four-family residential mortgage loans
            
            $
            33,268
            
            $
            33,268Multi-family
            
            
            18,965
            
            
            18,965Total
                mortgage loans
            
            
            52,233
            
            
            52,233Total
                loans
            
            $
            52,233
            
            $
            52,233





***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, 2006, $33.3 million, or 63.6% of our loan
      portfolio, consisted of one- to four-family residential mortgage loans. Included
      within these one- to four-family loans were $1.3 million in second mortgage
      loans at December 31, 2006. At December 31, 2006, the average balance
      of our one- to four-family loans was $106,000. 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, 2006, our
      largest loan secured by one- to four-family




4
 *Table
          of Contents*




real
      estate had a principal balance of $949,000 and was performing in accordance
      with
      its repayment terms. 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 $19.0 million, or 36.3%, of our
      total loan portfolio at December 31, 2006. 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, 2006, we had
      100 multi-family real estate loans with an average principal balance of
      $190,000, 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 $59,000, or 0.1%, of our total loan portfolio
      at
      December 31, 2006.




***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 committee consists of the President and three outside directors. All
      loans
      secured by deposits require the approval of the President. 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 table below
      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,****2006**
            
            
            **2005**
            
            
            **2004****(dollars
                in thousands)**Non-accrual
                loans:One-
                to four-family
            
            $
            226
            
            $
            184
            
            $
            306Multi-family
            
            
            217
            
            
            —
            
            
            —Consumer
            
            
            —
            
            
            —
            
            
            —Total
                non-accrual loans
            
            $
            443
            
            $
            184
            
            $
            306Accruing
                loans delinquent 90 days or more:One-
                to four-family
            
            
            —
            
            
            —
            
            
            —Multi-family
            
            
            —
            
            
            —
            
            
            —Consumer
            
            
            —
            
            
            —
            
            
            —Total
                non-performing loans
            
            $
            443
            
            $
            184
            
            $
            306Real
                estate owned:One-
                to four-family
            
            
            —
            
            
            —
            
            
            —Multi-family
            
            
            —
            
            
            —
            
            
            —Consumer
            
            
            —
            
            
            —
            
            
            —Total
                real estate owned
            
            
            —
            
            
            —
            
            
            —Total
                non-performing assets
            
            $
            443
            
            $
            184
            
            $
            306Allowance
                for loan losses attributable to non-performing loans
            
            
            —
            
            
            —
            
            
            —Ratios:Non-performing
                loans to total loans
            
            
            0.85
            %
            
            0.48
            %
            
            1.07
            %Non-performing
                assets to total assets
            
            
            0.59
            
            
            0.29
            
            
            0.47





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




**Loans
                Delinquent for****60-89
                Days**
            
            **90
                Days and Over**
            
            **Total****Number**
            
            
            **Amount**
            
            
            **Number**
            
            
            **Amount**
            
            
            **Number**
            
            
            **Amount****(dollars
                in thousands)****At
                December 31, 2006**One-
                to four-family
            
            
            1
            
            $
            101
            
            
            4
            
            $
            226
            
            
            5
            
            $
            327Multi-family
            
            
            1
            
            
            284
            
            
            1
            
            
            217
            
            
            2
            
            
            501Consumer
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Total
            
            
            2
            
            $
            385
            
            
            5
            
            $
            443
            
            
            7
            
            $
            828**At
                December 31, 2005**One-
                to four-family
            
            
            4
            
            $
            301
            
            
            2
            
            $
            184
            
            
            6
            
            $
            485Multi-family
            
            
            1
            
            
            217
            
            
            —
            
            
            —
            
            
            1
            
            
            217Consumer
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Total
            
            
            5
            
            $
            518
            
            
            2
            
            $
            184
            
            
            7
            
            $
            702**At
                December 31, 2004**One-
                to four-family
            
            
            6
            
            $
            336
            
            
            3
            
            $
            306
            
            
            9
            
            $
            642Multi-family
            
            
            1
            
            
            206
            
            
            —
            
            
            —
            
            
            1
            
            
            206Consumer
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Total
            
            
            7
            
            $
            542
            
            
            3
            
            $
            306
            
            
            10
            
            $
            848





***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.




7
 *Table
          of Contents*




Holding
      costs and declines in fair value result in charges to expense after acquisition.
      At December 31, 2006, we held no real estate owned.




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




An
      insured institution is required to establish general allowances for loan losses
      in an amount deemed prudent by management for loans classified substandard
      or
      doubtful, as well as for other problem loans. General allowances represent
      loss
      allowances which have been established to recognize the 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, 2006, $443,000 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




8
 *Table
          of Contents*




future
      cash flows discounted at the loan’s effective interest rate or, as a practical
      measure, at the loan’s observable market price or the fair value of the
      collateral if the loan is collateral dependent.




General
      loan loss allowances are based upon historical loan loss experience as adjusted
      after evaluation of other factors that may or may not be present, including
      changes in the composition of the loan portfolio, current national and local
      economic conditions, changes in lending policies and procedures and personnel
      changes in our lending management or staff. The allowance is increased through
      provisions charged against current earnings and recoveries of previously
      charged-off loans. Loans that are determined to be uncollectible are charged
      against the allowance. While management uses available information to recognize
      probable and reasonably estimable loan losses, future loss provisions may be
      necessary based on changing economic conditions or other factors. 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, 2006
      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,****2006**
            
            
            **2005**
            
            
            **2004****(dollars
                in
                thousands)**Balance
                at beginning of year
            
            $
            170
            
            $
            150
            
            $
            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
            
            
            70
            
            
            20
            
            
            —Balance
                at end of year
            
            $
            240
            
            $
            170
            
            $
            150Ratios:Net
                charge-offs to average loans outstanding
            
            
            —
            
            
            —
            
            
            —Allowance
                for loan losses to non-performing loans
            
            
            0.54x
            
            
            0.92x
            
            
            0.49xAllowance
                for loan losses to total loans
            
            
            0.46
            %
            
            0.44
            %
            
            0.53
            %





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 increased
      to
      $443,000 at December 31, 2006, from $184,000 at December 31, 2005.
      However, loans delinquent for 60-89 days decreased to $385,000 at
      December 31, 2006, from $518,000 at December 31, 2005.




During
      2006 the Bank’s loan portfolio increased $13.9 million, or 36.5%, to $51.9
      million at December 31, 2006, from $38.0 million at December 31, 2005.
      Based on the application of our allowance for loan losses methodology, as
      discussed previously, management determined that a provision of $70,000 for
      loan
      losses was adequate and necessary for the year ended December 31, 2006.
      During 2005, using the same methodology, management determined that a $20,000
      provision for loan losses was necessary for the year ended December 31,
      2005.




9
 *Table
          of Contents*




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




**At
                December 31,****2006**
            **2005****Allowance
                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
            
            $
            83
            
            $
            33,270
            
            
            63.62
            %
            $
            60
            
            $
            24,424
            
            
            63.70
            %Multi-family
            
            
            157
            
            
            18,965
            
            
            36.27
            
            
            110
            
            
            13,839
            
            
            36.10Consumer
            
            
            —
            
            
            59
            
            
            0.11
            
            
            —
            
            
            77
            
            
            0.20Total
                allowance
            
            $
            240
            
            $
            52,294
            
            
            100.00
            %
            $
            170
            
            $
            38,340
            
            
            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.




**Investments**




***Investments
      and Mortgage-backed Securities*** .
      Our
      investment portfolio at December 31, 2006, included $6.7 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, 2006, our mortgage-backed securities
      portfolio totaled $9.6 million, or 12.8% of total assets. The portfolio
      consisted of $5.9 million in fixed-rate mortgage-backed securities, and $3.7
      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). Based on the
      concentration of unrealized gains in this one equity security, we have
      consistently monitored the performance of the stock and related market
      conditions, and have periodically sold shares since 1998.




The
      10,000 shares of FHLMC preferred stock was acquired in 1999 at a cost basis
      of
      $500,000 ($50.00 per share) and pays a non-cumulative annualized preferred
      dividend of 5.79%. It is callable in June 2009. While we do not currently
      plan to sell a significant portion of the remaining shares of FHLMC stock held
      in the investment portfolio, depending on liquidity or market conditions
      relating to the stock, we may decide that further sales are
      prudent.




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




**At
                December 31,****2006**
            **2005**
            **2004****Amortized
                Cost**
            
            
            **Fair
                Value**
            
            
            **Amortized
                Cost**
            
            
            **Fair
                Value**
            
            
            **Amortized
                Cost**
            
            
            **Fair
                Value****(in
                thousands)****Investment
                Securities:**U.S.
                agency and government-sponsored entity bonds
            
            $
            6,695
            
            $
            6,654
            
            $
            8,694
            
            $
            8,584
            
            $
            13,186
            
            $
            13,152Mutual
                funds
            
            
            2,357
            
            
            2,293
            
            
            2,250
            
            
            2,195
            
            
            2,165
            
            
            2,151FHLMC
                common stock
            
            
            8
            
            
            543
            
            
            8
            
            
            523
            
            
            15
            
            
            1,140FHLMC
                preferred stock
            
            
            500
            
            
            487
            
            
            500
            
            
            505
            
            
            500
            
            
            546**Mortgage-backed
                Securities:**GNMA
            
            
            1,555
            
            
            1,532
            
            
            2,162
            
            
            2,135
            
            
            2,931
            
            
            2,939FNMA
            
            
            4,582
            
            
            4,489
            
            
            5,757
            
            
            5,654
            
            
            6,388
            
            
            6,427FHLMC
            
            
            3,067
            
            
            3,000
            
            
            3,798
            
            
            3,721
            
            
            4,222
            
            
            4,208FNMA,
                FHLMC collateralized mortgage obligations
            
            
            578
            
            
            561
            
            
            722
            
            
            711
            
            
            996
            
            
            1,033Total
                securities available for sale
            
            $
            19,342
            
            $
            19,559
            
            $
            23,891
            
            $
            24,028
            
            $
            30,403
            
            $
            31,596





***Portfolio
      Maturities and Yields*** .
      The
      composition and maturities of the investment securities portfolio and the
      mortgage-backed securities portfolio at December 31, 2006 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.




11
 *Table
          of Contents*


**One
                Year or Less**
            
            **More
                Than One Year Through Five Years**
            
            **More
                Than Five Years Through Ten Years****Amortized
                Cost**
            
            **Weighted
                Average Yield**
            
            **Amortized
                Cost**
            
            **Weighted
                Average Yield**
            
            **Amortized
                Cost**
            
            **Weighted
                Average Yield****(dollars
                in thousands)****Available-for-Sale****Investment
                Securities:**U.S.
                agency and government-sponsored entity bonds
            
            $
            200
            
            
            3.58
            %
            $
            5,495
            
            
            4.95
            %
            $
            1,000
            
            
            3.00
            %**Mortgage-backed
                Securities:**GNMA
            
            
            —
            
            
            —
            
            
            38
            
            
            6.94
            
            
            —
            
            
            —FNMA
            
            
            16
            
            
            7.00
            
            
            571
            
            
            5.49
            
            
            1,703
            
            
            4.34FHLMC
            
            
            —
            
            
            —
            
            
            907
            
            
            4.77
            
            
            365
            
            
            4.89FNMA,
                FHLMC collateralized mortgage obligations
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Total
                securities available for sale
            
            $
            216
            
            
            3.83
            %
            $
            7,011
            
            
            4.98
            %
            $
            3,068
            
            
            3.97
            %





**More
                Than Ten Years**
            
            **Total
                Securities****Amortized
                Cost**
            
            **Weighted
                Average Yield**
            
            **Amortized
                Cost**
            
            **Fair
                Value**
            
            **Weighted
                Average Yield****(dollars
                in thousands)****Available-for-Sale****Investment
                Securities:**U.S.
                agency and government-sponsored entity bonds
            
            $
            —
            
            
            —
            %
            $
            6,695
            
            $
            6,654
            
            
            4.61
            %**Mortgage-backed
                Securities:**GNMA
            
            
            1,517
            
            
            4.95
            
            
            1,555
            
            
            1,532
            
            
            5.00FNMA
            
            
            2,292
            
            
            4.81
            
            
            4,582
            
            
            4,489
            
            
            4.73FHLMC
            
            
            1,795
            
            
            5.09
            
            
            3,067
            
            
            3,000
            
            
            4.97FNMA,
                FHLMC collateralized mortgage obligations
            
            
            578
            
            
            3.85
            
            
            578
            
            
            561
            
            
            3.85Total
                securities available for sale
            
            $
            6,182
            
            
            4.83
            %
            $
            16,477
            
            $
            16,236
            
            
            4.72
            %





**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 in
      the
      short term 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




12
 *Table
          of Contents*




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, 2006, $22.2 million, or
      51.4% of our deposit accounts were certificates of deposit, of which
      $20.2 million had maturities of one year or less.




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




**At
                December 31,****2006**
            
            **2005**
            
            **2004****Balance**
            
            **Percent**
            
            **Weighted
                Average Rate**
            
            **Balance**
            
            **Percent**
            
            **Weighted
                Average Rate**
            
            **Balance**
            
            **Percent**
            
            **Weighted
                Average Rate****(dollars
                in thousands)**Savings
                deposits
            
            $
            20,334
            
            
            46.95
            %
            
            1.24
            %
            $
            21,827
            
            
            50.15
            %
            
            1.20
            %
            $
            22,552
            
            
            50.60
            %
            
            1.15
            %Certificates
                of deposit
            
            
            22,246
            
            
            51.37
            
            
            4.16
            
            
            21,348
            
            
            49.05
            
            
            3.01
            
            
            21,936
            
            
            49.21
            
            
            2.03Non-interest-bearing
                checking accounts
            
            
            728
            
            
            1.68
            
            
            —
            
            
            350
            
            
            0.80
            
            
            —
            
            
            83
            
            
            0.19
            
            
            —Total
                deposits
            
            $
            43,308
            
            
            100.00
            %
            
            2.72
            %
            $
            43,525
            
            
            100.00
            %
            
            2.08
            %
            $
            44,571
            
            
            100.00
            %
            
            1.58
            %





The
      following table sets forth certificates of deposit by time remaining until
      maturity as of December 31, 2006.




**Maturity****3
                Months or Less**
            
            **Over
                3 to 6 Months**
            
            **Over
                6 to 12 Months**
            
            **Over
                12 Months**
            
            **Total****(in
                thousands)**Certificates
                of deposit less than $100,000
            
            $
            4,741
            
            $
            4,490
            
            $
            4,027
            
            $
            1,490
            
            $
            14,748Certificates
                of deposit of $100,000 or more(1)
            
            
            1,841
            
            
            2,592
            
            
            2,478
            
            
            587
            
            
            7,498Total
                of certificates of deposit
            
            $
            6,582
            
            $
            7,082
            
            $
            6,505
            
            $
            2,077
            
            $
            22,246


_____________
 (1)
                The
                    weighted average interest rates for these accounts, by maturity
                    period,
                    are: 3.72% for 3 months or less; 4.26% for 3 to 6 months; 4.48%
                    for 6 to
                    12 months; and 4.22% for over 12 months. The overall weighted
                    average
                    interest rate for accounts of $100,000 or more was
                    4.43%.
 
 13
 *Table
          of Contents*




The
      following table sets forth, by interest rate range, information concerning
      certificates of deposit as of December 31, 2006.




**At
                December 31, 2006****Period
                to Maturity****Less
                Than One Year**
            
            **One
                to Two Years**
            
            **Two
                to Three Years**
            
            **More
                Than Three Years**
            
            **Total**
            
            **Percent
                of Total****(dollars
                in thousands)****Interest
                Rate Range:**2.00%
                to 2.99%
            
            $
            594
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            594
            
            
            2.67
            %3.00%
                to 3.99%
            
            
            11,620
            
            
            780
            
            
            41
            
            
            95
            
            
            12,536
            
            
            56.354.00%
                to 4.99%
            
            
            3,049
            
            
            596
            
            
            82
            
            
            17
            
            
            3,744
            
            
            16.835.00%
                to 5.99%
            
            
            4,906
            
            
            34
            
            
            78
            
            
            354
            
            
            5,372
            
            
            24.15Total
            
            $
            20,169
            
            $
            1,410
            
            $
            201
            
            $
            466
            
            $
            22,246
            
            
            100.00
            %





**Borrowings**




The
      Bank
      had $2.0 million in overnight borrowings from the Federal Home Loan Bank at
      December 31, 2006, at an interest rate of 5.50%. The Bank had no outstanding
      borrowings at December 31, 2005. The Bank borrowed periodically during 2006
      to
      meet short term liquidity needs. The Bank may borrow up to $10.0 million under
      its present credit arrangement with the Federal Home Loan Bank.




**Properties**




The
      following table provides certain information with respect to our banking office
      as of December 31, 2006 and December 31, 2005:




**Location**
            
            **Leased
                or Owned**
            
            **Year
                Acquired**
            
            **Net
                Book Value of Real Property at December 31,
                2006**
            
            **Net
                Book Value of Real Property at December 31,
                2005**2212
                West Cermak Road
              Chicago,
                Illinois 60608
            
            
            Owned
            
            
            1964
            
            $
            184,000
            
            $
            191,000





The
      net
      book value of our premises, land and equipment was $289,000 at December 31,
      2006 and $305,000 at December 31, 2005.




**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 $3,000 for the twelve months ended December 31, 2006.
      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, 2006, we were not involved in any legal proceedings, the
      outcome of which would be material to our financial condition or results of
      operations.




14
 *Table
          of Contents*




**Personnel**




As
      of
      December 31, 2006, we had 12 full-time employees and three part-time
      employees. 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. The Bank was required to use the reserve
      method in computing its bad debt deduction beginning with its 1997 federal
      tax
      return (similar to commercial banks). Savings institutions were required to
      recapture any excess reserves over those established as of December 31,
      1987 (base year reserve). At December 31, 2006 the Bank had no remaining
      reserves subject to recapture.




*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, 2006, 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, 2006, the Company had no net operating loss carryforwards for
      federal income tax purposes.




15
 *Table
          of Contents*




*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. 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
      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.




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




16
 *Table
          of Contents*




engage.  
      In particular, certain lending authority for federal savings institutions,
      with
      regard to commercial, nonresidential real property loans and cons umer 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 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, 2006, 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




17
 *Table
          of Contents*




“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 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, 2006, the Bank maintained 97.1% 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




18
 *Table
          of Contents*




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
      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




19
 *Table
          of Contents*





know
      of
      any practice, condition, or violation that might lead to termination of the
      Bank’s deposit insurance.




*Federal
      Home Loan Bank 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 that 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, 2006 of
      $500,000.




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 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.




20
 *Table
          of Contents*




*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 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




21
 *Table
          of Contents*




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.




*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.




22
 *Table
          of Contents*




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.
      Recently, however, the SEC has further extended the Section 404 compliance
      deadline for smaller public companies, such as the Company, while the costs
      and
      other burdens of Section 404 on small issuers is further evaluated. Under
      the current extension, we would first be required to provide our report on
      internal control over financial reporting in our annual report covering the
      fiscal year ended December 31, 2007.




Although
      we anticipate that we will incur additional expense in complying with the
      provisions of Sarbanes-Oxley and the resulting regulations, management does
      not
      expect that such compliance will have a material impact on our results of
      operations or financial condition.




**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**




At
      a
      Special Meeting of Stockholders of the Company held on November 29, 2006, the
      following matters were submitted to and approved by a vote of
      stockholders:




·  Adoption
      of the Mutual Federal Bancorp, Inc. 2006 Stock Option Plan. (Vote totals exclude
      2,545,813 shares held by MHC.)




Total
                votes for
            
            
            691,165Total
                votes against
            
            
            90,972Total
                votes abstaining
            
            
            10,830





23
 *Table
          of Contents*




·Adoption
      of the
      Mutual Federal Bancorp, Inc. 2006 Management Recognition and Retention Plan
      and
      Trust. (Vote totals exclude 2,545,813 shares held by MHC.)




Total
                votes for
            
            
            602,745Total
                votes against
            
            
            179,422Total
                votes abstaining
            
            
            10,800







**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 26,
      2007, the Company had 86record 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
      2006.
      The Company completed its initial public offering on April 4, 2006.




**2006****High**
            
            **Low**
            
            **Dividends
                Declared**First
                quarter
            
            
            N/A
            
            
            N/A
            
            
            N/ASecond
                quarter
            
            $
            11.50
            
            $
            10.84
            
            
            N/AThird
                quarter
            
            
            11.50
            
            
            10.05
            
            
            N/AFourth
                quarter
            
            
            14.50
            
            
            11.05
            
            
            N/A





**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 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




24
 *Table
          of Contents*




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”.




**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 and time deposits. 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;
  ·
              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;
  25
 *Table
            of Contents*
 ·
                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
      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.




26
 *Table
          of Contents*


**Selected
      Consolidated Financial and Other Data**




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




**At
                December 31,****2006**
            
            **2005****(dollars
                in thousands)****Selected
                Financial Condition Data:**Total
                assets
            
            $
            75,063
            
            $
            64,489Loans,
                net
            
            
            51,924
            
            
            38,030Interest-bearing
                deposits
            
            
            855
            
            
            13Securities
                available-for-sale
            
            
            19,559
            
            
            24,028Federal
                Home Loan Bank stock, at cost
            
            
            500
            
            
            500Deposits
            
            
            43,308
            
            
            43,525Equity
            
            
            28,233
            
            
            18,336





**Year
                Ended December 31,****2006**
            
            **2005****(dollars
                in thousands)****Selected
                Operating Data:**Total
                interest and dividend income
            
            $
            3,986
            
            $
            3,241Total
                interest expense
            
            
            1,112
            
            
            788Net
                interest income
            
            
            2,874
            
            
            2,453Provision
                for loan losses
            
            
            70
            
            
            20Net
                interest income after provision for loan losses
            
            
            2,804
            
            
            2,433Total
                non-interest income
            
            
            56
            
            
            514Total
                non-interest expense
            
            
            2,026
            
            
            1,762Income
                before income tax expense
            
            
            834
            
            
            1,185Income
                tax expense
            
            
            304
            
            
            442Net
                income
            
            $
            530
            
            $
            743





27
 *Table
          of Contents*






**At
                or for the Years Ended**
              **December 31,****2006**
            
            **2005****Selected
                Financial Ratios and Other Data:***Performance
                Ratios:*Return
                on average assets
            
            
            0.73
            %
            
            1.15
            %Return
                on average equity
            
            
            2.10
            
            
            4.06Average
                interest rate spread(1)
            
            
            3.20
            
            
            3.45Net
                interest margin(2)
            
            
            4.10
            
            
            3.96Efficiency
                ratio(3)
            
            
            69.15
            
            
            70.76Non-interest
                expense to average total assets
            
            
            2.79
            
            
            2.72Average
                interest-earning assets to average interest-bearing
                liabilities
            
            
            156.97
            
            
            139.81*Asset
                Quality Ratios:*Non-performing
                assets to total assets
            
            
            0.59
            %
            
            0.29
            %Non-performing
                loans to total loans
            
            
            0.85
            
            
            0.48Allowance
                for loan losses to non-performing loans
            
            
            0.54x
            
            
            0.92xAllowance
                for loan losses to total loans
            
            
            0.46
            %
            
            0.44
            %*Capital
                Ratios:*Equity
                to total assets
            
            
            37.61
            %
            
            28.43
            %Tangible
                capital(4)
            
            
            30.99
            
            
            28.36Tier 1
                (core) capital(4)
            
            
            30.99
            
            
            28.36Tier 1
                risk-based ratio(4)
            
            
            56.63
            
            
            56.84


_____________


(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 other 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.


(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, 2006 and December 31,
      2005**




Our
      total
      assets increased by $10.6 million, or 16.4%, to $75.1 million at
      December 31, 2006, from $64.5 million at December 31, 2005. The
      primary reason for the increase in total assets was the Company’s minority stock
      offering, which closed on April 4, 2006. The offering resulted in a net addition
      of $9.3 million of equity to the balance sheet.




Loans
      receivable increased $13.9 million, or 36.5%, to $51.9 million at
      December 31, 2006, from $38.0 million at December 31, 2005, reflecting
      an increase in multi-family residential mortgage loans of $5.1 million, or
      37.0%, to $19.0 million at December 31, 2006, from $13.8 million at
      December 31, 2005, and an increase in one-to-four family residential
      mortgage loans of $8.8 million, or 36.2%, to $33.3 million at December 31,
      2006,
      from $24.4 million at December 31, 2005. Cash and cash equivalents increased
      $1.0 million, or 81.4%, to $2.3 million at December 31, 2006, from $1.3
      million at December 31, 2005, and securities available for sale decreased
      $4.5 million, or 18.6%, to $19.6 million at December 31, 2006, from $24.0
      million at December 31, 2005.




While
      multi-family residential properties have always comprised a large part of our
      immediate market area, the increase in both multi-family and one-to-four family
      residential mortgage loans during 2006 is the result of our continued focus
      in
      this area, as well as an increase in the dollar amount of multi-family mortgage
      loan referrals that have been generated from our new borrowers. Management
      also
      believes the increase in loans is the result of borrowers seeking to lock in
      financing at current rates in a rising interest rate environment.




Total
      deposits decreased $217,000, or 0.50%, to $43.3 million at December 31,
      2006, from $43.5 million at December 31, 2005. During 2006, $796,000 in
      deposits was used to purchase common stock in our minority stock offering.
      The
      lack of significant growth 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 2006
      or 2005.




Stockholders’
      equity increased $9.9 million, or 54.0%, to $28.2 million at December 31,
      2006, from $18.3 million at December 31, 2005, reflecting $10.2 million in
      new equity from the sale of a 30% minority interest in the Company, reduced
      by
      $873,000 in unearned ESOP shares established in the offering. Stockholders’
equity also increased by net income of $530,000, and by a $50,000 increase
      in
      accumulated unrealized gains in the fair value of securities
      available-for-sale.




**Comparison
      of Operating Results for the Years Ended December 31, 2006 and
      2005**




***General*** .
      Net
      income decreased $213,000, or 28.7%, to $530,000 for the year ended
      December 31, 2006, from $743,000 for the year ended December 31, 2005.
      The decrease in net income resulted primarily from a $477,000 decrease in gains
      on the sale of securities and a $264,000 increase in operating expenses,
      partially offset by a $421,000 increase in net interest income. Return on
      average assets was 0.73% for the year ended December 31, 2006, compared to
      1.15% for the year ended December 31, 2005, and return on equity was 2.10%
      and 4.06% for these same two periods.




***Interest
      Income*** .
      Interest and dividend income increased $745,000, or 23.0%, to $4.0 million
      for
      the year ended December 31, 2006, from $3.2 million for the year ended December
      31, 2005, primarily due to the investment of proceeds from the stock offering.
      A
      46 basis point increase in the average yield on interest-earning assets, to
      5.69% in 2006, from 5.23% in 2005, combined with a $8.2 million increase in
      the
      average balance of interest-earning assets, resulted in the
      increase.




29
 *Table
          of Contents*




Interest
      income and fees from loans receivable increased $864,000, or 41.2%, to $3.0
      million for the year ended December 31, 2006, from $2.1 million for the
      year ended December 31, 2005. The increase was due to an increase in the
      average balance of loans of $13.9 million, or 43.5%, to $46.0 million in 2006,
      from $32.0 million in 2005, partially offset by an 11 basis point decrease
      in
      the average yield on loans to 6.44% in 2006, from 6.55% in 2005.




Interest
      and dividend income from securities and deposits decreased $119,000, or 10.4%,
      to $1.0 million for the year ended December 31, 2006 from $1.1 million for
      the year ended December 31, 2005. The decrease resulted from a decrease in
      the average balance of these investments of $5.7 million, or 19.2%, to $24.1
      million in 2006, from $29.9 million in 2005, partially offset by an increase
      in
      the average yield on securities and deposits to 4.24% in 2006, from 3.82% in
      2005.




***Interest
      Expense*** .
      Total
      interest expense increased $324,000, or 41.1%, to $1.1 million for the year
      ended December 31, 2006, from $788,000 for the year ended December 31, 2005.
      The
      increase in interest expense resulted from an increase in the average cost
      of
      deposits to 2.43% in 2006, from 1.78% in 2005, partially offset by a $672,000
      decrease in the average balance of interest-bearing deposits. Interest expense
      on certificates of deposit increased $268,000, or 51.4%, due to a 127 basis
      point increase in the average rate paid on such deposits to 3.69% for the year
      ended December 31, 2006, from 2.42% for the year ended December 31,
      2005. This was partially offset by a decrease in the average balance of
      certificates of deposit of $137,000, or 0.6%, to $21.4 million in 2006, from
      $21.5 million in 2005.




During
      2006 the Company periodically used advances from the Federal Home Loan Bank
      to
      fund its loan pipeline. Interest on borrowings was $54,000 for the year ended
      December 31, 2006, based on average borrowings of $1.1 million and an average
      rate of 5.10%. The Company did not do any borrowing in 2005.




***Net
      Interest Income*** .
      Net
      interest income increased $421,000, or 17.2%, to $2.9 million for the year
      ended
      December 31, 2006, from $2.5 million for the year ended December 31,
      2005. Our net interest margin increased to 4.10% during 2006, from 3.96% during
      2005, and our interest rate spread decreased to 3.20% in 2006, from 3.45% in
      2005. The average yield on interest earning assets increased from 5.23% in
      2005
      to 5.69% in 2006, complementing an $8.2 million increase in average interest
      earning assets, with interest income increasing by $745,000. At the same time
      the average rate paid on interest bearing liabilities increased from 1.78%
      in
      2005 to 2.49% in 2006, causing interest expense to increase by $324,000 in
      2006.




***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.




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




30
 *Table
          of Contents*




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. During
      the
      year ended December 31, 2006, our loan portfolio increased by $13.9
      million, including a $5.1 million increase in our multi-family residential
      mortgage loans. 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 increased to $443,000 at December 31, 2006, from $184,000 at
      December 31, 2005. Loans delinquent for 60-89 days decreased to $385,000 at
      December 31, 2006, from $518,000 at December 31, 2005. There were no
      impaired loans at December 31, 2006. Typically non-performing loans are
      assigned a higher percentage of allowance allocation. The allowance for loan
      losses was $240,000, or 0.46% of gross loans outstanding at December 31,
      2006, as compared with $170,000, or 0.44% of loans outstanding at
      December 31, 2005. In reviewing the allowance during 2006 and at
      December 31, 2006, we considered the growth in the loan portfolio, the
      increase in non-performing and delinquent loans, the fact that there were no
      impaired loans, and the fact that we have no recent loss experience. After
      an
      evaluation of these factors, management determined that it needed an additional
      $70,000 provision for loan losses for the year ended December 31, 2006. In
      a similar evaluation of the allowance for loan losses at December 31, 2005,
      management determined that there was a need for an additional $20,000 provision
      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.




***Non-Interest
      Income*** .
      Non-interest income decreased $458,000, or 89.1%, to $56,000 for the year ended
      December 31, 2006, from $514,000 for year ended December 31, 2005. The
      decrease was due primarily to a $477,000 decrease in gains on sales of FHLMC
      common stock, since the sales of 2005 were not repeated in 2006. Other
      non-interest income increased $20,000, to $53,000 in 2006, from $33,000 in
      2005,
      and included a $24,000 recovery of legal fees previously expensed as
      professional fees.




31
 *Table
          of Contents*




During
      the year ended December 31, 2005, we sold 7,468 shares of FHLMC common
      stock for a gain of $477,000. 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 $0.9792 per share). Based on the concentration of unrealized gains
      in
      this one equity security, we have consistently monitored the performance of
      the
      stock and related market conditions, and have periodically sold shares since
      1998.




At
      December 31, 2006, we held 8,000 shares of FHLMC common stock, as well as
      10,000 shares of FHLMC preferred stock paying a non-cumulative annualized
      preferred dividend of 5.79%. While we do not currently plan to sell a
      significant portion of the remaining shares of FHLMC stock held in the
      investment portfolio, depending on liquidity or market conditions relating
      to
      the stock, we may decide that further sales are prudent.




***Non-Interest
      Expense*** .
      Non-interest expense increased $264,000, or 15.0%, to $2.0 million for the
      year
      ended December 31, 2006 compared to $1.8 million for the year ended
      December 31, 2005. Compensation and employee benefits increased $53,000, or
      5.0%, to $1.1 million in 2006, from $1.05 million in 2005, resulting from normal
      salary increases and higher benefit costs. The Company’s newly established ESOP
      increased benefit expense by $52,000, although this was offset in part by a
      $31,000 reduction in contributions to the Company’s Profit Sharing and 401(k)
      Plan. In addition, the Company received management fees from MHC of $64,000
      in
      2006, compared to $53,000 in 2005, to offset costs associated with sharing
      of
      the management team. It is expected that payments from MHC will be significantly
      reduced in future years.




Professional
      fees, including legal, accounting and consulting fees, increased $211,000,
      or
      162.3%, to $341,000 in 2006, from $130,000 in 2005, primarily due to increased
      legal fees associated with changes in benefit plans, SEC reporting compliance,
      and other costs associated with being a new public company.




Occupancy
      expense decreased $23,000, or 11.9%, to $170,000 in 2006, from $193,000 in
      2005,
      primarily due to decreased depreciation charges, and data processing costs
      decreased $7,000, or 6.3%, to $104,000 in 2006, from $111,000 in 2005.
      Miscellaneous other expenses increased $30,000, or 10.9%, to $305,000 in 2006,
      from $275,000 in 2005. The ratio of non-interest expense to average assets
      was
      2.79% for the year ended December 31, 2006, compared to 2.72% for
      2005.




***Income
      Tax Expense*** .
      The
      provision for income taxes decreased $138,000, to $304,000 for the year ended
      December 31, 2006 from $442,000 for the prior year, due primarily to our
      reduced income before income taxes. The effective tax rates for the periods
      ended December 31, 2006 and 2005 were 36.45% and 37.30%,
      respectively.




**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,**
                **2006**
              
              **For
                  the Years Ended December 31,****Yield/**
                **Rate**
              
              **Average
                  Outstanding Balance**
              
              **Interest**
              
              **Yield/**
                **Rate**
              
              **Average
                  Outstanding Balance**
              
              **Interest**
              
              **Yield/**
                **Rate****(dollars
                  in thousands)****Interest-earning
                  assets:**Loans
              
              
              6.37
              %
              $
              45,977
              
              $
              2,963
              
              
              6.44
              %
              $
              32,041
              
              $
              2,099
              
              
              6.55
              %Securities
                  available for sale
              
              
              4.72
              
              
              22,377
              
              
              948
              
              
              4.24
              
              
              26,671
              
              
              1,037
              
              
              3.89Federal
                  Home Loan Bank Stock
              
              
              3.10
              
              
              500
              
              
              15
              
              
              3.00
              
              
              489
              
              
              23
              
              
              4.70Interest-earning
                  deposits
              
              
              5.04
              
              
              1,253
              
              
              60
              
              
              4.79
              
              
              2,702
              
              
              82
              
              
              3.03Total
                  interest-earning assets
              
              
              5.89
              %
              
              70,107
              
              
              3,986
              
              
              5.69
              %
              
              61,903
              
              
              3,241
              
              
              5.23
              %Non-interest-earning
                  assets
              
              
              
              
              
              2,470
              
              
              
              
              
              
              
              
              2,801Total
                  assets
              
              
              
              
              $
              72,577
              
              
              
              
              
              
              
              $
              64,704**Interest-Bearing
                  Liabilities:(1)**Savings
                  deposits
              
              
              1.24
              %
              $
              22,195
              
              $
              269
              
              
              1.21
              %
              $
              22,730
              
              $
              267
              
              
              1.17
              %Certificates
                  of deposit
              
              
              4.16
              
              
              21,409
              
              
              789
              
              
              3.69
              
              
              21,546
              
              
              521
              
              
              2.41Total
                  deposits
              
              
              2.77
              %
              
              43,604
              
              
              1,058
              
              
              2.43
              
              
              44,276
              
              
              788
              
              
              1.78Borrowings
              
              
              5.50
              
              
              1,059
              
              
              54
              
              
              5.10
              
              
              --
              
              
              --
              
              
              --Total
                  interest-bearing liabilities
              
              
              2.89
              %
              
              44,663
              
              
              1,112
              
              
              2.49
              %
              
              44,276
              
              
              788
              
              
              1.78
              %Non-interest-bearing
                  liabilities.
              
              
              
              
              
              2,691
              
              
              
              
              
              
              
              
              2,135Total
                  liabilities
              
              
              
              
              
              47,354
              
              
              
              
              
              
              
              
              46,411Stockholders’
                  equity
              
              
              
              
              
              25,223
              
              
              
              
              
              
              
              
              18,293Total
                  liabilities and stockholders’ equity
              
              
              
              
              $
              72,577
              
              
              
              
              
              
              
              $
              64,704**Net
                  interest income**
              
              
              
              
              
              
              
              $
              2,874
              
              
              
              
              
              
              
              $
              2,453**Net
                  interest rate spread(2)**
              
              
              
              
              
              
              
              
              
              
              
              3.20
              %
              
              
              
              
              
              
              
              3.45
              %**Net
                  interest-earning assets(3)**
              
              
              
              
              $
              25,444
              
              
              
              
              
              
              
              $
              17,627**Net
                  interest margin(4)**
              
              
              
              
              
              
              
              
              
              
              
              4.10
              %
              
              
              
              
              
              
              
              3.96
              %**Ratio
                  of interest-earning assets to interest-bearing
                  liabilities**
              
              
              
              
              
              
              
              
              
              
              
              156.97
              %
              
              
              
              
              
              
              
              139.81
              %




_____________


(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, 2006 vs. 2005****Increase
                (Decrease) Due to**
            
            **Total
                Increase****Volume**
            
            **Rate**
            
            **(Decrease)****(in
                thousands)****Interest-Earning
                Assets:**Loans
            
            $
            898
            
            $
            (34
            )
            $
            864Securities
                available for sale
            
            
            (157
            )
            
            68
            
            
            (89
            )Federal
                Home Loan Bank Stock
            
            
            1
            
            
            (9
            )
            
            (8
            )Interest-earning
                deposits
            
            
            (32
            )
            
            10
            
            
            (22
            )Total
                interest-earning assets
            
            
            710
            
            
            35
            
            
            745**Interest-Bearing
                Liabilities:**Savings
                deposits
            
            
            (6
            )
            
            8
            
            
            2Certificates
                of deposit
            
            
            (3
            )
            
            271
            
            
            268Total
                deposits
            
            
            (9
            )
            
            279
            
            
            270Borrowings
            
            
            54
            
            
            --
            
            
            54Total
                interest-bearing liabilities
            
            
            45
            
            
            279
            
            
            324Change
                in net interest income
            
            $
            665
            
            $
            (244
            )
            $
            (421
            )





**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, 2006, 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
                Assets****Change
                  In****Interest
                Rates (Basis Points)**
            
            **Estimated
                NPV**
            
            **Amount**
              **of
                Change**
            
            **Percentage**
              **Change**
            
            **NPV
                Ratio**
            
            **Change
                in Basis Points****(dollars
                in thousands)**+300
            
            $
            20,038
            
            $
            (6,671
            )
            
            -25
            %
            
            28.31
            %
            
            -571bp+200
            
            
            22,306
            
            
            (4,403
            )
            
            -16
            
            
            30.41
            
            
            -361+100
            
            
            24,579
            
            
            (2,130
            )
            
            -8
            
            
            32.35
            
            
            -162Unchanged
            
            
            26,709
            
            
            —
            
            
            —
            
            
            34.02
            
            
            —-100
            
            
            28,446
            
            
            1,737
            
            
            +7
            
            
            35.24
            
            
            +122-200
            
            
            29,849
            
            
            3,141
            
            
            +12
            
            
            36.11
            
            
            +209





The
      table
      above indicates that at December 31, 2006, 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 16% 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, amortization and prepayment of loans,
      maturities of investment securities and other short-term investments, and
      earnings and funds provided from operations. While scheduled principal
      repayments on loans are a relatively predictable source of funds, deposit flows
      and loan prepayments are greatly influenced by market interest rates, economic
      conditions, and rates




35
 *Table
          of Contents*




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, 2006,
      $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 and increases in deposit
      accounts.




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, 2006, our loan
      originations, net of collected principal, totaled $14.0 million. During the
      year
      ended December 31, 2005, there was a net increase that totaled $9.7
      million. We did not sell any loans during the years ended December 31, 2006
      and 2005. Cash received from calls and maturities of securities totaled $6.6
      million and $8.4 million for the years ended December 31, 2006 and 2005,
      respectively. We purchased $2.0 million and $1.9 million in securities during
      the years ended December 31, 2006 and 2005, respectively, and sold $484,000
      in securities during 2005.




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 $217,000 and $1.0 million for the years
      ended December 31, 2006 and 2005, respectively. During 2006 depositors used
      $796,000 in deposits to purchase the Company’s common stock during its public
      offering. Deposit growth has been very 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, 2006, the Bank
      borrowed $6.0 million from the Federal Home Loan Bank and repaid $4.0 million
      of
      those advances. During 2005 we did not borrow any funds. Our available
      additional borrowing limit at December 31, 2006, was $8.0
      million.




At
      December 31, 2006, we had outstanding commitments to originate loans of
      $576,000. At December 31, 2006, certificates of deposit scheduled to mature
      in less than one year totaled $20.2 million. Based on prior experience,
      management believes that a significant portion of such deposits will remain
      with
      us, although there can be no assurance that this will be the case. In the event
      we do not retain a significant portion of our maturing certificates of deposit,
      we will have to utilize other funding sources, such as Federal Home Loan Bank
      advances, in order to maintain our level of assets. Alternatively, we would
      reduce our level of liquid assets, such as our cash and cash equivalents. In
      addition, the cost of such deposits may be significantly higher if market
      interest rates are higher at the time of renewal.




**Off-Balance
      Sheet Arrangements**




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




36
 *Table
          of Contents*




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, 2006 and December 31, 2005, the Bank had $576,000 and
      $2.0 million, 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
      (20% per year) over the next five years. Compensation expense related to vesting
      of the restricted stock awards granted will approximate $152,000 per year.
      The
      Company will also be required to record compensation expense related to the
      stock options in accordance with Statement on Financial Account Standard No.
      123R. Compensation expense related to vesting of stock options granted will
      approximate $104,000 per year.




**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.




**ITEM
      7.** **FINANCIAL
      STATEMENTS**




See
      Index
      to Financial Statements on page F-1.




37
 *Table
          of Contents*




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




None.




**ITEM
      8A.  C** **ONTROLS
      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 and the
      Bank’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.




**ITEM
      8B.** **OTHER
      INFORMATION**




None.




**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 9, 2007 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 is attached as an exhibit to this Annual Report on
      Form 10-KSB, which is filed with the Securities and Exchange Commission and
      is available to the public on the Internet at the SEC’s website at
      www.sec.gov.




38
 *Table
          of Contents*


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, 2006, relating to
      equity compensation plans of the Company pursuant to which equity securities
      are
      authorized for issuance.




**Plan
                category**
            **Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights**
              **(a)**
            **Weighted-average
                exercise price of outstanding options, warrants and
                rights**
              **(b)**
            **Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities reflected in column
                (a))**
              **(c)**Equity
                compensation plans approved by security holders
            —
            —
            249,488Equity
                compensation plans not approved by security holders
            —
            —
            —Total
            
            
            249,488




**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.




39
 *Table
          of Contents*


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,
      2006 and 2005**





**Page**REPORT
                  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-6NOTES
                  TO CONSOLIDATED FINANCIAL STATEMENTS
              F-7
 F-1
 *Table
            of Contents*
  **REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




To
      the
      Board of Directors and Stockholders of


Mutual
      Federal Bancorp, Inc.




We
      have
      audited the accompanying consolidated statements of financial condition of
      the
      Mutual Federal Bancorp, Inc. (“the Company”) as of December 31, 2006 and 2005,
      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. 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, 2006 and 2005, 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


February 26,
      2007




F-2
 *Table
          of Contents*















**2006**
            
            **2005****ASSETS**Cash
                and cash equivalents
            
            $
            2,268
            
            $
            1,250Securities
                available-for-sale
            
            
            19,559
            
            
            24,028Loans,
                net of allowance for loan losses of $240 at
              December
                31, 2006; $170 at December 31, 2005
            
            
            51,924
            
            
            38,030Federal
                Home Loan Bank stock, at cost
            
            
            500
            
            
            500Premises
                and equipment, net
            
            
            289
            
            
            305Accrued
                interest receivable
            
            
            339
            
            
            236Other
                assets
            
            
            184
            
            
            140Total
                assets
            
            $
            75,063
            
            $
            64,489**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Liabilities:Non-interest-bearing
                deposits
            
            $
            728
            
            $
            350Interest-bearing
                deposits
            
            
            42,580
            
            
            43,175Total
                deposits
            
            
            43,308
            
            
            43,525Advance
                payments by borrowers for taxes and insurance
            
            
            401
            
            
            361Advances
                from the Federal Home Loan Bank
            
            
            2,000
            
            
            —Accrued
                interest payable and other liabilities
            
            
            1,055
            
            
            2,267Common
                stock in ESOP subject to contingent repurchase obligation
            
            
            66
            
            
            —Total
                liabilities
            
            
            46,830
            
            
            46,153Commitments
                and contingenciesStockholders’
                equity:Preferred
                stock, $0.01 par value, 1,000,000 shares authorized at December 31,
                2006;
                no par value, 1,000,000 shares authorized at December 31,
                2005
            
            
            —
            
            
            —Common
                stock, $0.01 par value, 12,000,000 shares authorized, 3,636,875 shares
                issued and outstanding at December 31, 2006; $0.10 par value, 5,000,000
                shares authorized, 10,000 shares issued and outstanding at December
                31,
                2005
            
            
            36
            
            
            1Additional
                paid-in capital
            
            
            10,175Retained
                earnings
            
            
            18,782
            
            
            18,252Reclassification
                of 4,537 ESOP shares
            
            
            (66
            )
            
            —Unearned
                ESOP shares (82,748 shares)
            
            
            (827
            )
            
            —Accumulated
                other comprehensive income
            
            
            133
            
            
            83Total
                stockholders’ equity
            
            
            28,233
            
            
            18,336Total
                liabilities and stockholders’ equity
            
            $
            75,063
            
            $
            64,489









See
      accompanying notes to consolidated financial statements.




F-3
 *Table
          of Contents*










**2006**
            
            **2005**Interest
                and dividend income:Loans,
                including fees
            
            $
            2,963
            
            $
            2,099Securities
            
            
            948
            
            
            1,037Interest
                earning deposits
            
            
            60
            
            
            82Federal
                Home Loan Bank stock dividends
            
            
            15
            
            
            23Total
                interest and dividend income
            
            
            3,986
            
            
            3,241Interest
                expense:Deposits
            
            
            1,058
            
            
            788Advances
                from the Federal Home Loan Bank
            
            
            54
            
            
            —Total
                interest expense
            
            
            1,112
            
            
            788Net
                interest income
            
            
            2,874
            
            
            2,453Provision
                for loan losses
            
            
            70
            
            
            20Net
                interest income after provision for loan losses
            
            
            2,804
            
            
            2,433Non-interest
                income:Insurance
                commissions and fees
            
            
            3
            
            
            4Gain
                on sale of securities
            
            
            —
            
            
            477Other
                income
            
            
            53
            
            
            33Total
                non-interest income
            
            
            56
            
            
            514Non-interest
                expense:Compensation
                and benefits
            
            
            1,106
            
            
            1,053Occupancy
                and equipment
            
            
            170
            
            
            193Data
                processing
            
            
            104
            
            
            111Professional
                fees
            
            
            341
            
            
            130Other
                expense
            
            
            305
            
            
            275Total
                non-interest expense
            
            
            2,026
            
            
            1,762Income
                before income taxes
            
            
            834
            
            
            1,185Income
                tax expense
            
            
            304
            
            
            442Net
                income
            
            $
            530
            
            $
            743Earnings
                per share (basic and diluted)
            
            $
            0.12
            
            
            NmNm
                - not meaningful, see Note 1







See
      accompanying notes to consolidated financial statements.




F-4
 *Table
          of Contents*











**Common**
              **Stock**
            
            **Additional**
              **Paid-in**
              **Capital**
            
            **Retained**
              **Earnings**
            
            **Amount**
              **Reclassified**
              **On**
              **ESOP**
              **Shares**
            
            **Unearned**
              **ESOP**
              **Shares**
            
            **Accumulated**
              **Other**
              **Comprehensive**
              **Income**
            
            **Total**Balance
                at January 1, 2005
            
            $
            1
            
            $
            —
            
            $
            17,809
            
            $
            —
            
            $
            —
            
            $
            730
            
            $
            18,540**Comprehensive
                income:**Net
                income
            
            
            —
            
            
            —
            
            
            743
            
            
            —
            
            
            —
            
            
            —
            
            
            743Change
                in net unrealized gain (loss) on securities available-for-sale, net
                of
                taxes and reclassification adjustments
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (647
            )
            
            (647
            )Total
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            96Cash
                dividends
            
            
            —
            
            
            —
            
            
            (300
            )
            
            —
            
            
            —
            
            
            —
            
            
            (300
            )Balance
                at December 31, 2005
            
            
            1
            
            
            —
            
            
            18,252
            
            
            —
            
            
            —
            
            
            83
            
            
            18,336**Comprehensive
                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
            
            $
            28,233









See
      accompanying notes to consolidated financial statements.




F-5
 *Table
          of Contents*










**2006**
            
            **2005****Cash
                flows from operating activities**Net
                income
            
            $
            530
            
            $
            743Adjustments
                to reconcile net income to net cash
              from
                operating activities:Provision
                for loan losses
            
            
            70
            
            
            20Depreciation
            
            
            59
            
            
            87Gain
                on sale of securities
            
            
            —
            
            
            (477
            )Net
                amortization of securities
            
            
            61
            
            
            76Federal
                Home Loan Bank stock dividends
            
            
            —
            
            
            (23
            )ESOP
                expense
            
            
            52
            
            
            —Dividends
                reinvested on securities
            
            
            (106
            )
            
            (85
            )Provision
                for deferred income taxes
            
            
            —
            
            
            (5
            )Increase
                in accrued interest receivable and other assets
            
            
            (147
            )
            
            (71
            )(Decrease)
                increase in accrued interest payable and other liabilities
            
            
            (1,242
            )
            
            1,305Net
                cash (used in) provided by operating activities
            
            
            (723
            )
            
            1,570**Cash
                flows from investing activities**Activity
                in securities available-for-sale:Proceeds
                from maturities, calls, and principal repayments
            
            
            6,594
            
            
            8,401Proceeds
                from sales
            
            
            —
            
            
            484Purchases
            
            
            (2,000
            )
            
            (1,887
            )Loan
                originations and payments, net
            
            
            (13,964
            )
            
            (9,724
            )Additions
                to premises and equipment
            
            
            (43
            )
            
            (35
            )Net
                cash used in investing activities
            
            
            (9,413
            )
            
            (2,761
            )**Cash
                flows from financing activities**Net
                decrease in deposits
            
            
            (217
            )
            
            (1,046
            )Net
                increase in advance payments byborrowers
                for taxes and insurance
            
            
            40
            
            
            103Advances
                from the Federal Home Loan Bank
            
            
            6,000
            
            
            —Repayment
                of Federal Home Loan Bank advances
            
            
            (4,000
            )
            
            —Proceeds
                of common stock offering
            
            
            9,331
            
            
            —Cash
                dividends paid
            
            
            —
            
            
            (300
            )Net
                cash provided by (used in) financing activities
            
            
            11,154
            
            
            (1,243
            )Net
                increase (decrease) in cash and cash equivalents
            
            
            1,018
            
            
            (2,434
            )Cash
                and cash equivalents at beginning of period
            
            
            1,250
            
            
            3,684**Cash
                and cash equivalents at end of period**
            
            $
            2,268
            
            $
            1,250Supplemental
                disclosure of cash flow informationCash
                paid during the year for:Interest
            
            $
            1,086
            
            $
            779Income
                taxes
            
            
            294
            
            
            831









See
      accompanying notes to consolidated financial statements.




F-6
 *Table
          of Contents*







**NOTE
      1 -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**




Change
      in Reporting Entity: The
      Board of Directors of Mutual Federal Bancorp, MHC (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 common stock was offered on a priority
      basis
      to eligible depositors, qualified tax-exempt employee plans, other depositors
      and other voting members of the Bank, with any remaining shares offered to
      the
      public in a community offering or a syndicated community offering, or a
      combination thereof. The MHC’s applications to establish a subsidiary holding
      company and effect a minority stock offering were approved by the Office of
      Thrift Supervision on February 1, 2006. The offering period opened on
      February 13, 2006 and closed on March 16, 2006. The offering was
      oversubscribed in the first tier (eligible depositors on June 30, 2004) and
      closed at the adjusted maximum on April 4, 2006. A total of 1,091,062
      shares (30%) were sold and 2,545,813 shares (70%) were retained by MHC. Costs
      incurred in connection with the common stock offering were recorded as a
      reduction of the proceeds from the offering and were $707.  With the
      proceeds the Company loaned its employee stock ownership plan $873 to enable
      it
      to buy 8% of the shares issued to persons other than the MHC. Approximately
      half
      of the net proceeds of $10.2
      million was retained by the Company and half paid to the
      Bank.




Nature
      of Operations and Principles of Consolidation :
      The
      consolidated financial statements include Mutual Federal Bancorp, Inc. (the
      “Company”), 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, 2006, Mutual
      Federal Bancorp, MHC (the “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 in
      this report at and for the year ended December 31, 2005, and the period prior
      to
      April 4, 2006, including the financial statements and related financial data,
      relates to the Bank only.




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.




F-7
 *Table
          of Contents*









**NOTE
      1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**




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. Other securities such as Federal Home Loan Bank stock are
      carried at cost.




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.




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.




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-8
 *Table
          of Contents*









**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 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, 2006 and 2005.




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, 2006 and 2005 were $35 and
      $27, 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.




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.




F-9
 *Table
          of Contents*




**NOTE
        1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
        (Continued)**




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. Earnings per share, prior to the
      minority stock issuance, is no longer meaningful. 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. There were 3,551,886 weighted average shares outstanding
      for
      the period from April 4, 2006, through December 31, 2006.




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.




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.




F-10
 *Table
          of Contents*









**NOTE
      1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**




Effect
      of Newly Issued Accounting Standards :
      In
      September 2006, the Securities and Exchange Commission (SEC) released Staff
      Accounting Bulletin No. 108, *Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements in
      Current Year Financial Statements (SAB 108),* which
      is
      effective for fiscal years ending on or after November 15, 2006. SAB 108
      provides guidance on how the effects of prior-year uncorrected financial
      statement misstatements should be considered in quantifying a current year
      misstatement. SAB 108 requires public companies to quantify misstatements using
      both an income statement (rollover) and balance sheet (iron curtain) approach
      and evaluate whether either approach results in a misstatement that, when all
      relevant quantitative and qualitative factors are considered, is material.
      If
      prior year errors that had been previously considered immaterial now are
      considered material based on either approach, no restatement is required so
      long
      as management properly applied its previous approach and all relevant facts
      and
      circumstances were considered. Adjustments considered immaterial in prior years
      under the method previously used, but now considered material under the dual
      approach required by SAB 108, are to be recorded upon initial adoption of SAB
      108. The adoption of SAB 108 had no effect on the Company’s financial statements
      for the year ended December 31, 2006.




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 Company has not completed its evaluation
      of the impact of the adoption of this standard.





In
      July
      2006, the FASB issued FASB Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes - an interpretation of FASB Statement No.
      109* (FIN
      48), which prescribes a recognition threshold and measurement attribute for
      a
      tax position taken or expected to be taken in a tax return. FIN 48 also provides
      guidance on derecognition, classification, interest and penalties, accounting
      in
      interim periods, disclosure and transition. FIN 48 is effective for fiscal
      years
      beginning after December 15, 2006. The Company has determined that the adoption
      of FIN 48 will not have a material effect on the financial statements.





F-11
 *Table
          of Contents*









**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 (loss) were as follows:




**Amortized**
              **Cost**
            
            **Gross**
              **Unrealized**
              **Gains**
            
            **Gross**
              **Unrealized**
              **Losses**
            
            **Fair**
              **Value**December
                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
            )
            $
            19,559December
                31, 2005U.S.
                agency and government-sponsored entity bonds
            
            $
            8,694
            
            $
            2
            
            $
            (112
            )
            $
            8,584GNMA
                certificates
            
            
            2,162
            
            
            11
            
            
            (38
            )
            
            2,135FNMA
                certificates
            
            
            5,757
            
            
            19
            
            
            (122
            )
            
            5,654FHLMC
                certificates
            
            
            3,798
            
            
            17
            
            
            (94
            )
            
            3,721Collateralized
                mortgage obligations
            
            
            722
            
            
            —
            
            
            (11
            )
            
            711FHLMC
                common stock
            
            
            8
            
            
            515
            
            
            —
            
            
            523FHLMC
                preferred stock
            
            
            500
            
            
            5
            
            
            —
            
            
            505Mutual
                funds
            
            
            2,250
            
            
            —
            
            
            (55
            )
            
            2,195Total
                available-for-sale
            
            $
            23,891
            
            $
            569
            
            $
            (432
            )
            $
            24,028





At
      December 31, 2006 and 2005, 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, except for mutual fund securities. Mutual
      fund securities at December 31, 2006 and 2005 include $2,293 and $2,195 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, 2006 and 2005.




There
      were no security sales in the year ended December 31, 2006. During the year
      ended December 31, 2005, the Bank sold shares of FHLMC common stock. A
      summary of those transactions is as follows:




**2005**Proceeds
            
            $
            484Gross
                gains
            
            
            477Gross
                losses
            
            
            —





F-12
 *Table
          of Contents*









**NOTE
      2 - SECURITIES (Continued)**




The
      amortized cost and fair values of debt securities available-for-sale at December
      31, 2006 by contractual maturity were as follows:




**Amortized**
              **Cost**
            
            **Fair**
              **Value**Due
                in one year or less
            
            $
            200
            
            $
            198Due
                from one to five years
            
            
            5,495
            
            
            5,463Due
                from five to ten years
            
            
            1,000
            
            
            993CMO’s
                and mortgage backed securities
            
            
            9,782
            
            
            9,582Total
            
            $
            16,477
            
            $
            16,236





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, 2006****Less
                Than 12 Months**
            
            **12
                Months or More**
            
            **Total****Description
                of Securities**
            
            **Fair**
              **Value**
            
            **Unrealized**
              **Loss**
            
            **Fair**
              **Value**
            
            **Unrealized**
              **Loss**
            
            **Fair**
              **Value**
            
            **Unrealized**
              **Loss**U.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
            )








**December
                31, 2005****Less
                Than 12 Months**
            
            **12
                Months or More**
            
            **Total****Description
                of Securities**
            
            **Fair**
              **Value**
            
            **Unrealized**
              **Loss**
            
            **Fair**
              **Value**
            
            **Unrealized**
              **Loss**
            
            **Fair**
              **Value**
            
            **Unrealized**
              **Loss**U.S.
                agency and government-sponsored entity bonds
            
            $
            498
            
            $
            (2
            )
            $
            7,090
            
            $
            (110
            )
            $
            7,588
            
            $
            (112
            )GNMA
                certificates
            
            
            327
            
            
            (1
            )
            
            1,384
            
            
            (37
            )
            
            1,711
            
            
            (38
            )FNMA
                certificates
            
            
            2,349
            
            
            (42
            )
            
            2,314
            
            
            (80
            )
            
            4,663
            
            
            (122
            )FHLMC
                certificates
            
            
            851
            
            
            (16
            )
            
            2,413
            
            
            (78
            )
            
            3,264
            
            
            (94
            )Collateralized
                mortgage obligations
            
            
            705
            
            
            (11
            )
            
            —
            
            
            —
            
            
            705
            
            
            (11
            )Mutual
                funds
            
            
            743
            
            
            (10
            )
            
            1,452
            
            
            (45
            )
            
            2,195
            
            
            (55
            )Total
                temporarily impaired
            
            $
            5,473
            
            $
            (82
            )
            $
            14,653
            
            $
            (350
            )
            $
            20,126
            
            $
            (432
            )





F-13
 *Table
          of Contents*









**NOTE
      2 - SECURITIES (Continued)**




At
      December 31, 2006, the 43 debt securities with unrealized losses have
      depreciated 2.3% from the Company’s amortized cost basis. At December 31,
      2005, there were 52 debt securities with unrealized losses that have depreciated
      2.2% from the Company’s amortized cost basis. These unrealized losses related
      principally to current interest rates for similar types of securities. In
      analyzing an issuer’s financial condition, management considers whether the
      securities are issued by the federal government or its agencies, whether
      downgrades by bond rating agencies have occurred, and what the results are
      of
      reviews of the issuer’s financial condition. The fair value is expected to
      recover as securities approach their maturity date. As management has the
      ability to hold debt securities until forecasted recovery, which may be
      maturity, no declines are deemed to be other than temporary.




The
      Company has investments in various mutual funds including an adjustable rate
      mortgage fund, a U.S. government mortgage fund, and a short-term government
      fund. The Net Asset Value (“NAV”) of the adjustable rate and U.S. government
      mortgage funds have declined in the current interest rate environment. 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 market
      net asset value. Management expects the funds to recover once rates stabilize
      and/or the underlying adjustable rate mortgages re-price to market. The Company
      has the ability and intent to hold the investments for a sufficient period
      of
      time to allow for anticipated recovery in fair value.




**NOTE
      3 - LOANS**




Loans
      are
      as follows:




**2006**
            
            **2005**First
                mortgage loansPrincipal
                balancesSecured
                by one- to four-family residences
            
            $
            33,270
            
            $
            24,424Secured
                by multi-family properties
            
            
            18,965
            
            
            13,83952,235
            
            
            38,263Less:Loans
                in process
            
            
            9
            
            
            51Net
                deferred loan origination fees
            
            
            121
            
            
            89Total
                first mortgage loans
            
            
            52,105
            
            
            38,123Loans
                on savings accounts
            
            
            59
            
            
            7752,164
            
            
            38,200Less
                allowance for loan losses
            
            
            240
            
            
            170$
            51,924
            
            $
            38,030





F-14
 *Table
          of Contents*





**NOTE
      3 - LOANS (Continued)**




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




**2006**
            
            **2005**Balance
                at beginning of year
            
            $
            170
            
            $
            150Loans
                charged off
            
            
            —
            
            
            —Recoveries
            
            
            —
            
            
            —Provision
                charged to income
            
            
            70
            
            
            20Balance
                at end of year
            
            $
            240
            
            $
            170





As
      of
      December 31, 2006 and 2005, there were no loans that were individually
      considered as impaired. Nonaccrual loans, which include all loans past due
      90
      days and over at December 31, 2006 and 2005 were $443 and
      $184.




Loans
      to
      principal officers, directors, and their affiliates in 2006 were as
      follows:




Balance
                at January 1, 2005
            
            $
            253New
                loans
            
            
            —Repayments
            
            
            (15
            )Balance
                at December 31, 2006
            
            $
            238





**NOTE
      4 - PREMISES AND EQUIPMENT**




Year-end
      premises and equipment were as follows:




**2006**
            
            **2005**Land
            
            $
            97
            
            $
            97Building
            
            
            355
            
            
            355Building
                improvements
            
            
            152
            
            
            144Parking
                lot improvements
            
            
            44
            
            
            44Furniture
                and equipment
            
            
            645
            
            
            611Total
                cost
            
            
            1,293
            
            
            1,251Accumulated
                depreciation
            
            
            (1,004
            )
            
            (946
            )$
            289
            
            $
            305





Depreciation
      expense was $59 and $87 for the years ended December 31, 2006 and
      2005.




F-15
 *Table
          of Contents*







**NOTE
      5** **-
      ACCRUED INTEREST RECEIVABLE**




Accrued
      interest receivable is summarized as follows:




**2006**
            
            **2005**Securities
            
            $
            116
            
            $
            117Loans
            
            
            223
            
            
            119$
            339
            
            $
            236





**NOTE
      6 - DEPOSITS**




Deposits,
      by major category, are as follows:




**2006**
            
            **2005**Non-interest-bearing
                checking
            
            $
            728
            
            $
            350Savings
            
            
            20,334
            
            
            21,827Certificates
                of deposit
            
            
            22,246
            
            
            21,348$
            43,308
            
            $
            43,525





The
      aggregate amount of certificates of deposit with a minimum denomination of
      $100
      was approximately $7,498 and $5,990 at December 31, 2006 and 2005,
      respectively. Deposit balances over $100 are not federally insured.




Scheduled
      maturities of certificates of deposit for the year ended December 31, 2006
      are as follows:




2007
            
            $
            20,1692008
            
            
            1,4102009
            
            
            2012010
            
            
            4522011
            
            
            14$
            22,246





Deposits
      of related parties totaled approximately $1,020 and $1,225 at December 31,
      2006 and 2005, respectively.




Interest
      expense on deposit accounts is summarized as follows:




**2006**
            
            **2005**Savings
            
            $
            269
            
            $
            267Certificates
                of deposit
            
            
            789
            
            
            521$
            1,058
            
            $
            788




F-16
 *Table
          of Contents*









**NOTE
      7 - FEDERAL HOME LOAN BANK ADVANCES**




The
      Company had $2,000 in outstanding overnight advances from the Federal Home
      Loan
      Bank at December 31, 2006, at an interest rate of 5.50%. The Company had no
      outstanding advances at December 31, 2005. 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
      at December 31, 2006 was $8 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, 2006,
      the Company contributed $46 to the plan and reported compensation expense of
      $52
      and released 4,537 shares of common stock.




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 will be reflected in the Company’s financial statements as
“common stock in ESOP subject to contingent repurchase obligation” and will
      reduce 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, 2006, there are
      4,537 allocated ESOP shares and a contingent repurchase obligation of $66.
      In
      addition, the fair value of unearned ESOP shares was $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 178,026 and 71,282 shares of Company common stock have been reserved
      for issuance under the SOP and the RRP, respectively. As of December 31, 2006
      no
      shares have been awarded under either plan.




F-17
 *Table
          of Contents*









**NOTE
      8 - BENEFIT PLANS (Continued)**




During
      January of 2007, under the plans, the Company granted 131,871 stock options
      and
      52,748 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 (20% per year) over the next five years. Compensation
      expense related to vesting of the stock awards will approximate $152 per year
      (before tax). The Company will also be required to record compensation expense
      related to the stock options in accordance with Statement on Financial Account
      Standard No. 123R. Compensation expense related to vesting of stock options
      will
      approximate $104 per year (before tax), based on the options
      outstanding.




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 $25 and $22 for the years ended December 31, 2006
      and
      2005. The 401(k) profit sharing plan also provides for a discretionary profit
      sharing contribution determined annually by the Board of Directors. The Board
      approved $0 and $34 in discretionary contributions for the years ended December
      31, 2006 and 2005.




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, 2006 and 2005
      approximated $14 and $9. In addition, for the years ended December 31, 2006
      and
      2005, approximately $24 and $24 was distributed. The agreements were amended
      during 2005 to terminate deferrals after 2004. At December 31, 2006 and 2005,
      $396 and $406 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, 2006 and 2005, a liability of $83 and $95 is
      included in accrued expenses and other liabilities in the statements of
      financial condition. The Company recorded expense of $8 and $39 for the years
      ended December 31, 2006 and 2005. During 2005, the Medicare supplement cost
      increased and the Bank adjusted its liability to take the increase into account,
      amended the Plan to cap the maximum amount of premium that it would reimburse
      at
      $277.00 per qualified individual per month, and provided that new entrants
      after
September30, 2006 would pay the entire premium. The other related disclosures
      are
      not considered significant to the consolidated financial
      statements.




F-18
 *Table
          of Contents*









**NOTE
      9 - INCOME TAXES**




Income
      tax expense was as follows.




**2006**
            
            **2005**FederalCurrent
            
            $
            282
            
            $
            397Deferred
            
            
            (9
            )
            
            (14
            )$
            273
            
            $
            383StateCurrent
            
            
            24
            
            
            50Deferred
            
            
            7
            
            
            931
            
            
            59$
            304
            
            $
            442





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




**2006**
            
            **2005**Provision
                calculated at statutory federal rate
            
            $
            284
            
            $
            403Effect
                of:State
                taxes, net of federal benefit
            
            
            24
            
            
            33Other,
                net
            
            
            (4
            )
            
            6Total
            
            $
            304
            
            $
            442Effective
                tax rate
            
            
            36.5
            %
            
            37.3
            %





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




**2006**
            
            **2005**Deferred
                tax assets:Allowance
                for loan losses
            
            $
            90
            
            $
            64Deferred
                compensation
            
            
            154
            
            
            158Accrued
                post retirement benefit
            
            
            32
            
            
            37Other
            
            
            -
            
            
            3$
            276
            
            $
            262Deferred
                tax liabilities:Federal
                Home Loan Bank stock dividends
            
            $
            (61
            )
            $
            (61
            )Depreciation
            
            
            (12
            )
            
            (12
            )Net
                unrealized gain on securities available-for-sale
            
            
            (84
            )
            
            (54
            )Other
            
            
            (12
            )
            
            -(169
            )
            
            (127
            )Net
                deferred tax asset (liability)
            
            $
            107
            
            $
            135




F-19
 *Table
          of Contents*









**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 2006.
      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, 2006 and
      2005
      were $576 and $2,046. Commitments to make loans are generally made for periods
      of 60 days or less. The fixed-rate loan commitments at December 31, 2006 have
      interest rates ranging from 6.00% to 7.20% and maturities ranging from 5 years
      to 30 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 2006 and 2005, 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-20
 *Table
          of Contents*









**NOTE
      11 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS
      (Continued)**




**Actual**
            
            **For
                Capital**
              **Adequacy
                Purposes**
            
            **To
                Be Well**
              **Capitalized
                Under**
              **Prompt
                Corrective**
              **Action
                Provisions****Amount**
            
            **Ratio**
            
            **Amount**
            
            **Ratio**
            
            **Amount**
            
            **Ratio**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
            
            
            —
            
            
            —December
                31, 2005Total
                capital to risk-weighted assets
            
            $
            18,657
            
            
            58.03
            %
            $
            2,569
            
            
            8.0
            %
            $
            3,211
            
            
            10.0
            %Tier
                1 (core) capital to risk-weighted assets
            
            
            18,253
            
            
            56.84
            
            
            1,285
            
            
            4.0
            
            
            1,927
            
            
            6.0Tier
                1 (core) capital toadjusted
                total assets
            
            
            18,253
            
            
            28.36
            
            
            2,574
            
            
            4.0
            
            
            3,218
            
            
            5.0Tangible
                capital (to adjusted total assets)
            
            
            18,253
            
            
            28.36
            
            
            965
            
            
            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.




**2006**
            
            **2005**GAAP
                equity
            
            $
            23,307
            
            $
            18,336Unrealized
                gain on securities available-for-sale
            
            
            (133
            )
            
            (83
            )Tier
                1 capital
            
            
            23,174
            
            
            18,253General
                allowance for loan losses
            
            
            240
            
            
            170Allowable
                portion (45%) of unrealized gains on equity securities
                available-for-sale
            
            
            235
            
            
            234Total
                regulatory capital
            
            $
            23,649
            
            $
            18,657





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




F-21
 *Table
          of Contents*









**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, 2007, the
      Bank could, without prior approval, declare dividends of approximately
      $1,387.




**NOTE
      12 - OTHER COMPREHENSIVE INCOME (LOSS)**




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




**2006**
            
            **2005**Unrealized
                holding gains (losses) on securities available-for-sale
            
            $
            80
            
            $
            (579
            )Reclassification
                adjustment for gains realized in income
            
            
            —
            
            
            (477
            )Net
                unrealized gains (losses)
            
            
            80
            
            
            (1,056
            )Tax
                effect
            
            
            (30
            )
            
            409Other
                comprehensive income (loss)
            
            $
            50
            
            $
            (647
            )





**NOTE
      13 - FAIR VALUES OF FINANCIAL INSTRUMENTS**




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




**December 31,
                2006**
            
            **December 31,
                2005****Carrying
                Amount**
            
            **Fair**
              **Value**
            
            **Carrying**
              **Amount**
            
            **Fair**
              **Value**Financial
                assets:Cash
                and cash equivalents
            
            $
            2,268
            
            $
            2,268
            
            $
            1,250
            
            $
            1,250Securities
                available-for-sale
            
            
            19,559
            
            
            19,559
            
            
            24,028
            
            
            24,028Loans,
                net
            
            
            51,924
            
            
            52,209
            
            
            38,030
            
            
            38,031Federal
                Home Loan Bank stock
            
            
            500
            
            
            500
            
            
            500
            
            
            500Accrued
                interest receivable
            
            
            339
            
            
            339
            
            
            236
            
            
            236Financial
                liabilities:Deposits
            
            
            43,308
            
            
            43,227
            
            
            43,525
            
            
            43,381Advances
                from Federal Home Loan Bank
            
            
            2,000
            
            
            2,000
            
            
            —
            
            
            —Advance
                payments by borrowers for taxes and insurance
            
            
            401
            
            
            401
            
            
            361
            
            
            361Accrued
                interest payable
            
            
            70
            
            
            70
            
            
            44
            
            
            44





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




F-22
 *Table
          of Contents*









**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 as of December 31, 2006, and for the period April 4,
      2006,
      through December 31, 2006, for the parent company only, Mutual Federal Bancorp,
      Inc., follows:




CONDENSED
      BALANCE SHEET


December
      31, 2006


ASSETSCash
                  and cash equivalents
              
              $
              4,088Investment
                  in banking subsidiary
              
              
              23,307ESOP
                  note receivable
              
              
              840Other
                  assets
              
              
              72Total
                  assets
              
              $
              28,307LIABILITIES
                  AND EQUITYAccrued
                  expenses and other liabilities
              
              $
              8Common
                  stock in ESOP subject to contingent repurchase obligation
              
              
              66Stockholders’
                  equity
              
              
              28,233Total
                  liabilities and stockholders’ equity
              
              $
              28,307CONDENSED
                  STATEMENT OF INCOMEFor
                  the period April 4, 2006 through December 31, 2006Interest
                  income
              
              $
              59Other
                  expense
              
              
              (246
              )Income
                  before income tax and undistributed subsidiary income
              
              
              (187
              )Income
                  tax expense (benefit)
              
              
              (73
              )Equity
                  in undistributed subsidiary income
              
              
              537Net
                  income
              
              $
              423




F-23
 *Table
          of Contents*









**NOTE
      14 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
      (continued)**




CONDENSED
        STATEMENT OF CASH FLOWS
 For
        the
        period April 4, 2006 through December 31, 2006


Cash
                  flows from operating activitiesNet
                  income
              
              $
              423Adjustments:
              
              
              -Equity
                  in undistributed subsidiary income
              
              
              (537
              )Change
                  in other assets
              
              
              (72
              )Change
                  in other liabilities
              
              
              7Net
                  cash from operating activities
              
              
              (179
              )Cash
                  flows from investing activitiesInvestments
                  in subsidiary
              
              
              (4,224
              )ESOP
                  loan made
              
              
              (873
              )ESOP
                  loan payments received
              
              
              33Net
                  cash from investing activities
              
              
              (5,064
              )Cash
                  flows from financing activitiesProceeds
                  from stock issue
              
              
              9,331Net
                  cash from financing activities
              
              
              9,331Net
                  change in cash and cash equivalents
              
              
              4,088Beginning
                  cash and cash equivalents
              
              
              --Ending
                  cash and cash equivalents
              
              $
              4,088


**NOTE
        15 - EARNINGS PER SHARE**




The
      Company completed its public offering on April 4, 2006. Earnings per share
      data
      prior to that date are not meaningful. The factors used in the earnings per
      share computation follow:




**2006**Basic
                and dilutedNet
                income
            
            $
            530Less
                net income from January 1, 2006 to April 4, 2006
            
            
            (107
            )Net
                income
            
            $
            423Weighted
                average common sharesoutstanding
            
            
            3,551,886Basic
                and diluted earnings percommon
                share
            
            $
            0.12





F-24
 *Table
          of Contents*




**Signatures**




Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act
      of 1934, the Registrant has duly caused this report to be signed on its behalf
      by the undersigned, thereunto duly authorized on the 29th
      day of March 2007.




MUTUAL
                FEDERAL BANCORP, INC.
              
              By:/s/
                Stephen M.
                Oksas
              Stephen
                M. Oksas
              President
                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
              Stephen M.
                Oksas
            Chairman,
                President, Chief Executive Officer and Director
              (Principal
                Executive Officer)
            March 29,
                2007/s/
                John L.
                Garlanger
              John
                L. Garlanger
            Executive
                Vice President and Chief Financial Officer
              (Principal
                Financial and Accounting Officer)
            March 29,
                2007/s/
                Stanley
                Balzekas III
              Stanley
                Balzekas III
            Director
            March 29,
                2007/s/
                Robert P.
                Kazan
              Robert P.
                Kazan
            Director
            March 29,
                2007/s/
                Leonard F.
                Kosacz
              Leonard F.
                Kosacz
            Director
            March 29,
                2007/s/
                Julie H.
                Oksas
              Julie H.
                Oksas
            Executive
                Vice President and Director
            March 29,
                2007/s/
                Stephanie
                Simonaitis
              Stephanie
                Simonaitis
            Director
            March 29,
                2007




S-1
 *Table
          of Contents*




/s/
                Amy P.
                Keane
              Amy
                P. Keane
            Director
            March 29,
                2007




S-2
 *Table
          of Contents*




**EXHIBIT INDEX**




**Exhibit No.**
            **Description
                of Exhibit**3.1
            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. (incorporated by reference to
                Exhibit 3.2 to Registrant’s Form SB-2 filed with the Commission
                on November 18, 2005).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 Ethics21.1
            Subsidiaries
                of the Company23.1
            Consent
                of Crowe Chizek and Company LLC




*Table
          of Contents*




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