Mutual Federal Bancorp (MFDB) 10QSB 2006 Q2 Quarterly report (small business)

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-QSB

(mark one)

ý QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

or

¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from _______to_______

Commission File Number 000-51867

MUTUAL FEDERAL BANCORP, INC.

(Exact name of small business issuer specified in its charter)

Federal (State or other jurisdiction of incorporation or organization)	33-1135091 (I.R.S. Employer Identification Number)
2212 West Cermak Road Chicago, Illinois 60608 (Address of principal executive offices)

(773) 847-7747

(Issuer’s telephone number)

Not Applicable

(Former name, former address and former fiscal year,

if changes since last report)

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 ¨

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

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:

Class	Outstanding as of August 4, 2006
Common Stock, $0.01 par value	3,636,875

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

MUTUAL FEDERAL BANCORP, INC.

FORM 10-QSB

For the quarterly period ended June 30, 2006

TABLE OF CONTENTS

	Page
PART I. - FINANCIAL INFORMATION	1
Item 1.Financial Statements	1
Consolidated Statements of Financial Condition as of June 30, 2006 (unaudited) and December 31, 2005	2
Consolidated Statements of Income and Other Comprehensive Income (unaudited) for the three months and the six months ended June 30, 2006 and 2005	3
Consolidated Statements of Equity (unaudited) for the six months ended June 30, 2006 and 2005	4
Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2006 and 2005	5
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 3.Controls and Procedures	20
PART II. - OTHER INFORMATION	21
Item 1.Legal Proceedings	21
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds	21
Item 3.Defaults Upon Senior Securities	21
Item 4.Submission of Matters to a Vote of Security Holders	21
Item 5.Other Information	21
Item 6.Exhibits	21
SIGNATURES	22
EXHIBIT INDEX

PART I. - FINANCIAL INFORMATION

Item 1.Financial Statements

The minority stock offering of Mutual Federal Bancorp, Inc. (the “Company”) was completed on April 4, 2006, and the Company became the owner of 100% of the capital stock of Mutual Federal Savings and Loan Association of Chicago (the “Bank”). At June 30, 2006, the information presented in this report for the Company is fully consolidated with the Bank. Operating results prior to April 4, 2006, reflect operations of the Bank.

1

MUTUAL FEDERAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollar amounts in thousands except share data)

	June 30, 2006			December 31, 2005
	(unaudited)
ASSETS
Cash and cash equivalents	$	3,273		$	1,250
Securities available-for-sale		22,758			24,028
Loans, net of allowance for loan losses of $210 at June 30, 2006; $170 at December 31, 2005		46,223			38,030
Federal Home Loan Bank stock, at cost		500			500
Premises and equipment, net		287			305
Accrued interest receivable		304			236
Other assets		299			140
Total assets	$	73,644		$	64,489
LIABILITIES AND STOCKHOLDER’S EQUITY
Liabilities
Non-interest-bearing deposits	$	791		$	350
Interest-bearing deposits		42,498			43,175
Total deposits		43,289			43,525
Advance payments by borrowers for taxes and insurance		437			361
Accrued interest payable and other liabilities		2,220			2,267
Total liabilities		45,946			46,153
Commitments and contingencies
Stockholder’s equity
Preferred stock, $0.01 par value, 1,000,000 shares authorized at June 30, 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 June 30, 2006; $0.10 par value, 5,000,000 shares authorized, 10,000 shares issued and outstanding at December 31, 2005		36			1
Additional paid-in capital		10,158			—
Retained earnings		18,496			18,252
Unearned ESOP		(858	)		—
Accumulated other comprehensive income/(loss)		(134	)		83
Total stockholder’s equity		27,698			18,336
Total liabilities and stockholder’s equity	$	73,644		$	64,489

See accompanying notes to unaudited consolidated financial statements.

2

MUTUAL FEDERAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME

(unaudited)

(Dollar amounts in thousands except share data)

	Three Months Ended June 30,				Six Months Ended June 30,
	2006		2005		2006		2005
Interest and dividend income
Loans, including fees	$	717	$	497	$	1,371	$	979
Securities		246		260		476		549
Interest earning deposits		28		20		40		36
Federal Home Loan Bank stock dividends		4		7		8		13
Total interest and dividend income		995		784		1,895		1,577
Interest expense
Deposits		253		189		496		363
Advances from Federal Home Loan Bank		—		—		27		—
		253		189		523		363
Net interest income		742		595		1,372		1,214
Provision for loan losses		15		—		40		—
Net interest income after provision for loan losses		727		595		1,332		1,214
Non-interest income
Gain on sale of securities		—		477		—		477
Other income		8		12		16		20
Total non-interest income		8		489		16		497
Non-interest expense
Compensation and benefits		285		241		532		496
Occupancy and equipment		45		39		87		92
Data processing		23		28		47		53
Professional fees		94		43		156		79
Other expense		73		63		142		129
Total non-interest expense		520		414		964		849
Income before income taxes		215		670		384		862
Income tax expense		78		252		140		324
Net income	$	137	$	418	$	244	$	538
Earnings per share (basic and diluted)	$	0.04		nm	$	0.04		nm
Other comprehensive income (loss)	$	19	$	248	$	27	$	55

See accompanying notes to unaudited consolidated financial statements.

3

MUTUAL FEDERAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF EQUITY (unaudited)

(Dollar amounts in thousands)

	Common Stock		Additional Paid-in Capital		Retained Earnings			Unearned ESOP			Accumulated Other Comprehensive Income/(Loss)			Total
Balance at December 31, 2004	$	1		—	$	17,809			—		$	730		$	18,540
Comprehensive income:
Net income		—		—		538			—			—			538
Change in net unrealized gain (loss) on securities available-for-sale, net of taxes and reclassification adjustments		—		—		—			—			(483	)		(483	)
Total comprehensive income		—		—		—			—			—			55
Dividends paid		—		—		(300	)		—			—			(300	)
Balance at June 30, 2005	$	1		—	$	18,047			—		$	247		$	18,295
Balance at December 31, 2005	$	1	$	—	$	18,252		$	—		$	83		$	18,336
Comprehensive income:
Net income		—		—		244			—			—			244
Change in net unrealized gain (loss) on securities available-for-sale, net of taxes and reclassification adjustments		—		—		—			—			(217	)		(217	)
Total comprehensive income		—		—		—			—			—			27
Proceeds from sale of common stock		35		10,157		—			(873	)		—			9,319
ESOP shares committed to be released				1					15						16
Balance at June 30, 2006	$	36	$	10,158	$	18,496		$	(858	)	$	(134	)	$	27,698

See accompanying notes to unaudited consolidated financial statements.

4

MUTUAL FEDERAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(Dollar amounts in thousands)

	Six Months Ended June 30,
	2006			2005
Cash flows from operating activities
Net income	$	244		$	538
Adjustments to reconcile net income to net cash from operating activities
Provision for loan losses		40			—
Depreciation		29			47
Net amortization of securities		32			42
Federal Home Loan Bank stock dividends		—			(13	)
Gains on sale of securities		—			(477	)
Dividends reinvested on securities		(50	)		(41	)
ESOP expense		16			—
(Increase) decrease in accrued interest receivable and other assets		(227	)		6
(Decrease) increase in accrued interest payable and other liabilities		91			596
Net Cash (used in) provided by operating activities		175			698
Cash flows from investing activities
Activity in securities available-for-sale:
Proceeds from maturities, calls, and principal repayments		2,933			3,645
Proceeds from sales		—			484
Purchases		(2,000	)		—
Loan originations and payments, net		(8,233	)		(3,942	)
Additions to premises and equipment		(11	)		(13	)
Net cash (used in) provided by investing activities		(7,311	)		174
Cash flows from financing activities
Net increase (decrease) in deposits		(236	)		(470	)
Net increase (decrease) in advance payments by borrowers for taxes and insurance		76			77
Advances from FHLB		4,000			—
Repayment of FHLB advances		(4,000	)		—
Net proceeds of minority common stock offering		9,319			—
Dividends paid		—			(300	)
Net cash provided by (used in) financing activities		9,159			(693	)
Net increase in cash and cash equivalents		2,023			179
Cash and cash equivalents at beginning of period		1,250			3,684
Cash and cash equivalents at end of period	$	3,273		$	3,863
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest	$	517		$	363
Income taxes		50			491

See accompanying notes to unaudited consolidated financial statements.

5

MUTUAL FEDERAL BANCORP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands)

Note 1 - Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with instructions to Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments consisting of normal recurring accruals necessary for a fair presentation have been included. The results of operations and other data for the six months ended June 30, 2006, are not necessarily indicative of results that may be expected for the entire fiscal year ended December 31, 2006.

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 June 30, 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 included in this Form 10-QSB 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 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 Chicagoland area.

Note 2 - Capital Resources

The Bank is subject to regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a material impact on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated for regulatory accounting purposes. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets and of tangible capital to average assets. As of June 30, 2006, the Bank met the capital adequacy requirements to which it is subject. The Bank’s tangible equity ratio at June 30, 2006, was 30.83%. The Tier 1 capital ratio was 30.83% and the Tier 1 risk-based capital ratio was 58.90%, and the total risk-based capital ratio was 59.93%.

The most recent notification from the federal banking agencies categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be well-capitalized, the

6

MUTUAL FEDERAL BANCORP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands)

Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios. There are no conditions or events since that notification that have changed the Bank’s category.

Note 3 - Commitments

At June 30, 2006, the Bank had outstanding commitments to make loans of $2.4 million. At December 31, 2005, the Bank had outstanding commitments to make loans of $2.0 million.

Note 4 - 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 fiscal years beginning on or after June 15, 2005. The adoption of Statement 123(R) is expected to reduce reported net income and earnings per share if the Company adopts a stock award program.

Note 5 - Stock Issuance

The Board of Directors of 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 are estimated to be approximately $719,000. Approximately half of the net proceeds of $10.2 million was retained by the Company and half paid to the Bank.

Note 6 - Employee Stock Ownership Plan

As of January 1, 2006, the Company adopted an employee stock ownership plan (“ESOP”) for the benefit of substantially all employees. The ESOP borrowed $872,850 from the Company and used

7

MUTUAL FEDERAL BANCORP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands)

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 $44,000, plus interest at 7.0% on the unpaid loan balance.

As shares are released from collateral, the Company will report compensation expense equal to the current market price of the shares and the shares will become outstanding for earnings-per-share (“EPS”) computations. 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 June 30, 2006 there are no allocated ESOP shares.

Note 7 - Earnings Per Share

Basic earnings per share are computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. Earnings per share, prior to the minority stock issuance, was based on 10,000 shares outstanding for the periods presented, and is no longer meaningful. Earnings per share for the three-month and the six-month periods ended June 30, 2006, is calculated beginning with April 4, 2006, the date of conversion. Net income for the period from April 4, 2006 through June 30, 2006 was $137,000. Weighted average shares outstanding for the period from April 4, 2006, through June 30, 2006, are 3,550,346.

8

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

General

This discussion and analysis reflects the Company’s 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 for the years ended December 31, 2005 and 2004, which are included in Form 10-KSB filed with the Securities and Exchange Commission on March 30, 2006.

Forward-Looking Information

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;

· 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 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.

9

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, U.S. government and agency securities, mortgage-backed securities and other interest earning assets (primarily cash and cash equivalents), and the interest we pay on our interest-bearing liabilities, consisting of savings accounts, time deposits, and advances from the Federal Home Loan Bank. Our results of operations are also affected by our provisions for loan losses, non-interest income and non-interest expense. Non-interest income consists primarily of gains and losses on sales 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.

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.

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 subject 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.

Comparison of Financial Condition at June 30, 2006 and December 31, 2005

Our total assets increased by $9.2 million, or 14.2%, to $73.6 million at June 30, 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 an addition of $9.3 million of equity to the balance sheet.

10

Loans receivable increased $8.2 million, or 21.5%, to $46.2 million at June 30, 2006, from $38.0 million at December 31, 2005, reflecting an increase of $4.4 million, or 18.3%, in one-to-four family residential mortgage loans and an increase of $3.8 million, or 27.2%, in multi-family residential mortgage loans during the period. While multi-family residential properties have always been a large part of our immediate market area, the increase in both multi-family and one-to-four family residential mortgage loans during the six months ended June 30, 2006, is the result of our continued focus on customer service and the referrals it generates, as well as increased demand for fixed rate loans in a rising interest rate environment.

Total deposits decreased $236,000, or 0.5%, to $43.3 million at June 30, 2006, from $43.5 million at December 31, 2005. The primary reason for the decrease was the purchase of $796,000 in common stock of the Company by depositors with funds from their deposit accounts.

Stockholder Equity increased $9.4 million, to $27.7 million at June 30, 2006, from $18.3 million at December 31, 2005. The increase reflects $10.2 million in new equity from the sale of a 30% minority interest in the Company, reduced by $858,000 in unearned ESOP shares established with the minority stock offering, net income of $244,000 for the six months ended June 30, 2006, and by a $217,000 decrease in accumulated other comprehensive income (loss) from unrealized gains and losses on securities available-for-sale.

Comparison of Operating Results for the Three Months Ended June 30, 2006 and 2005

General. Net income decreased $281,000, or 67.2%, to $137,000 for the three months ended June 30, 2006, from $418,000 for the three months ended June 30, 2005. The primary reason for the decrease was a $477,000 gain on the sale of securities in 2005 that was not repeated in 2006. Other reasons for the decrease include a provision for losses on loans of $15,000 in 2006, where none was made in 2005, and a $51,000 increase in professional fees. This was partially offset by an increase in net interest income of $147,000, or 24.7%, to $742,000 in 2006, from $595,000 in 2005. Return on average assets was 0.75% for the three months ended June 30, 2006, compared to 2.57% for the same period last year, and return on equity was 1.99% and 9.08%, respectively, for these two periods.

Interest Income. Interest and dividend income increased $211,000, or 26.9%, to $995,000 for the three months ended June 30, 2006, compared to $784,000 for the three months ended June 30, 2005. The increase resulted from the $9.4 million, or 15.2%, increase in the average balance of interest-earning assets, to $70.9 million in the second quarter of 2006, compared to $61.5 million in the second quarter of 2005, and to an increase of 52 basis points in the average yield on interest earning assets, to 5.62% in 2006, from 5.10% in 2005.

Interest income and fees from loans receivable increased $220,000, or 44.3%, to $717,000 for the three months ended June 30, 2006, from $497,000 for the three months ended June 30, 2005. The increase resulted from the $13.6 million, or 44.0%, increase in the average balance of loans receivable, to $44.5 million in the second quarter of 2006, compared to $30.9 million in the second quarter of 2005. The average yield on loans receivable was 6.44% in 2006, compared to 6.43% in 2005.

Interest and dividend income from securities and interest-earning deposits decreased $9,000, or 3.1%, to $278,000 for the three months ended June 30, 2006, from $287,000 for the three months ended June 30, 2005. The primary reason for the decrease was the decrease in average balances of securities and interest-earning deposits of $4.3 million, or 14.0%, to $26.3 million in 2006, from $30.6 million in 2005, partially offset by a 47 basis point increase in average yield to 4.22% in 2006, compared to 3.75% in 2005.

11

Interest Expense. Interest expense increased $64,000, or 33.9%, to $253,000 for the three months ended June 30, 2006, from $189,000 for the three months ended June 30, 2005. The increase in interest expense was due to several factors, including an increase in rates paid on deposits and the increase in deposits due to stock subscriptions from the minority offering. The average rate paid on deposits increased 65 basis points, to 2.35% for the quarter ended June 30, 2006, from 1.70% for the quarter ended June 30, 2005. Interest expense on certificates of deposit increased $70,000, or 57.9%, to $191,000 in 2006, from $121,000 in 2005, and the average rate paid on certificates increased 140 basis points, to 3.65% in 2006, from 2.25% in 2005.

Net Interest Income. Net interest income increased $147,000, or 24.7%, to $742,000 for the three months ended June 30, 2006, from $595,000 for the same quarter last year. Our net interest margin increased 32 basis points, to 4.19% in 2006, from 3.87% in 2005. The average yield on interest-earning assets increased 52 basis points, to 5.62% in 2006, from 5.10% in 2005, and was augmented by an increase of $9.4 million, or 15.2%, in the average balance of interest-earning assets, with interest income increasing by $211,000. The average rate paid on interest-bearing liabilities also increased, to 2.35% in 2006, from 1.70% in 2005, and the average balance of interest-bearing liabilities decreased $1.4 million, or 3.2%, with interest expense increasing by $64,000. The interest rate spread between interest earning assets and interest bearing liabilities decreased 13 basis points, to 3.27% in 2006, from 3.40% in 2005.

Provision for Loan Losses. During the three months ended June 30, 2006, management increased the general loan loss allowance by $15,000, with a charge to operations, based on its quarterly evaluation of the level of the allowance necessary to absorb probable incurred loan losses at June 30, 2006. Management considers changes in delinquencies, changes in the composition and volume of loans, historical loan loss experience, general economic and real estate market conditions, as well as peer group data, when determining the level on the allowance for loan losses.

During the six months ended June 30, 2006, non-performing (non-accrual) loans increased to $460,000, from $184,000 at December 31, 2005. Loans delinquent 60-89 days decreased to $361,000, from $518,000 at December 31, 2005. The loan portfolio increased $8.2 million, or 21.5%, to $46.2 million at June 30, 2006, from $38.0 million at December 31, 2005. During this period one- to four-family residential mortgage loans increased $4.4 million, or 18.3%, and multi-family residential mortgage loans increased $3.8 million, or 27.2%. After reviewing these and other factors, management determined that it was necessary to increase the allowance for loan losses by $40,000 ($25,000 of this amount was recorded during the quarter ended March 31, 2006). At June 30, 2006, the allowance for loan losses was $210,000, or 0.45% of loans receivable, compared to $170,000, or 0.44% of loans receivable at December 31, 2005. In a similar evaluation of the allowance for loan losses at June 30, 2005, management determined that there was no need for a provision for the six months then ended.

Non-interest Income. Non-interest income decreased $481,000, to $8,000 for the three months ended June 30, 2006, compared to $489,000 for the three months ended June 30, 2005. During 2005 the Company sold part of its investment in FHLMC common stock for a gain of $477,000. There were no security sales in 2006.

Non-interest Expense. Non-interest expense increased $106,000, or 25.6%, to $520,000 for the three months ended June 30, 2006, from $414,000 for the same quarter last year. Salaries and employee benefits increased $44,000, or 18.3%, to $285,000 in 2006, from $241,000 in 2005. The increase was due to additional staff and normal salary adjustments for 2006, to additional director’s fees paid by the Company, and to the establishment of an Employee Stock Ownership Plan (“ESOP”) during the second quarter of 2006. The Bank received a payment of $10,000 from Mutual Federal Bancorp, MHC, pursuant to Tax and Expense Sharing Agreements, for services provided by Bank officers to MHC during the quarter ended June 30, 2006, that was not necessary for the quarter ended June 30, 2005. This payment

12

reduced salaries and employee benefits for the quarter. In future periods, the Company will incur these costs and as such they will be included in the consolidated results, with smaller payments by MHC.

Occupancy costs increased $6,000, or 15.4%, to $45,000 for the three months ended June 30, 2006, from $39,000 for the same period in 2005, primarily due to increased provisions for property taxes. Data processing fees decreased $5,000, or 17.9%, to $23,000, from $28,000 in 2005. Professional fees, including legal, accounting and consulting fees, increased $51,000, or 118.6%, to $94,000 in 2006, from $43,000 in 2005. The increase was due primarily to increased legal fees associated with changes in benefit plans, SEC reporting compliance, and other changes resulting from the minority stock offering. Miscellaneous expenses increased $10,000, or 15.9%, to $73,000 in 2006, from $63,000 in 2005.

The Bank’s ratio of non-interest expense to average assets increased to 2.85% for the three months ended June 30, 2006, from 2.55% for the same period in 2005, and its efficiency ratio was 69.3% in 2006, compared to 68.2% in 2005.

Income Tax Expense. The provision for income taxes decreased $174,000, to $78,000 for the three months ended June 30, 2006, from $252,000 for the same period in 2005, reflecting primarily the reduction in pre-tax net income. The effective tax rate for the quarter ended June 30, 2006, was 36.3%, compared to 37.6% for this quarter last year.

Average Balance Sheet

The following table sets forth average balance sheets, average yields and costs, and certain other information for the three months ended June 30, 2006 and 2005. 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 are 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.

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	For the Three Months Ended June 30,
	2006							2005
	Average Outstanding Balance		Interest		Yield/Rate			Average Outstanding Balance		Interest		Yield/Rate
Interest-earning assets:
Loans	$	44,525	$	717		6.44	%	$	30,929	$	497		6.43	%
Securities available for sale		23,528		246		4.18			27,246		260		3.82
Interest-earning deposits		2,318		28		4.83			2,852		20		2.81
Federal Home Loan Bank Stock		500		4		3.20			485		7		5.77
Total interest-earning assets		70,871	$	995		5.62	%		61,512	$	784		5.10	%
Non-interest-earning assets		2,080							3,494
Total assets	$	72,951						$	65,006
Interest-Bearing Liabilities:(1)
Savings deposits	$	22,128	$	62		1.12	%	$	22,950	$	68		1.19	%
Certificates of deposit		20,913		191		3.65			21,525		121		2.25
Total interest-bearing deposits		43,041		253		2.35			44,475		189		1.70
Federal Home Loan Bank advances		—		—		—			—		—		—
Total interest-bearing liabilities		43,041		253		2.35	%		44,475		189		1.70	%
Non-interest-bearing liabilities		2,401							2,114
Total liabilities		45,442							46,589
Stockholders’ equity		27,509							18,417
Total liabilities and stockholders’ equity	$	72,951						$	65,006
Net interest income			$	742						$	595
Net interest rate spread(2)						3.27	%						3.40	%
Net interest-earning assets(3)	$	27,830						$	17,037
Net interest margin(4)						4.19	%						3.87	%
Ratio of interest-earning assets to interest-bearing liabilities						164.66	%						138.31	%

____________

(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.

Comparison of Operating Results for the Six Months Ended June 30, 2006 and 2005

General. Net income decreased $294,000, or 54.7%, to $244,000 for the six months ended June 30, 2006, from $538,000 for the six months ended June 30, 2005. The primary reason for the decrease was the $477,000 gain on the sale of securities in 2005 that was not repeated in 2006. Other reasons for the decrease included a provision for losses on loans of $40,000 in 2006, where none was made in 2005, a $36,000 increase in salaries and employee benefits, and a $77,000 increase in professional fees, partially offset by an increase in net interest income of $158,000, or 13.0%, to $1.4 million in 2006, from $1.2 million in 2005. Return on average assets was 0.68% for the six months ended June 30, 2006, compared to 1.66% for the same period last year, and return on equity was 4.25% and 5.85%, respectively, for these two periods.

Interest Income. Interest and dividend income increased $318,000, or 20.2%, to $1.9 million for the six months ended June 30, 2006, compared to $1.6 million for the six months ended June 30, 2005. The increase resulted from the $6.9 million, or 11.3%, increase in the average balance of interest-earning assets, to $68.4 million in the first half of 2006, compared to $61.6 million in the first half of 2005, and to an increase of 41 basis points in the average yield on interest earning assets, to 5.54% in 2006, from 5.13% in 2005.

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Interest income and fees from loans receivable increased $392,000, or 40.0%, to $1.4 million for the six months ended June 30, 2006, from $979,000 for the six months ended June 30, 2005. The increase resulted from the $12.6 million, or 42.2%, increase in the average balance of loans receivable, to $42.6 million in the first half of 2006, compared to $30.0 million in the first half of 2005, partially offset by a decrease of 10 basis points in the average yield on loans receivable, to 6.43% in 2006, from 6.53% in 2005.

Interest and dividend income from securities and interest-earning deposits decreased $74,000, or 12.4%, to $524,000 for the six months ended June 30, 2006, from $598,000 for the six months ended June 30, 2005. The primary reason for the decrease was the decrease in average balances of securities and interest-earning deposits of $5.7 million, or 18.2%, to $25.8 million in 2006, from $31.5 million in 2005, partially offset by a 27 basis point increase in the average yield, to 4.07% in 2006, from 3.80% in 2005.

Interest Expense. Interest expense increased $160,000, or 44.1%, to $523,000 for the six months ended June 30, 2006, from $363,000 for the six months ended June 30, 2005. The increase in interest expense was due to several factors, including an increase in rates paid on deposits and the increase in deposits due to stock subscriptions from the minority offering. The average rate paid on deposits increased 63 basis points, to 2.27% for the first half of 2006, from 1.64% for the first half of 2005. Interest expense on certificates of deposit increased $127,000, or 54.7%, to $359,000 in 2006, from $232,000 in 2005, and the average rate paid on certificates increased 124 basis points, to 3.39% in 2006, from 2.15% in 2005.

We paid $10,000 of interest on $16.7 million in stock subscription deposits accumulated during the last six weeks of the quarter ended March 31, 2006. The average effective rate paid on the stock subscription deposits was 1.20%. We also drew $4.0 million in advances from the Federal Home Loan Bank during the early part of the quarter to fund our loan pipeline, but repaid those advances during the quarter. The average effective rate paid on advances was 4.71%. The Bank did not use advances during 2005. The overall average cost of funds increased 63 basis points, to 2.27% in 2006, from 1.64% in 2005.

Net Interest Income. Net interest income increased $158,000, or 13.0%, to $1.4 million for the six months ended June 30, 2006, from $1.2 million for the same period last year. Our net interest margin increased 6 basis points, to 4.01% in 2006, from 3.95% in 2005. The average yield on interest-earning assets increased 41 basis points, to 5.54% in 2006, from 5.13% in 2005, and was augmented by an increase of $6.9 million, or 11.3%, in the average balance of interest-earning assets, with interest income increasing by $318,000. The average rate paid on interest-bearing liabilities also increased, to 2.27% in 2006, from 1.64% in 2005, and the average balance of interest-bearing liabilities increased $1.8 million, or 4.1%. The interest rate spread between interest earning assets and interest bearing liabilities decreased 22 basis points, to 3.27% in 2006, from 3.49% in 2005.

Provision for Loan Losses. During the six months ended June 30, 2006, management increased the general loan loss allowance by $40,000, with a charge to operations, based on its quarterly evaluation of the level of the allowance necessary to absorb probable incurred loan losses at June 30, 2006. Management considers changes in delinquencies, changes in the composition and volume of loans, historical loan loss experience, general economic and real estate market conditions, as well as peer group data, when determining the level on the allowance for loan losses.

During the six months ended June 30, 2006, non-performing (non-accrual) loans increased to $460,000, from $184,000 at December 31, 2005. Loans delinquent 60-89 days decreased to $361,000, from $518,000 at December 31, 2005. The loan portfolio increased $8.2 million, or 21.5%, to $46.2 million at June 30, 2006, from $38.0 million at December 31, 2005. During this period one- to four-

15

family residential mortgage loans increased $4.4 million, or 18.3%, and multi-family residential mortgage loans increased $3.8 million, or 27.2%. After reviewing these and other factors, management determined that it was necessary to increase the allowance for loan losses by $40,000. At June 30, 2006, the allowance for loan losses was $210,000, or 0.45% of loans receivable, compared to $170,000, or 0.44% of loans receivable at December 31, 2005. In a similar evaluation of the allowance for loan losses at June 30, 2005, management determined that there was no need for a provision for the six months then ended.

Non-interest Income. Non-interest income decreased $481,000, to $16,000 for the six month period ended June 30, 2006, compared to $497,000 for the six months ended June 30, 2005. During 2005 the Company sold part of its investment in FHLMC common stock for a gain of $477,000. There were no security sales in 2006.

Non-interest Expense. Non-interest expense increased $115,000, or 13.6%, to $964,000 for the six months ended June 30, 2006, from $849,000 for the same period last year. Salaries and employee benefits increased $36,000, or 7.3%, to $532,000 in 2006, from $496,000 in 2005. The increase was due to additional staff and normal salary adjustments for 2006, to additional director’s fees paid by the Company, and to the establishment of the ESOP during the second quarter of 2006. The Bank received payments totaling $48,000 from Mutual Federal Bancorp, MHC, pursuant to Tax and Expense Sharing Agreements, for services provided by Bank officers to MHC during the six months ended June 30, 2006, that was not necessary for the quarter ended June 30, 2005. This payment reduced salaries and employee benefits for the quarter. In future periods, the Company will incur most of these costs and as such they will be included in the consolidated results, with smaller payments by MHC.

Occupancy costs decreased $5,000, or 5.4%, to $87,000 for the six months ended June 30, 2006, from $92,000 for the same period last year, primarily due to decreased depreciation charges, partially offset by increased provisions for property taxes. Data processing fees decreased $6,000, or 11.3%, to $47,000, from $53,000 in 2005. Professional fees, including legal, accounting and consulting fees, increased $77,000, or 97.5%, to $156,000 in 2006, from $79,000 in 2005. The increase was due primarily to increased legal fees associated with changes in benefit plans, SEC reporting compliance, and other changes resulting from the minority stock offering. Miscellaneous expenses increased $13,000, or 10.1%, to $142,000 in 2006, from $129,000 in 2005.

The Bank’s ratio of non-interest expense to average assets increased to 2.70% for the six months ended June 30, 2006, from 2.63% for the same period last year, and its efficiency ratio was 69.5% in 2006, compared to 68.8% in 2005.

Income Tax Expense. The provision for income taxes decreased $184,000, to $140,000 for the six months ended June 30, 2006, from $324,000 for the same period last year, reflecting primarily the reduction in pre-tax net income. The effective tax rate for the quarter ended June 30, 2006, was 36.5%, compared to 37.6% for this quarter last year.

Average Balance Sheet

The following table sets forth average balance sheets, average yields and costs, and certain other information for the six months ended June 30, 2006 and 2005. 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 are 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.

16

	For the Six Months Ended June 30,
	2006							2005
	Average Outstanding Balance		Interest		Yield/Rate			Average Outstanding Balance		Interest		Yield/Rate
Interest-earning assets:
Loans	$	42,621	$	1,371		6.43	%	$	29,965	$	979		6.53	%
Securities available for sale		23,452		476		4.06			28,172		549		3.90
Interest-earning deposits		1,805		40		4.43			2,839		36		2.54
Federal Home Loan Bank Stock		500		8		3.20			483		13		5.38
Total interest-earning assets		68,378	$	1,895		5.54	%		61,459	$	1,577		5.13	%
Non-interest-earning assets		2,972							3,185
Total assets	$	71,350						$	64,644
Interest-Bearing Liabilities:(1)
Savings deposits	$	23,778	$	137		1.15	%	$	22,702	$	131		1.15	%
Certificates of deposit		21,149		359		3.39			21,547		232		2.15
Total interest-bearing deposits		44,927		496		2.21			44,249		363		1.64
Federal Home Loan Bank advances		1,146		27		4.71			—		—		—
Total interest-bearing liabilities		46,073		523		2.27	%		44,249		363		1.64	%
Non-interest-bearing liabilities		2,324							2,006
Total liabilities		48,397							46,255
Stockholders’ equity		22,953							18,389
Total liabilities and stockholders’ equity	$	71,350						$	64,644
Net interest income			$	1,372						$	1,214
Net interest rate spread(2)						3.27	%						3.49	%
Net interest-earning assets(3)	$	22,305						$	17,210
Net interest margin(4)						4.01	%						3.95	%
Ratio of interest-earning assets to interest-bearing liabilities						148.41	%						138.89	%

____________

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

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

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

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

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

17

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 June 30, 2006, $3.3 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.

Our primary investing activities are the origination of loans and the purchase of investment securities. During the six months ended June 30, 2006, our loan originations, net of collected principal, totaled $8.2 million. During the six months ended June 30, 2005, the net loan originations totaled $3.9 million. We did not sell any loans during the first-half of 2006 or 2005. Cash received from calls and maturities of securities totaled $2.9 million and $3.6 million for the six months ended June 30, 2006 and 2005, respectively. We purchased $2.0 million in securities during the six months ended June 30, 2006, but none during the six months ended June 30, 2005. We sold part of our investment in FHLMC common stock for proceeds of $484,000, a gain of $477,000, during the six months ended June 30, 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 $236,000 for the six months ended June 30, 2006, and a net decrease of $470,000 in 2005. However, depositors used $796,000 in deposits to purchase stock in our minority common stock offering that closed on April 4, 2006.

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 six months ended June 30, 2006, the Bank borrowed $4.0 million in advances from the Federal Home Loan Bank and repaid the advances prior to June 30, 2006. At June 30, 2006 and December 31, 2005, we had no outstanding advances from the Federal Home Loan Bank of Chicago. Our available borrowing limit at June 30, 2006, was $10.0 million.

At June 30, 2006, we had outstanding commitments to originate loans of $2.4 million. At June 30, 2006, certificates of deposit scheduled to mature in less than one year totaled $18.5 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 of Chicago 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.

18

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 June 30, 2006 and December 31, 2005, the Bank had $2.4 million and $2.0 million, respectively, of commitments to grant mortgage loans.

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.

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

19

the assumption that the United States Treasury yield curve increases or decreases instantaneously by 100 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 March 31, 2006, the latest date available, 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	$	17,179	$	(6,225	)		-27	%		21.94	%		-568bp
+200		19,195		(4,209	)		-18			23.88			-374
+100		21,310		(2,095	)		-9			25.81			-181
Unchanged		23,405		—			—			27.62			—
-100		25,160		1,756			+8			29.06			+144
-200		26,288		2,883			+12			29.93			+231

The table above indicates that at March 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 an 18% 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.

Item 3.Controls and Procedures

The Bank’s Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation within 90 days prior to the filing date of this report, that the Bank’s disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-14(c) and 15d-14(c)) are effective to ensure that information required to be disclosed in the reports that the Bank files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. There have been no significant changes in the Bank’s internal controls or in other factors that could significantly affect these controls subsequent to the date of the foregoing evaluation.

20

PART II. - OTHER INFORMATION

Item 1.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 2.Unregistered Sales of Equity Securities and Use of Proceeds.

None

Item 3.Defaults Upon Senior Securities.

None

Item 4.Submission of Matters to a Vote of Security Holders.

No matters were submitted to a vote of stockholders of the Company during the second quarter of 2006.

Item 5.Other Information.

None

Item 6.Exhibits.

31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

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

	MUTUAL FEDERAL BANCORP, INC.
Date:  August 8, 2006	By:	/s/ Stephen M. Oksas

 Stephen M. Oksas

 President and Chief Executive Officer

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