United
States


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K


x
            Annual
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934For
      the Fiscal Year Ended December 31, 2008oro
            Transition
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934For
      the transition period from _______________ to
      ______________________




Commission
File Number: 000-53573


St.
      Joseph Bancorp, Inc.(Exact
      name of registrant as specified in its
charter)




Maryland
                
                
                26-3616144(State
      or other jurisdiction of
                
                
                (I.R.S.
      Employerincorporation
      or organization)
                
                
                Identification
      Number)




1901
      Frederick Avenue, St. Joseph, Missouri
                
                64501(Address
      of Principal Executive Offices)
                
                Zip
      Code




(816)
      233-5148(Registrant’s
      telephone number, including area code)Securities
      Registered Pursuant to Section 12(b) of the
Act:


NoneSecurities
      Registered Pursuant to Section 12(g) of the
Act:


Common
      Stock, par value $0.01 per share(Title
      of Class)




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. YES  o NO x




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. YES o NO x




Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.1
YES o NO x




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




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


Large accelerated
      filer o
            Accelerated filer
      o
            Non-accelerated
      filer o
            Smaller reporting
      company x




Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Act). YES o NO x




As
of March 28, 2009, there were issued and outstanding 376,918 shares of the
Registrant’s Common Stock.




The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant, computed by reference to the last sale price
on June 30, 2008 was $0. The Registrant’s common stock did not begin trading on
the over-the counter electronic bulletin board until February 2,
2009.




DOCUMENTS
INCORPORATED BY REFERENCE


1.
            Portions
      of Annual Report to Stockholders (Parts II and IV)2.
            Proxy
      Statement for the 2009 Annual Meeting of Stockholders of the Registrant
      (Part III)







1
      The Registrant became subject to the Securities Exchange Act of 1934 on
      January 28, 2009 as a result of filing a Registration Statement of Form
      8-A.





St.
Joseph Bancorp, Inc.


Annual
Report on Form 10-K


For
The Year Ended


December
31, 2008




Table
of Contents


ITEM
      1.
            Business
            
            2ITEM
      1A.
            Risk
      Factors
            
            29ITEM
      1B.
            Unresolved
      Staff Comments
            
            29ITEM
      2.
            Properties
            
            29ITEM
      3.
            Legal
      Proceedings
            
            30ITEM
      4.
            Submission
      of Matters to a Vote of Security
      Holders
            
            30ITEM
      5.
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Securities
            
            30ITEM
      6.
            Selected
      Financial Data
            
            31ITEM
      7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            
            31ITEM
      7A.
            Quantitative
      and Qualitative Disclosures About Market
      Risk
            
            31ITEM
      8.
            Financial
      Statements and Supplementary
    Data
            
            31ITEM
      9.
            Changes
      In and Disagreements With Accountants on Accounting and Financial
      Disclosure
            
            31ITEM
      9A. (T)
            Controls
      and Procedures
            
            31ITEM
      9B.
            Other
      Information
            
            32ITEM
      10.
            Directors,
      Executive Officers, and Corporate
      Governance
            
            32ITEM
      11.
            Executive
      Compensation
            
            32ITEM
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            
            32ITEM
      13.
            Certain
      Relationships and Related Transactions, and Director
      Independence
            
            32ITEM
      14.
            Principal
      Accountant Fees and Services
            
            32ITEM
      15.
            Exhibits
      and Financial Statement
    Schedules
            
            33SIGNATURES
            
            
            34







PART
I




Forward
Looking Statements




This
Annual Report contains forward-looking statements, which can be identified by
the use of words such as “estimate,” “project,” “believe,” “intend,”
“anticipate,” “plan,” “seek,” “expect,” “will,” “may” and words of similar
meaning. These forward-looking statements include, but are not limited
to:


●
              statements
      of our goals, intentions and expectations;●
              statements
      regarding our business plans, prospects, 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 based on our current beliefs and expectations and
are subject to significant business, economic and competitive uncertainties and
contingencies, many of which are beyond our control. In addition, these
forward-looking statements are subject to assumptions with respect to future
business strategies and decisions that are subject to change. We are under no
duty to and do not take any obligation to update any forward-looking statements
after the date of this Annual Report.




The
following factors, among others, could cause actual results to differ materially
from the anticipated results or other expectations expressed in the
forward-looking statements:


●
              general
      economic conditions, either nationally or in our market area, that are
      worse than expected;●
              competition
      among depository and other financial institutions;●
              inflation
      and changes in the interest rate environment that reduce our margins or
      reduce the fair value of financial instruments;●
              adverse
      changes in the securities markets;●
              changes
      in laws or government regulations or policies affecting financial
      institutions, including changes in regulatory fees and capital
      requirements;●
              our
      ability to enter new markets successfully and capitalize on growth
      opportunities;●
              our
      ability to successfully integrate acquired entities;●
              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
      Securities and Exchange Commission and the Public Company Accounting
      Oversight Board;●
              changes
      in our organization, compensation and benefit plans;●
              changes
      in our financial condition or results of operations that reduce capital
      available to pay dividends;●
              regulatory
      changes or actions; and●
              changes
      in the financial condition or future prospects of issuers of securities
      that we own.







Because
of these and a wide variety of other uncertainties, our actual future results
may be materially different from the results indicated by these forward-looking
statements.


ITEM
      1.Business




St.
Joseph Bancorp, Inc.




St.
Joseph Bancorp, Inc. is incorporated in the State of Maryland. We have not
engaged in any business to date, other than owning all of the issued and
outstanding stock of Midwest Federal Savings and Loan Association of St. Joseph
(“Midwest Federal Savings”), a federally chartered savings association that
converted to a stock savings association in connection with our initial public
offering of common stock in January 2009. In the future, St. Joseph Bancorp,
Inc., as the holding company of Midwest Federal Savings, is authorized to pursue
other business activities permitted by applicable laws and regulations, which
may include the acquisition of banking and financial services companies. See
“—Supervision and Regulation—Holding Company Regulation” for a discussion of the
activities that are permitted for savings and loan holding companies. We
currently have no understandings or agreements to acquire other financial
institutions. We may also borrow funds for reinvestment in Midwest Federal
Savings.




We
completed our initial public offering of common stock on January 30, 2009. In
that offering, St. Joseph Bancorp, Inc. sold 376,918 shares of common stock at
$10.00 per share. After offering expenses of $790,000 attributable to the
offering, net proceeds excluding ESOP loan amounted to $3.0 million. St. Joseph
Bancorp, Inc. contributed $1.5 million of the net proceeds of the offering to
Midwest Federal Savings.




Our
cash flow depends on earnings from the investment of the net proceeds from the
offering that we retained, and any dividends we receive from Midwest Federal
Savings. St. Joseph Bancorp, Inc. neither owns nor leases any property, but
instead pays a fee to Midwest Federal Savings for the use of its premises,
equipment and furniture. At the present time, we employ only persons who are
officers of Midwest Federal Savings to serve as officers of St. Joseph Bancorp,
Inc.




Our
executive offices are located at 1901 Frederick Avenue, St. Joseph, Missouri
64501. Our telephone number at this address is (816) 233-5148.




Midwest
Federal Savings and Loan Association of St. Joseph




Midwest
Federal Savings and Loan Association of St. Joseph is a federally chartered
savings and loan association located in St. Joseph, Missouri. Midwest Federal
Savings is a community-oriented savings association with total assets of $21.8
million, net loans of $10.0 million, total deposits of $16.2 million and total
equity of $5.5 million at December 31, 2008. Midwest Federal Savings provides
financial services to individuals, families and businesses through its main
office in St. Joseph, Missouri.




Midwest
Federal Savings’ business consists primarily of accepting deposits from the
general public and investing those deposits, together with funds generated from
operations, in one- to four-family residential mortgage loans. At December 31,
2008, one- to four-family residential mortgage loans totaled $9.7 million, or
96.7% of our loan portfolio. We also invest in various investment securities.
Our profitability depends primarily on our net interest income, which is the
difference between the income we receive on our loans and other assets and our
cost of funds, which consists of the interest we pay on deposits.




Midwest
Federal Savings offers a variety of deposit accounts, including savings
accounts, NOW accounts and certificates of deposit.




We
intend to expand and diversify our lending programs to include commercial real
estate loans, construction loans and a variety of consumer loans. Additionally,
we intend to implement a program to originate adjustable rate residential
mortgage loans. We intend to expand our banking franchise by opening a branch
office in St. Joseph, Missouri in 2010.


2




Midwest
Federal Savings’ executive offices are located at 1901 Frederick Avenue, St.
Joseph, Missouri 64501. Its telephone number is (816) 233-5148.




Market
Area




Midwest
Federal Savings primarily serves communities located in Buchanan and Andrew
Counties in Missouri from its main office in St. Joseph. St. Joseph is the
largest city in Northwest Missouri and is located near the Missouri/Kansas
border approximately 35 miles north of Kansas City. It is the 8th largest city
in the state, serving as the county seat for Buchanan County. Buchanan and
Andrew Counties have estimated populations of 86,000 and 17,000, respectively,
as of 2007. St. Joseph, in Buchanan County, has a diversified economy with major
employers in the fields of education, health and social services, healthcare,
animal pharmaceuticals, and retail trade. The largest employers in St. Joseph
are Heartland Health, Triumph Foods and the St. Joseph School District. Andrew
County is primarily an agricultural county with livestock, grain and fruit
farms.




Competition




We
face significant competition in both originating loans and attracting deposits.
Our market area has a large number of financial institutions, most of which are
significantly larger institutions with greater financial resources than Midwest
Federal Savings, and all of which are our competitors to varying degrees. Our
competition for loans comes principally from commercial banks, savings banks,
mortgage banking companies, credit unions, insurance companies and other
financial service companies. Our most direct competition for deposits has
historically come from commercial banks, savings banks and credit unions. We
face additional competition for deposits from non-depository competitors such as
mutual funds, securities and brokerage firms and insurance
companies.




Recent
Economic and Regulatory Developments




The
United States economy entered a recession in the fourth quarter of 2007.
Throughout the course of 2008 and in the first quarter of 2009, economic
conditions continued to worsen, due in large part to the fallout from the
collapse of the sub-prime mortgage market. While we did not originate or invest
in sub-prime mortgages, our lending business is tied, in large part, to the
housing market. Declines in home prices, increases in foreclosures and higher
unemployment have adversely affected the credit performance of real
estate-related loans, resulting in the write-down of asset values. The
continuing housing slump also has resulted in reduced demand for the
construction of new housing, further declines in home prices, and increased
delinquencies on residential, commercial and construction mortgage loans.
Further, the ongoing concern about the stability of the financial markets in
general has caused many lenders to reduce or cease providing funding to
borrowers. These conditions may also cause a further reduction in loan demand,
and increases in our non-performing assets, net charge-offs and provisions for
loan losses.




In
response to the financial crises affecting the banking system and financial
markets, the U.S. Congress has passed legislation and the U.S. Treasury has
promulgated programs designed to purchase assets from, provide equity capital
to, and guarantee the liquidity of the financial services industry. The U.S.
government continues to evaluate and develop various programs and initiatives
designed to stabilize the financial and housing markets and stimulate the
economy, including the U.S. Treasury’s recently announced financial stability
plan and the recently announced foreclosure prevention program. There can be no
assurance that actions of the U.S. Government, Federal Reserve and other
governmental and regulatory bodies for the purpose of stabilizing the financial
markets will achieve the intended effect.
In addition, new laws, regulations, and other regulatory changes will increase
our costs of regulatory compliance and of doing business, and otherwise affect
our operations. Our FDIC insurance premiums have increased, and may continue to
increase, because market developments have significantly depleted the insurance
fund of the FDIC and reduced the ratio of reserves to insured deposits. New
laws, regulations, and other regulatory changes, along with negative
developments in the financial services industry and the credit markets, may
significantly affect the markets in which we do business, the markets for and
value of our loans and investments, and our ongoing operations, costs and
profitability. See “Regulation” herein for additional information.


3




Lending
Activities




Our
principal lending activity is the origination of fixed-rate, one- to four-family
residential loans with terms of up to 30 years. To a lesser extent, we also
originate construction/permanent loans to individuals for the construction and
permanent financing of one- to four-family dwellings, second mortgage loans and
deposit account loans. We retain in our portfolio all loans that we originate.
Although our lending policies permit the origination of commercial real estate
loans, commercial business loans and other types of consumer loans, our loan
portfolio has generally not included such loans in recent years. At December 31,
2008, one- to four-family residential mortgage loans totaled $9.7 million, or
96.7% of our loan portfolio, commercial real estate loans totaled $100,000, or
1.0% of our loan portfolio, commercial business loans totaled $200,000, or 2.0%
of our loan portfolio, and other loans totaled $28,000, or 0.3% of our loan
portfolio. At that date, second mortgage loans, which are included in the one-
to four-family residential mortgage loan category, totaled $209,000, or 2.1% of
our loan portfolio.




Our
lending activities have increased significantly in recent years since Ralph E.
Schank was hired in May 2005. For several years prior to that date, Midwest
Federal Savings was not very active in the real estate lending market, but under
a new business strategy and with Mr. Schank joining our management team in 2005,
Midwest Federal Savings has more actively pursued lending activities. As a
result, we have grown our loan portfolio from $3.3 million at June 30, 2004 to
$10.0 million at December 31, 2008.




In
accordance with our business plan adopted in connection with the conversion, we
plan to implement a program to continue to expand and diversify our loan
portfolio. Specifically, in addition to our continuing emphasis on one- to
four-family residential lending, we intend to diversify our loan portfolio by
focusing on the origination of commercial real estate loans, which we expect
will represent an increasing portion of our loan portfolio in future years. In
addition, we intend to increase our originations of construction loans and
second mortgage loans, and also to implement a home equity line of credit
program. To a lesser extent, we intend to originate other types of consumer
loans, such as automobile, boat and recreational vehicle loans. We also intend
to begin to originate adjustable-rate residential mortgage loans. In conjunction
with our expanded lending activities, we expect to hire additional staff. We
have recently hired a commercial loan officer.




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


At
      December 31,2008
                        
                        
                        2007Amount
                        
                        
                        Percent
                        
                        
                        Amount
                        
                        
                        Percent(Dollars
      in Thousands)Real
      Estate:One- to four-family
      (1)
                        
                        $
                        9,739
                        
                        
                        
                        96.74
                        %
                        
                        $
                        8,653
                        
                        
                        
                        95.89
                        %Commercial
                        
                        
                        100
                        
                        
                        
                        1.00
                        
                        
                        
                        —
                        
                        
                        
                        —Construction
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        280
                        
                        
                        
                        3.10Total
      real estate
                        
                        
                        9,839
                        
                        
                        
                        97.74
                        
                        
                        
                        8,933
                        
                        
                        
                        98.99Consumer
      and other loans:Commercial
                        
                        
                        200
                        
                        
                        
                        1.98
                        
                        
                        
                        66
                        
                        
                        
                        0.73Other
                        
                        
                        28
                        
                        
                        
                        0.28
                        
                        
                        
                        25
                        
                        
                        
                        0.28Total
      consumer and other loans
                        
                        
                        228
                        
                        
                        
                        2.26
                        
                        
                        
                        91
                        
                        
                        
                        1.01Total
      loans
                        
                        
                        10,067
                        
                        
                        
                        100.00
                        %
                        
                        
                        9,024
                        
                        
                        
                        100.00
                        %Premiums
      and net deferred loan costs
                        
                        
                        4
                        
                        
                        
                        
                        
                        
                        
                        5Loans
      in process
                        
                        
                        —
                        
                        
                        
                        
                        
                        
                        
                        —Allowance
      for loan losses
                        
                        
                        22
                        
                        
                        
                        
                        
                        
                        
                        18Total
      loans, net
                        
                        $
                        10,041
                        
                        
                        
                        
                        
                        
                        $
                        9,001







(1)
      Includes second mortgage
loans.


4




Loan
Portfolio Maturities and Yields.The
following table sets forth certain information at December 31, 2008 regarding
the dollar amount of loan principal repayments becoming due during the periods
indicated. The table does not reflect scheduled principal payments, unscheduled
prepayments, or the ability of certain loans to reprice prior to maturity dates.
Demand loans, loans having no stated repayment schedule, and overdraft loans are
reported as being due in one year or less.


One-
      to Four-Family
                          
                          
                          Commercial
                          
                          
                          Consumer (1)
                          
                          
                          TotalAmount
                          
                          
                          Weighted
                            Average
                            Rate
                          
                          
                          Amount
                          
                          
                          Weighted
                            Average
                            Rate
                          
                          
                          Amount
                          
                          
                          Weighted
                            Average
                            Rate
                          
                          
                          Amount
                          
                          
                          Weighted
                            Average
                            Rate(Dollars
      in Thousands)Due
      During the YearsEnding
      December 31,2009
                          
                          $
                          1
                          
                          
                          
                          6.80
                          %
                          
                          $
                          —
                          
                          
                          
                          —
                          %
                          
                          $
                          14
                          
                          
                          
                          6.19
                          %
                          
                          $
                          15
                          
                          
                          
                          6.26
                          %2010
                          
                          
                          9
                          
                          
                          
                          5.50
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          9
                          
                          
                          
                          5.502011
                          
                          
                          47
                          
                          
                          
                          6.80
                          
                          
                          
                          55
                          
                          
                          
                          9.00
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          102
                          
                          
                          
                          7.992012
      to 2013
                          
                          
                          22
                          
                          
                          
                          5.50
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          14
                          
                          
                          
                          6.50
                          
                          
                          
                          36
                          
                          
                          
                          5.892014
      to 2018
                          
                          
                          896
                          
                          
                          
                          6.19
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          896
                          
                          
                          
                          6.192019
      to 2023
                          
                          
                          1,619
                          
                          
                          
                          6.18
                          
                          
                          
                          145
                          
                          
                          
                          7.00
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          1,764
                          
                          
                          
                          6.252023
      and beyond
                          
                          
                          7,145
                          
                          
                          
                          6.17
                          
                          
                          
                          100
                          
                          
                          
                          7.25
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          7,245
                          
                          
                          
                          6.18Total
                          
                          $
                          9,739
                          
                          
                          
                          6.18
                          %
                          
                          $
                          300
                          
                          
                          
                          7.45
                          %
                          
                          $
                          28
                          
                          
                          
                          6.35
                          %
                          
                          $
                          10,067
                          
                          
                          
                          6.22
                          %







(1)
      Includes loans on deposit
accounts.


5




The
following table sets forth the dollar amount of all fixed- and adjustable-rate
loans at December 31, 2008 that are contractually due after December 31,
2009.


Due
      After December 31, 2009Fixed
                
                
                Adjustable
                
                
                Total(In
      thousands)Real
      Estate:One-
      to four-family
                
                $
                9,460
                
                
                $
                278
                
                
                $
                9,738Commercial
                
                
                100
                
                
                
                —
                
                
                
                100Total
      real estate loans
                
                
                9,560
                
                
                
                278
                
                
                
                9,838Consumer
      and other loans:Commercial
                
                
                55
                
                
                
                145
                
                
                
                200Other
                
                
                14
                
                
                
                —
                
                
                
                14Total
      consumer and other loans
                
                
                69
                
                
                
                145
                
                
                
                214Total
      loans
                
                
                9,629
                
                
                
                423
                
                
                
                10,052Premiums
      and net deferred loan costs
                
                
                4
                
                
                
                —
                
                
                
                4Loans
      in process
                
                
                —
                
                
                
                —
                
                
                
                —Allowance
      for loan losses
                
                
                22
                
                
                
                —
                
                
                
                22Total
      loans, net
                
                $
                9,603
                
                
                $
                423
                
                
                $
                10,026




One-
to Four-Family Residential Mortgage Loans. Our primary lending activity
consists of the origination of first mortgage loans secured by one- to
four-family residential property located in our market area. Most of the one- to
four-family mortgage loans that we originate are secured by owner-occupied
residences, although a portion is secured by investor-owned, non-owner occupied
residences. Loans are generated through Midwest Federal Savings’ existing
customers and referrals, real estate brokers and other marketing efforts.
Midwest Federal Savings generally has limited its real estate loan originations
to the financing of properties located within its market area and has not made
out-of-state loans. At December 31, 2008, $9.7 million, or 96.7% of our loan
portfolio, consisted of one- to four-family residential mortgage
loans.




Our
residential mortgage loans generally have terms of 15, 20 or 30 years.
Traditionally, we have offered only fixed-rate residential loans. However, as
part of our business plan adopted in connection with the conversion, we are
implementing a program to originate adjustable-rate residential mortgage loans.
All of the loans we originate are retained in our portfolio for long-term
investment. We have not sold loans in the secondary mortgage market, and our
loans generally are not underwritten for resale in the secondary mortgage
market. Our fixed-rate mortgage loans amortize monthly with principal and
interest due each month. Residential real estate loans often remain outstanding
for significantly shorter periods than their contractual terms because borrowers
may refinance or prepay loans at their option.




Under
our real estate lending policy, a title insurance policy must be obtained for
each real estate loan. We also require fire and extended coverage casualty
insurance, in order to protect the properties securing our real estate loans.
Borrowers must also obtain flood insurance policies when the property is in a
flood hazard area. Midwest Federal Savings requires borrowers either to advance
funds to an escrow account for the payment of real estate taxes and hazard
insurance premiums or alternatively to provide us with other proof of the
payment of taxes and an effective hazard insurance policy. We do not conduct
environmental testing on residential mortgage loans unless specific concerns for
hazards are identified by the appraiser used in connection with the origination
of the loan.




Our
residential mortgage loans customarily include due-on-sale clauses, which are
provisions giving us the right to declare a loan immediately due and payable in
the event, among other things, that the borrower sells or otherwise disposes of
the underlying real property serving as security for the loan.


6




Our
second mortgage loans are secured by second mortgages on owner-occupied, one- to
four-family residences. We do not currently originate home equity lines of
credit. Second mortgage loans are generally offered with fixed interest rates
and with terms of up to 15 years. We generally offer second mortgage loans with
a maximum loan to value ratio of 90% (including senior liens on the collateral
property). All of the second mortgage loans in our portfolio are junior to our
own first mortgages, and are included as one- to four-family real estate loans
in the financial schedules in this prospectus.




The
underwriting standards for second mortgage loans include a title review, a
determination of the applicant’s credit history, an assessment of the
applicant’s ability to meet existing obligations and payments on the proposed
loan, and the value of the collateral securing the loan. At December 31, 2008,
our largest second mortgage loan had an outstanding balance of $45,000, and was
performing in accordance with its terms.




Second
mortgage loans secured by second mortgages have greater risk than residential
mortgage loans secured by first mortgages. When customers default on their
loans, we attempt to foreclose on the property or seize the collateral securing
the loan. However, the value of the collateral may not be sufficient to
compensate us for the amount of the unpaid loan and we may be unsuccessful in
recovering the remaining balance from those customers. Particularly with respect
to our home equity loan activities, decreases in real estate values could
adversely affect the value of property used as collateral for our
loans.




We
generally limit the maximum loan to value ratio to 80% of the lesser of the
appraised value or the purchase price of the property securing the loan,
although we will occasionally originate loans with a loan to value ratio up to
90% of the appraised value or purchase price of the property. As of December 31,
2008, approximately $1.6 million, or 15.9%, of our total loans had loan to value
ratios in excess of 80%. At the time of their origination, approximately 15.9%
of our total loans exceeded a loan to value ratio of 80%.




When
underwriting residential real estate loans, we review and verify each loan
applicant’s employment, income and credit history and, if applicable, our
experience with the borrower. Our policy is to obtain credit reports and
financial statements on all borrowers and guarantors, and to verify references.
Properties securing real estate loans are appraised by Board-approved
independent appraisers, although we may rely on county tax records on smaller
loans. Appraisals are subsequently reviewed by our loan underwriting
committee.




We
do not offer “interest only” loans, where the borrower pays interest for an
initial period after which the loan converts to a fully amortizing loan, nor do
we offer “Option ARM” or negative amortization loans, where the borrower can pay
less than the interest owed on the loan, resulting in an increased principal
balance during the life of the loan. We also do not make loans that are known as
“sub-prime” or “Alt-A” loans.




In
the recent economic climate, many areas of the United States have experienced an
increase in foreclosures. Although management does not have precise data on the
number of foreclosures in our market area, management believes that foreclosures
in our market area have also increased but not to the same extent as in more
severely impacted areas of the United States. In comparison, Midwest Federal
Savings has experienced no foreclosures on its loan portfolio during recent
periods. We believe this is due mainly to Midwest Federal Savings’ conservative
lending strategies, including its non-participation in “interest only,” “Option
ARM,” “sub-prime” or “Alt-A” loans.




Residential
Construction Loans. On a limited basis, we originate residential
construction loans to individuals for the construction and permanent financing
of their personal residence. Our origination of construction/permanent loans has
been minimal during recent years, and at December 31, 2008 we had no such loans
outstanding. Our business plan adopted in connection with the conversion
contemplates an expansion of our construction loan
activity.




Construction
loans to individuals are made on the same general terms as our one- to
four-family mortgage loans, but provide for the payment of interest only during
the construction phase, which is usually six months. At the end of the
construction phase, the loan converts to a permanent mortgage loan. Prior to
making a commitment to fund a construction loan, we require an appraisal of the
property by an independent appraiser. We also review and inspect each project
prior to disbursement of funds during the term of the construction loan. Loan
proceeds are disbursed after inspection of the project based on percentage of
completion.


7




Construction
financing generally involves greater credit risk than long-term financing on
improved, owner-occupied real estate. Risk of loss on a construction loan
depends largely upon the accuracy of the initial estimate of the value of the
property at completion of construction compared to the estimated cost (including
interest) of construction and other assumptions. If the estimate of construction
cost proves to be inaccurate, we may be required to advance additional funds
beyond the amount originally committed in order to protect the value of the
property. Moreover, if the estimated value of the completed project proves to be
inaccurate, the borrower may hold a property with a value that is insufficient
to assure full repayment. Construction loans also expose us to the risk that
improvements will not be completed on time in accordance with specifications and
projected costs.




Commercial
Real Estate Lending. Our loan policies permit the origination of loans
secured by commercial real estate including multi-family dwellings. During
recent years our loan portfolio has not included significant numbers of such
loans. At December 31, 2008, commercial business loans totaled $100,000 or 1.0%
of our loan portfolio. We intend to implement a program emphasizing the
origination of commercial real estate loans and we expect that such loans will
represent a significant portion of our loan portfolio in the
future.




Loans
secured by commercial real estate generally have larger loan balances and more
credit risk than one- to four-family mortgage loans. The increased credit risk
is a result of several factors, including the concentration of principal in a
limited number of loans and borrowers, the impact of local and general economic
conditions on the borrower’s ability to repay the loan, and the increased
difficulty of evaluating and monitoring these types of loans. If the cash flows
from the property are reduced, the borrower’s ability to repay the loan may be
impaired. However, commercial real estate loans generally have higher interest
rates than loans secured by one- to four-family real estate.




Consumer
Loans. We are authorized to make loans for a variety of personal and
consumer purposes. Currently, our consumer loans consist of deposit account
loans and other loans. At December 31, 2008, consumer loans totaled $28,000, or
0.3% of total loans. We intend to expand our consumer loan activities in the
future. Our loans secured by deposit accounts at Midwest Federal Savings are
generally made at an interest rate that is 2.0% above the account rate for up to
100% of the account balance and for a term through the next maturity
date.




Consumer
loans have greater risk than residential mortgage loans, particularly in the
case of loans that are unsecured or secured by rapidly depreciating assets such
as automobiles, motorcycles, motor homes and boats. In these cases, any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. In addition, consumer loan
collections depend on the borrower’s continuing financial stability, and thus
are more likely to be adversely affected by job loss, divorce, illness or
personal bankruptcy.




Commercial
Business Loans.We generally have not offered commercial business loans.
At December 31, 2008, we had one commercial business loan in our portfolio with
a balance of $200,000, or 2.0% of our total loans. This loan was a term loan,
carried a fixed rate of interest, and was secured by vehicles and equipment.
Going forward, we will consider originating additional commercial business loans
on a limited basis. We may make secured commercial business loans to customers
in our market area for the purpose of acquiring equipment and other general
business purposes.




Our
underwriting standards for commercial business loans include a review of the
applicant’s tax returns, financial statements, credit history and an assessment
of the applicant’s ability to meet existing obligations and payments on the
proposed loan based on cash flows generated by the applicant’s
business.




Commercial
business loans generally have higher interest rates and shorter terms than one-
to four-family residential loans, but they also may involve higher average
balances, increased difficulty of loan monitoring and a higher risk of default
since their repayment generally depends on the successful operation of the
borrower’s business. We typically require a principal of the company obtaining a
commercial business loan to personally sign the note as a
co-borrower.




Loan
Originations, Purchases and Sales.Loan originations are obtained through
a variety of sources, including referrals from existing customers and real
estate brokers. We hold all of our loan originations for long-term investment
purposes. We have not purchased any loans but may determine to do so in the
future. We also have not sold any loans, although our business plan contemplates
the sale of a portion of our fixed-rate loan originations in the
future.


8




The
following table shows our loan origination, sale and principal repayment
activity during the periods indicated.


Year
      Ended December 31,2008
                
                
                2007(In
      thousands)Total
      loans at beginning of period
                
                $
                9,024
                
                
                $
                8,793Loans
      originated:Real
      estate:One-
      to four-family
                
                
                2,359
                
                
                
                964Commercial
                
                
                100
                
                
                
                —Construction
                
                
                145
                
                
                
                670Consumer
      and other loans:Commercial
                
                
                175
                
                
                
                115Other
                
                
                167
                
                
                
                113Total
      loans originated
                
                
                2,946
                
                
                
                1,862Loans
      purchased
                
                
                —
                
                
                
                —Deduct:Principal
      repayments
                
                
                1,903
                
                
                
                1,631Loan
      sales
                
                
                —
                
                
                
                —Other
      repayments
                
                
                —
                
                
                
                —Net
      loan activity
                
                
                1,043
                
                
                
                231Total
      loans at end of period
                
                $
                10,067
                
                
                $
                9,024




Loan
Approval Procedures and Authority. Our lending activities are subject to
written, non-discriminatory underwriting standards and loan origination
procedures established by Midwest Federal Savings’ Board of Directors. The loan
approval process is intended to assess the borrower’s ability to repay the loan
and value of the property that will secure the loan. To assess the borrower’s
ability to repay, we review the borrower’s employment and credit history and
information on the historical and projected income and expenses of the
borrower.




Midwest
Federal Savings’ policies and loan approval limits are established by the Board
of Directors. Upon receipt of a loan application from a prospective borrower, a
credit report, tax returns and verifications are ordered or requested to confirm
specific information relating to the loan applicant’s employment, income and
credit standing. We require appraisals by independent, licensed, third-party
appraisers of all real property secured loans, except where we rely on county
tax records on smaller loans. All appraisers are approved by the Board of
Directors annually. All loans are processed at our main office. Overdrafts up to
$10,000 may be approved by the President or Vice President. Except for overdraft
loans, our loan underwriting committee comprised of Ralph E. Schank, John R.
Wray and George T. Hopkins, III, approves all loans originated.




Loans
to One Borrower.The maximum amount that we may lend to one borrower and
the borrower’s related entities is limited by regulation generally, with certain
exceptions, to 15% of our unimpaired capital and reserves. At December 31, 2008,
our regulatory limit on loans to one borrower was $825,000. At that date, our
largest lending relationship was $544,000 and was secured by five residential
real estate properties located in our primary market area. As a result of the
conversion, our regulatory loans to one borrower limit has
increased.




Non-performing
and Problem Assets




When
a loan is 15 days past due, we send the borrower a late notice. We generally
also contact the borrower by phone if the delinquency is not corrected promptly
after the notice has been sent. When the loan is 30 days past due, we mail the
borrower a letter reminding the borrower of the delinquency, and we attempt to
contact the borrower personally to determine the reason for the delinquency in
order to ensure that the borrower understands the terms of the loan and the
importance of making payments on or before the due date. If necessary,
subsequent delinquency notices are issued and the account will be monitored on a
regular basis thereafter. By the 90th day of
delinquency, we will send the borrower a final demand for payment and we may
recommend foreclosure. A summary report of all loans 30 days or more past due is
provided to the Board of Directors of Midwest Federal Savings.


9




Loans
are automatically placed on non-accrual status when payment of principal or
interest is more than 90 days delinquent. Loans are also placed on non-accrual
status if collection of principal or interest in full is in doubt or if the loan
has been restructured. When loans are placed on non-accrual status, unpaid
accrued interest is fully reversed, and further income is recognized only to the
extent received. The loan may be returned to accrual status if unpaid principal
and interest are repaid so that the loan is less than 90 days
delinquent.




Non-Performing
Assets.The table below sets forth the amounts and categories of our
non-performing assets at the dates indicated. At each date presented, we had no
troubled debt restructurings (loans for which a portion of interest or principal
has been forgiven and loans modified at interest rates materially less than
current market rates).


At
      December 31,2008
                
                
                2007(Dollars
      in thousands)Non-accrual
      loans:Real
      estate:One-
      to four-family
                
                $
                —
                
                
                $
                —Commercial
                
                
                —
                
                
                
                —Construction
                
                
                —
                
                
                
                —Consumer
      and other loans:Commercial
                
                
                —
                
                
                
                —Other
                
                
                —
                
                
                
                —Total
      consumer and other loans
                
                
                
                
                
                
                —Total
      non-accrual loans
                
                
                —
                
                
                
                —Loans
      delinquent 90 days or more and still accruing:One-
      to four-family
                
                
                —
                
                
                
                —Commercial
                
                
                —
                
                
                
                —Construction
                
                
                —
                
                
                
                —Consumer
      and other loans:Commercial
                
                
                —
                
                
                
                —Other
                
                
                —
                
                
                
                —Total
      consumer and other loans
                
                
                
                
                
                
                —Total
      non-performing loans
                
                
                —
                
                
                
                —Foreclosed
      assets
                
                
                —
                
                
                
                —Total
      non-performing assets
                
                $
                —
                
                
                $
                —Ratios:Non-performing
      loans to total loans
                
                
                —
                %
                
                
                —
                %Non-performing
      assets to total assets
                
                
                —
                %
                
                
                —
                %




At
December 31, 2008, Midwest Federal Savings had no loans that were not currently
classified as nonaccrual, 90 days past due or impaired but where known
information about possible credit problems of borrowers caused management to
have serious concerns as to the ability of the borrowers to comply with present
loan repayment terms and that may result in disclosure as nonaccrual, 90 days
past due or impaired.


10




On
the basis of our review of our assets, we had classified or held as special
mention the following assets as of the date indicated:




At
      December 31,2008
                  
                  
                  2007(In
      thousands)Substandard
                  
                  $
                  —
                  
                  
                  $
                  —Doubtful
                  
                  
                  —
                  
                  
                  
                  —Loss
                  
                  
                  —
                  
                  
                  
                  —Special
      Mention
                  
                  
                  —
                  
                  
                  
                  —Total
      classified and special mention assets
                  
                  $
                  —
                  
                  
                  $
                  —




Delinquent
Loans. The following table sets forth certain information with respect to
our loan portfolio delinquencies by type and amount at the dates
indicated.


Loans
      Delinquent For60-89
      Days
                    
                    
                    90
      Days and Over
                    
                    
                    TotalNumber
                    
                    
                    Amount
                    
                    
                    Number
                    
                    
                    Amount
                    
                    
                    Number
                    
                    
                    Amount(Dollars
      in thousands)At
      December 31, 2008Real
      estate:One-
      to four-family
                    
                    
                    —
                    
                    
                    $
                    —
                    
                    
                    
                    —
                    
                    
                    $
                    —
                    
                    
                    
                    —
                    
                    
                    $
                    —Commercial
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Construction
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Consumer
      and other loans:Commercial
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Other
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Total
      consumer and other loans
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Total
                    
                    
                    —
                    
                    
                    $
                    —
                    
                    
                    
                    —
                    
                    
                    $
                    —
                    
                    
                    
                    —
                    
                    
                    $
                    —At
      December 31, 2007Real
      estate:One-
      to four-family
                    
                    
                    —
                    
                    
                    $
                    —
                    
                    
                    
                    —
                    
                    
                    $
                    —
                    
                    
                    
                    —
                    
                    
                    $
                    —Commercial
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Construction
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Consumer
      and other loans:Commercial
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Other
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Total
      consumer and other loans
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Total
                    
                    
                    —
                    
                    
                    $
                    —
                    
                    
                    
                    —
                    
                    
                    $
                    —
                    
                    
                    
                    —
                    
                    
                    $
                    —




Foreclosed
and Repossessed Assets. Real estate acquired by us as a result of
foreclosure or by deed in lieu of foreclosure is classified as foreclosed real
estate until sold. When property is acquired it is recorded at the lower of cost
or estimated fair market value at the date of foreclosure, establishing a new
cost basis. Estimated fair value generally represents the sale price a buyer
would be willing to pay on the basis of current market conditions, including
normal terms from other financial institutions, less the estimated costs to sell
the property. Holding costs and declines in estimated fair market value result
in charges to expense after acquisition. At December 31, 2008, we had no
foreclosed real estate and no repossessed assets.




Classification
of Assets.Our policies, consistent with regulatory guidelines, provide
for the classification of loans and other assets that are considered to be of
lesser quality 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 assets characterized by the distinct possibility that we 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 (or portions of assets)
classified as loss are those considered uncollectible and of such little value
that their continuance as assets is not warranted. Assets that do not expose us
to risk sufficient to warrant classification in one of the aforementioned
categories, but which possess potential weaknesses that deserve our close
attention, are required to be designated as special mention. As of December 31,
2008, we had no assets designated as special
mention.


11




When
we classify assets as either substandard or doubtful, we allocate a portion of
the related general loss allowances to such assets as we deem prudent. The
allowance for loan losses is the amount estimated by management as necessary to
absorb credit losses incurred in the loan portfolio that are both probable and
reasonably estimable at the balance sheet date. When we classify a problem asset
as loss, we provide a specific reserve for that portion of the asset that is
uncollectible. Our determination as to the classification of our assets and the
amount of our loss allowances are subject to review by our principal federal
regulator, the Office of Thrift Supervision, which can require that we establish
additional loss allowances. We regularly review our asset portfolio to determine
whether any assets require classification in accordance with applicable
regulations. On the basis of our review of our assets at December 31, 2008, we
had no classified assets.




Allowance
for Loan Losses




The
allowance for loan losses is established through a provision for loan losses. We
maintain the allowance at a level believed, to the best of management’s
knowledge, to cover all known and inherent losses in the portfolio that are both
probable and reasonable to estimate at each reporting date. Management reviews
the allowance for loan losses on no less than a quarterly basis in order to
identify those inherent losses and to assess the overall collection probability
for the loan portfolio. Our evaluation process includes, among other things, an
analysis of delinquency trends, non-performing loan trends, the level of
charge-offs and recoveries, prior loss experience, total loans outstanding, the
volume of loan originations, the type, size and geographic concentration of our
loans, the value of collateral securing the loan, the borrower’s ability to
repay and repayment performance, the number of loans requiring heightened
management oversight, local economic conditions and industry experience. Such
risk factors are periodically reviewed by management and revised as deemed
appropriate. The establishment of the allowance for loan losses is significantly
affected by management judgment and uncertainties and there is a likelihood that
different amounts would be reported under different conditions or assumptions.
The Office of Thrift Supervision, as an integral part of its examination
process, periodically reviews our allowance for loan losses. The OTS may require
Midwest Federal Savings to make additional provisions for estimated loan losses
based upon judgments different from those of management.




The
allowance generally consists of specific and general components. The specific
component relates to loans that are classified as either doubtful, substandard
or special mention. The general component covers non-classified loans and is
based on historical loss experience adjusted for qualitative factors. At
December 31, 2008 and 2007, no specific components were allocated as we had no
classified assets.




We
will continue to monitor and modify our allowances for loan losses as conditions
dictate. No assurances can be given that our level of allowance for loan losses
will cover all of the inherent losses on our loans or that future adjustments to
the allowance for loan losses will not be necessary if economic and other
conditions differ substantially from the economic and other conditions used by
management to determine the current level of the allowance for loan
losses.


12




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


At
      or For the Years
                            Ended
      December 31,2008
                          
                          
                          2007(Dollars
      in thousands)Balance
      at beginning of period
                          
                          $
                          18
                          
                          
                          $
                          10Charge-offs:Real
      estate:One-
      to four-family
                          
                          
                          —
                          
                          
                          
                          —Commercial
                          
                          
                          —
                          
                          
                          
                          —Construction
                          
                          
                          —
                          
                          
                          
                          —Consumer
      and other loans:Commercial
                          
                          
                          —
                          
                          
                          
                          —Other
                          
                          
                          —
                          
                          
                          
                          —Total
      consumer and other loans
                          
                          
                          —Total
      charge-offs
                          
                          
                          —
                          
                          
                          
                          —Recoveries:Real
      estate:One-
      to four-family
                          
                          
                          —
                          
                          
                          
                          —Commercial
                          
                          
                          —
                          
                          
                          
                          —Construction
                          
                          
                          —
                          
                          
                          
                          —Consumer
      and other loans:Commercial
                          
                          
                          —
                          
                          
                          
                          —Other
                          
                          
                          —
                          
                          
                          
                          —Total
      consumer and other loans
                          
                          
                          —
                          
                          
                          
                          —Total
      recoveries
                          
                          
                          —
                          
                          
                          
                          —Net
      (charge-offs) recoveries
                          
                          
                          —
                          
                          
                          
                          —Provision
      for loan losses
                          
                          
                          4
                          
                          
                          
                          8Balance
      at end of year
                          
                          $
                          22
                          
                          
                          $
                          18Ratios:Net
      charge-offs to average loans outstanding (annualized)
                          
                          
                          —
                          %
                          
                          
                          —
                          %Allowance
      for loan losses to non-performing loans at end of period
                          
                          
                          —
                          
                          
                          
                          —Allowance
      for loan losses to total loans at end of period
                          
                          
                          0.22
                          %
                          
                          
                          0.20
                          %


13




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


At
      December 31,2008
                        
                        
                        2007Allowance
      for
                          Loan
      Losses
                        
                        
                        Loan
      Balances
                          by
      Category
                        
                        
                        Percent
      of
                          Loans
      in Each
                          Category
      to
                          Total
      Loans
                        
                        
                        Allowance
      for
                          Loan
      Losses
                        
                        
                        Loan
      Balances
                          by
      Category
                        
                        
                        Percent
      of
                          Loans
      in Each
                          Category
      to
                          Total
      Loans(Dollars
      in thousands)Real
      Estate:One-
      to four-family
                        
                        $
                        20
                        
                        
                        $
                        9,739
                        
                        
                        
                        96.74
                        %
                        
                        $
                        17
                        
                        
                        $
                        8,653
                        
                        
                        
                        95.89
                        %Commercial
                        
                        
                        —
                        
                        
                        
                        100
                        
                        
                        
                        1.00
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        0.00Construction
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        0.00
                        
                        
                        
                        —
                        
                        
                        
                        280
                        
                        
                        
                        3.10Total
      real estate
                        
                        
                        20
                        
                        
                        
                        9,839
                        
                        
                        
                        97.74
                        
                        
                        
                        17
                        
                        
                        
                        8,933
                        
                        
                        
                        98.99Consumer
      and other:Commercial
                        
                        
                        2
                        
                        
                        
                        200
                        
                        
                        
                        1.98
                        
                        
                        
                        1
                        
                        
                        
                        66
                        
                        
                        
                        0.73Other
                        
                        
                        —
                        
                        
                        
                        28
                        
                        
                        
                        0.28
                        
                        
                        
                        —
                        
                        
                        
                        25
                        
                        
                        
                        0.28Total
      consumer and other
                        
                        
                        2
                        
                        
                        
                        228
                        
                        
                        
                        2.26
                        
                        
                        
                        1
                        
                        
                        
                        91
                        
                        
                        
                        1.01Total
      loans
                        
                        $
                        22
                        
                        
                        $
                        10,067
                        
                        
                        
                        100.00
                        %
                        
                        $
                        18
                        
                        
                        $
                        9,024
                        
                        
                        
                        100.00
                        %


14




Investment
Activities




General.We are permitted under federal law to invest in various types of liquid
assets, including United States Government obligations, securities of various
federal agencies and of state and municipal governments, mortgage-backed
securities, deposits at the Federal Home Loan Bank of Des Moines, certificates
of deposit of federally insured institutions, certain bankers’ acceptances and
federal funds. Within certain regulatory limits, we may also invest a portion of
our assets in commercial paper and corporate debt securities. We are also
required to maintain an investment in FHLB stock.




Our
investment objectives are to maintain high asset quality, provide and maintain
liquidity, to establish an acceptable level of interest rate and credit risk, to
provide an alternate source of low-risk investments when demand for loans is
weak and to generate a favorable return. Our board of directors has the overall
responsibility for the investment portfolio, including approval of our
investment policy. The board of directors is also responsible for implementation
of the investment policy and monitoring our investment performance. Our board of
directors reviews the status of our investment portfolio on a quarterly basis,
or more frequently if warranted.




Our
current investment policy authorizes us to invest in debt securities issued by
the United States Government, agencies of the United States Government or United
States Government-sponsored enterprises. The policy also permits investments in
mortgage-backed securities, including pass-through securities, issued and
guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. The investment policy also
permits investments in federal funds and deposits in other insured institutions.
In addition, management is authorized to invest in investment grade state and
municipal obligations, commercial paper and corporate debt obligations within
regulatory parameters. We do not engage in any hedging activities or trading
activities, nor do we purchase any high-risk mortgage derivative products,
corporate junk bonds, zero coupon bonds and certain types of structured
notes.




SFAS
No. 115 requires that, at the time of purchase, we designate a security as
held-to-maturity, available-for-sale, or trading, depending on our ability and
intent. Securities available for sale are reported at fair value, while
securities held to maturity are reported at amortized cost. We do not maintain a
trading portfolio. Establishing a trading portfolio would require specific
authorization by our Board of Directors.




At
December 31, 2008, our available for sale investment portfolio totaled $5.3
million, or 24.2% of total assets. We also held $4.8 million in interest-bearing
deposits in other institutions and $22,000 in Federal Home Loan Bank of Des
Moines stock at December 31, 2008. Our available for sale investment portfolio
at December 31, 2008, at amortized cost, consisted of $2.0 million in United
States Government and federal agency obligations, $3.0 million of
mortgage-backed securities, and $205,000 in municipal obligations.




United
States Government and Federal Agency Obligations. While United States
Government and federal agency securities generally provide lower yields than
other investments in our securities investment portfolio, we maintain these
investments, to the extent appropriate, for liquidity purposes, as collateral
for borrowings and as an interest rate risk hedge in the event of significant
mortgage loan prepayments. At December 31, 2008, our United States government
and federal agency obligations consisted of a fixed-rate FHLB Bond, a “step-up”
security issued by Fannie Mae, and a debenture security issued by Fannie Mae. A
“step-up” security requires the issuer to pay increased interest rates in the
future according to pre-determined schedules.




Mortgage-Backed
Securities.We invest in mortgage-backed securities insured or guaranteed
by Fannie Mae, Freddie Mac or Ginnie Mae. We have not purchased privately-issued
mortgage-backed securities. We invest in mortgage-backed securities to achieve
positive interest rate spreads with minimal administrative expense, and to lower
our credit risk as a result of the guarantees provided by Freddie Mac, Fannie
Mae or Ginnie Mae. At December 31, 2008, our mortgage-backed securities
consisted primarily of mortgage pass-through certificates issued by Freddie
Mac.


15




Ginnie
Mae is a government agency within the Department of Housing and Urban
Development which is intended to help finance government-assisted housing
programs. Ginnie Mae securities are backed by loans insured by the Federal
Housing Administration, or guaranteed by the Veterans Administration. The timely
payment of principal and interest on Ginnie Mae securities is guaranteed by
Ginnie Mae and backed by the full faith and credit of the U.S. Government.
Freddie Mac is a private corporation chartered by the U.S. Government. Freddie
Mac issues participation certificates backed principally by conventional
mortgage loans. Freddie Mac guarantees the timely payment of interest and the
ultimate return of principal on participation certificates. Fannie Mae is a
private corporation chartered by the U.S. Congress with a mandate to establish a
secondary market for mortgage loans. Fannie Mae guarantees the timely payment of
principal and interest on Fannie Mae securities. In September 2008, the Federal
Housing Finance Agency placed Freddie Mac and Fannie Mae into conservatorship.
The U.S. Treasury has put in place a set of financing agreements to ensure that
Freddie Mac and Fannie Mae meet their obligations to holders of bonds that they
have issued or guaranteed.




Investments
in mortgage-backed securities involve a risk that actual payments will be
greater or less than the prepayment rate estimated at the time of purchase,
which may require adjustments to the amortization of any premium or acceleration
of any discount relating to such interests, thereby affecting the net yield on
our securities. We periodically review current prepayment speeds to determine
whether prepayment estimates require modification that could cause amortization
or accretion adjustments. There is also reinvestment risk associated with the
cash flows from such securities or in the event such securities are redeemed by
the issuer. In addition, the market value of such securities may be adversely
affected by changes in interest rates.




Investment
Securities Portfolio.The following table sets forth the composition of
our investment securities portfolio at the dates
indicated.




At
      December 31,2008
                                    
                                    
                                    2007Amortized
                                      Cost
                                    
                                    
                                    Fair
      Value
                                    
                                    
                                    Amortized
                                      Cost
                                    
                                    
                                    Fair
      Value(In
      thousands)Securities
      available for sale:U.S.
      Government and federal agency obligations
                                    
                                    $
                                    2,000
                                    
                                    
                                    $
                                    2,043
                                    
                                    
                                    $
                                    1,999
                                    
                                    
                                    $
                                    2,021Municipal
      securities
                                    
                                    
                                    205
                                    
                                    
                                    
                                    206
                                    
                                    
                                    
                                    205
                                    
                                    
                                    
                                    207Mortgage-backed
                                    
                                    
                                    2,987
                                    
                                    
                                    
                                    3,035
                                    
                                    
                                    
                                    3,812
                                    
                                    
                                    
                                    3,763Total
      securities available for sale
                                    
                                    $
                                    5,192
                                    
                                    
                                    $
                                    5,284
                                    
                                    
                                    $
                                    6,016
                                    
                                    
                                    $
                                    5,991




16




Investment
Portfolio Maturities and Yields.The composition and maturities of the
investment securities portfolio at December 31, 2008 are summarized in the
following table.


One
      Year or Less
                              
                              More
      than One Year
                                through
      Five Years
                              
                              More
      than Five Years
                                through
      Ten Years
                              
                              More
      than Ten Years
                              
                              Total
      SecuritiesAmortized
                                Cost
                              
                              Weighted
                                Average
                                Yield
                              
                              Amortized
                                Cost
                              
                              Weighted
                                Average
                                Yield
                              
                              Amortized
                                Cost
                              
                              Weighted
                                Average
                                Yield
                              
                              Amortized
                                Cost
                              
                              Weighted
                                Average
                                Yield
                              
                              Amortized
                                Cost
                              
                              Fair
      Value
                              
                              Weighted
                                Average
                                Yield(Dollars
      in thousands)Securities
      available for sale:U.S.
      Government and federal agency obligations
                              
                              $
                              —
                              
                              
                              
                              —
                              %
                              
                              $
                              1,000
                              
                              
                              
                              4.79
                              %
                              
                              $
                              —
                              
                              
                              
                              —
                              %
                              
                              $
                              1,000
                              
                              
                              
                              5.13
                              %
                              
                              $
                              2,000
                              
                              
                              $
                              2,043
                              
                              
                              
                              4.96
                              %Municipal
      securities
                              
                              
                              105
                              
                              
                              
                              4.56
                              
                              
                              
                              100
                              
                              
                              
                              4.68
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              205
                              
                              
                              
                              206
                              
                              
                              
                              4.62Mortgage-backed
      securities
                              
                              
                              54
                              
                              
                              
                              5.31
                              
                              
                              
                              1,496
                              
                              
                              
                              4.11
                              
                              
                              
                              1,437
                              
                              
                              
                              4.71
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              2,987
                              
                              
                              
                              3,035
                              
                              
                              
                              4.42Total
                              
                              $
                              159
                              
                              
                              
                              4.81
                              %
                              
                              $
                              2,596
                              
                              
                              
                              4.39
                              %
                              
                              $
                              1,437
                              
                              
                              
                              4.71
                              %
                              
                              $
                              1,000
                              
                              
                              
                              5.13
                              %
                              
                              $
                              5,192
                              
                              
                              $
                              5,284
                              
                              
                              
                              4.64
                              %


17




Sources
of Funds




General.Deposits traditionally have been our primary source of funds for our
lending and investment activities. In addition to deposits, we derive funds
primarily from principal and interest payments on loans. Loan repayments are a
relatively stable source of funds, while deposit inflows and outflows are
significantly influenced by general interest rates, money market conditions and
competition. Borrowings may also be used on a short- term basis to compensate
for reductions in the availability of funds from other sources and may be used
on a longer-term basis for general business purposes.




Deposits.We
generate deposits primarily from within our market area. We rely on our
competitive pricing and customer service to attract and retain deposits. We
offer a variety of deposit accounts with a range of interest rates and terms.
Our deposit accounts consist of savings accounts, certificates of deposit and
NOW accounts. We do not accept brokered deposits.




Interest
rates, 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 interest rates, liquidity requirements, interest
rates paid by competitors and our deposit growth goals.




At
December 31, 2008, we had a total of $11.0 million in certificates of deposit,
of which $6.2 million had remaining maturities of one year or less. Based on
historical experience and our current pricing strategy, we believe we will
retain a large portion of these accounts upon maturity.




The
following table sets forth the distribution of total deposit accounts, by
account type, at the dates indicated. The deposits classified as subscription
proceeds represent the subscription funds received in the stock conversion,
which were held in accounts at Midwest Federal Savings pending the closing of
the stock offering.




At
      December 31,2008
                                                        
                                                        
                                                        2007Balance
                                                        
                                                        
                                                        Percent
                                                        
                                                        
                                                        Weighted
                                                          Average
                                                          Rate
                                                        
                                                        
                                                        Balance
                                                        
                                                        
                                                        Percent
                                                        
                                                        
                                                        Weighted
                                                          Average
                                                          Rate(Dollars
      in thousands)NOW
      deposits
                                                        
                                                        $
                                                        345
                                                        
                                                        
                                                        
                                                        2.13
                                                        %
                                                        
                                                        
                                                        0.90
                                                        %
                                                        
                                                        $
                                                        206
                                                        
                                                        
                                                        
                                                        1.60
                                                        %
                                                        
                                                        
                                                        0.90
                                                        %Regular
      and other savings
                                                        
                                                        
                                                        2,687
                                                        
                                                        
                                                        
                                                        16.56
                                                        
                                                        
                                                        
                                                        1.25
                                                        
                                                        
                                                        
                                                        2,061
                                                        
                                                        
                                                        
                                                        15.98
                                                        
                                                        
                                                        
                                                        1.21Commercial
      checking
                                                        
                                                        
                                                        54
                                                        
                                                        
                                                        
                                                        0.34
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        —Total
      transaction accounts
                                                        
                                                        
                                                        3,086
                                                        
                                                        
                                                        
                                                        19.03
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        2,267
                                                        
                                                        
                                                        
                                                        17.58
                                                        
                                                        
                                                        
                                                        —Subscription
      proceeds
                                                        
                                                        
                                                        2,136
                                                        
                                                        
                                                        
                                                        13.16
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        —Certificates
      of deposit
                                                        
                                                        
                                                        11,004
                                                        
                                                        
                                                        
                                                        67.81
                                                        
                                                        
                                                        
                                                        3.66
                                                        
                                                        
                                                        
                                                        10,623
                                                        
                                                        
                                                        
                                                        82.42
                                                        
                                                        
                                                        
                                                        4.40Total
      deposits
                                                        
                                                        $
                                                        16,226
                                                        
                                                        
                                                        
                                                        100.00
                                                        %
                                                        
                                                        
                                                        2.71
                                                        
                                                        
                                                        $
                                                        12,890
                                                        
                                                        
                                                        
                                                        100.00
                                                        %
                                                        
                                                        
                                                        3.79




As
of December 31, 2008, the aggregate amount of our outstanding certificates of
deposit in amounts greater than or equal to $100,000 was approximately $2.1
million. The following table sets forth the maturity of these certificates as of
December 31, 2008.


At
      December 31, 2008(In
      thousands)Three
      months or less
                                          
                                          
                                          $
                                          221Over
      three months through six months
                                          
                                          
                                          
                                          100Over
      six months through one year
                                          
                                          
                                          
                                          987Over
      one year
                                          
                                          
                                          
                                          755Total
                                          
                                          
                                          $
                                          2,063




18




The
following table sets forth the time deposits in the Bank classified by interest
rate as of the dates indicated.


At
      December 31,2008
                                              
                                              
                                              2007(In
      thousands)Interest
      RateLess
      than 2%
                                              
                                              $
                                              316
                                              
                                              
                                              $
                                              —2.00%
      -2.99%
                                              
                                              
                                              3,681
                                              
                                              
                                              
                                              —3.00%
      -3.99%
                                              
                                              
                                              3,430
                                              
                                              
                                              
                                              3,7094.00%
      -4.99%
                                              
                                              
                                              2,228
                                              
                                              
                                              
                                              3,3665.00%
      -5.99%
                                              
                                              
                                              1,349
                                              
                                              
                                              
                                              3,548Total
                                              
                                              $
                                              11,004
                                              
                                              
                                              $
                                              10,623




The
following table sets forth the amount and maturities of time on deposits at
December 31, 2008.


Less
      Than
                                                        One
      Year
                                                      
                                                      
                                                      Over
      One
                                                        Year
      to Two
                                                        Years
                                                      
                                                      
                                                      Over
      Two
                                                        Years
      to
                                                        Three
      Years
                                                      
                                                      
                                                      Over
      Three
                                                        Years
                                                      
                                                      
                                                      Total
                                                      
                                                      
                                                      Percentage
                                                        of
      Total
                                                        Certificate
                                                        Accounts(Dollars in
      thousands)Interest
      Rate:Less
      than 2%
                                                      
                                                      $
                                                      316
                                                      
                                                      
                                                      $
                                                      —
                                                      
                                                      
                                                      $
                                                      —
                                                      
                                                      
                                                      $
                                                      —
                                                      
                                                      
                                                      $
                                                      316
                                                      
                                                      
                                                      
                                                      2.87
                                                      %2.00%
      - 2.99%
                                                      
                                                      
                                                      2,685
                                                      
                                                      
                                                      
                                                      912
                                                      
                                                      
                                                      
                                                      84
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      3,681
                                                      
                                                      
                                                      
                                                      33.453.00%
      - 3.99%
                                                      
                                                      
                                                      1,458
                                                      
                                                      
                                                      
                                                      1,064
                                                      
                                                      
                                                      
                                                      584
                                                      
                                                      
                                                      
                                                      324
                                                      
                                                      
                                                      
                                                      3,430
                                                      
                                                      
                                                      
                                                      31.174.00%
      - 4.99%
                                                      
                                                      
                                                      428
                                                      
                                                      
                                                      
                                                      79
                                                      
                                                      
                                                      
                                                      255
                                                      
                                                      
                                                      
                                                      1,466
                                                      
                                                      
                                                      
                                                      2,228
                                                      
                                                      
                                                      
                                                      20.255.00%
      - 5.99%
                                                      
                                                      
                                                      1,349
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      1,349
                                                      
                                                      
                                                      
                                                      12.26Total
                                                      
                                                      $
                                                      6,236
                                                      
                                                      
                                                      $
                                                      2,055
                                                      
                                                      
                                                      $
                                                      923
                                                      
                                                      
                                                      $
                                                      1,790
                                                      
                                                      
                                                      $
                                                      11,004
                                                      
                                                      
                                                      
                                                      100.0
                                                      %




The
following table sets forth our deposit activities for the periods
indicated.


Years
      Ended December 31,2008
                              
                              
                              2007(In
      thousands)Beginning
      balance
                              
                              $
                              12,890
                              
                              
                              $
                              12,797Net
      deposits (withdrawals) before interest credited
                              
                              
                              2,978
                              
                              
                              
                              (307
                              )Interest
      credited
                              
                              
                              358
                              
                              
                              
                              400Net
      increase (decrease) in deposits
                              
                              
                              3,336
                              
                              
                              
                              93Ending
      balance
                              
                              $
                              16,226
                              
                              
                              $
                              12,890




Borrowings.We may obtain advances from the FHLB of Des Moines upon the security of
the common stock we own in that bank and certain of our residential mortgage
loans and mortgage-backed securities, provided certain standards related to
creditworthiness have been met. These advances are made pursuant to several
credit programs, each of which has its own interest rate and range of
maturities. FHLB advances are generally available to meet seasonal and other
withdrawals of deposit accounts and to permit increased
lending.




At
December 31, 2008, we had not established a credit line from the FHLB of Des
Moines. We had no FHLB advances or other borrowings outstanding at December 31,
2008 or 2007.




Subsidiary
Activities




As
a federally chartered savings association, we are permitted by Office of Thrift
Supervision regulations to invest up to 2% of our assets in the stock of, or
loans to, service corporation subsidiaries. We may invest an additional 1% of
our assets in service corporations if the additional funds are used for
inner-city or community development purposes, and up to 50% of our total capital
in conforming loans to service corporations in which we own more than 10% of the
capital stock. In addition to investments in service corporations, we may invest
an unlimited amount in operating subsidiaries engaged solely in activities in
which Midwest Federal Savings may engage as a federal savings bank. At December
31, 2008, Midwest Federal Savings had one subsidiary, M.F.S. Financial Services,
Inc., which is an inactive insurance agency.


19




Expense
and Tax Allocation




Midwest
Federal Savings will enter into an agreement with St. Joseph Bancorp, Inc. to
provide it with certain administrative support services, whereby Midwest Federal
Savings will be compensated at not less than the fair market value of the
services provided. In addition, Midwest Federal Savings and St. Joseph Bancorp,
Inc. will enter into an agreement to establish a method for allocating and for
reimbursing the payment of their consolidated tax liability.




Personnel




As
of December 31, 2008, we had four full-time employees and two part-time
employees. Our employees are not represented by any collective bargaining group.
Management believes that we have a good working relationship with our
employees.




FEDERAL
AND STATE TAXATION




Federal
Taxation




General.
St. Joseph Bancorp, Inc. and Midwest Federal Savings are subject to federal
income taxation in the same general manner as other corporations, with some
exceptions discussed below. The following discussion of federal taxation is
intended only to summarize material federal income tax matters and is not a
comprehensive description of the tax rules applicable to St. Joseph Bancorp,
Inc. and Midwest Federal Savings.




Method
of Accounting. For federal income tax purposes, Midwest Federal Savings
currently reports its income and expenses on the accrual method of accounting
and uses a tax year ending December 31 for filing its federal income tax return.
The Small Business Protection Act of 1996 eliminated the use of the reserve
method of accounting for bad debt reserves by savings institutions, effective
for taxable years beginning after 1995.




Minimum
Tax. The Internal Revenue Code of 1986, as amended, imposes an
alternative minimum tax at a rate of 20% on a base of regular taxable income
plus certain tax preferences, referred to as “alternative minimum taxable
income.” The alternative minimum tax is payable to the extent alternative
minimum taxable income is in excess of an exemption amount. Net operating losses
can, in general, offset no more than 90% of alternative minimum taxable income.
Certain payments of alternative minimum tax may be used as credits against
regular tax liabilities in future years. At December 31, 2008, Midwest Federal
Savings had no minimum tax credit carry forward.




Net
Operating Loss Carryovers. A financial institution may carry back net
operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. At December 31, 2008, Midwest Federal Savings had a
net operating loss of $34,000 to carry forward for federal income tax
purposes.




Corporate
Dividends. We may exclude from our income 100% of dividends received from
Midwest Federal Savings as a member of the same affiliated group of
corporations.




Audit
of Tax Returns.MidwestFederal
Savings’ federal income tax returns have not been audited in the most recent
five-year period.




State
Taxation




Missouri
Taxation. Missouri-based thrift institutions, such as Midwest Federal
Savings, are subject to a special financial institutions tax, based on net
income without regard to net operating loss carryforwards, at the rate of 7% of
net income. This tax is in lieu of certain other state taxes on thrift
institutions, on their property, capital or income, except taxes on tangible
personal property owned by Midwest Federal Savings and held for lease or rental
to others and on real estate, contributions paid pursuant to the Unemployment
Compensation Law of Missouri, social security taxes, sales taxes and use taxes.
In addition, Midwest Federal Savings is entitled to credit against this tax all
taxes paid to the State of Missouri or any political subdivision except taxes on
tangible personal property owned by Midwest Federal Savings and held for lease
or rental to others and on real estate, contributions paid pursuant to the
Unemployment Compensation Law of Missouri, social security taxes, sales and use
taxes and taxes imposed by the Missouri Financial Institutions Tax Law. Missouri
thrift institutions are not subject to the regular state corporate income
tax.


20




Midwest
Federal Savings will be subject to the regular state corporate income tax at the
rate of 6.25% of taxable income derived from Missouri sources.




Maryland
State Taxation. As a Maryland business corporation, St. Joseph Bancorp,
Inc. will be required to file annual returns and pay annual fees to the State of
Maryland.




SUPERVISION
AND REGULATION




General




Midwest
Federal Savings is examined and supervised by the Office of Thrift Supervision
and is subject to examination by the Federal Deposit Insurance Corporation. This
regulation and supervision establishes a comprehensive framework of activities
in which an institution may engage and is intended primarily for the protection
of the Federal Deposit Insurance Corporation’s deposit insurance funds and
depositors. Under this system of federal regulation, financial institutions are
periodically examined to ensure that they satisfy applicable standards with
respect to their capital adequacy, assets, management, earnings, liquidity and
sensitivity to market interest rates. Following completion of its examination,
the federal agency critiques the institution’s operations and assigns its rating
(known as an institution’s CAMELS rating). Under federal law, an institution may
not disclose its CAMELS rating to the public. Midwest Federal Savings also is a
member of and owns stock in the Federal Home Loan Bank of Des Moines, which is
one of the twelve regional banks in the Federal Home Loan Bank System. Midwest
Federal Savings also is regulated to a lesser extent by the Board of Governors
of the Federal Reserve System, governing reserves to be maintained against
deposits and other matters. The Office of Thrift Supervision will examine
Midwest Federal Savings and prepare reports for the consideration of its Board
of Directors on any operating deficiencies. Midwest Federal Savings’
relationship with its depositors and borrowers also is regulated to a great
extent by federal law and, to a much lesser extent, state law, especially in
matters concerning the ownership of deposit accounts and the form and content of
Midwest Federal Savings’ mortgage documents.




Any
change in these laws or regulations, whether by the Federal Deposit Insurance
Corporation, the Office of Thrift Supervision or Congress, could have a material
adverse impact on St. Joseph Bancorp, Inc., Midwest Federal Savings and their
operations.




St.
Joseph Bancorp, Inc., as a savings and loan holding company following the
conversion, is required to file certain reports with, is subject to examination
by, and otherwise must comply with the rules and regulations of the Office of
Thrift Supervision. St. Joseph Bancorp, Inc. is also subject to the rules and
regulations of the Securities and Exchange Commission under the federal
securities laws.




Certain
of the regulatory requirements that are applicable to Midwest Federal Savings
and St. Joseph Bancorp, Inc. are described below. This description of statutes
and regulations is not intended to be a complete explanation of such statutes
and regulations and their effects on Midwest Federal Savings and St. Joseph
Bancorp, Inc. and is qualified in its entirety by reference to the actual
statutes and regulations.




Federal
Banking Regulation




Business
Activities.A federal savings association derives its lending and investment powers
from the Home Owners’ Loan Act, as amended, and the regulations of the Office of
Thrift Supervision. Under these laws and regulations, Midwest Federal Savings
may invest in mortgage loans secured by residential real estate without
limitation as a percentage of assets, and may invest in non-residential real
estate loans up to 400% of capital in the aggregate, commercial business loans
up to 20% of assets in the aggregate and consumer loans up to 35% of assets in
the aggregate, and in certain types of debt securities and certain other assets.
Midwest Federal Savings also may establish subsidiaries that may engage in
activities not otherwise permissible for Midwest Federal Savings, including real
estate investment and securities and insurance
brokerage.


21




Capital
Requirements.Office of Thrift Supervision regulations require savings associations to
meet three minimum capital standards: a 1.5% tangible capital ratio, a 4%
leverage ratio (3% for savings associations receiving the highest rating on the
CAMELS rating system) and an 8% risk-based capital
ratio.




The
risk-based capital standard for savings associations requires the maintenance of
Tier 1 (core) and total capital (which is defined as core capital and
supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the Office of Thrift Supervision, based on the
risks believed 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 and minority interests in equity
accounts of consolidated subsidiaries, less intangibles other than certain
mortgage servicing rights and credit card relationships. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock, the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets and up to 45% of net
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.
Additionally, a savings association that retains credit risk in connection with
an asset sale may be required to maintain additional regulatory capital because
of the recourse back to the savings association.




At
December 31, 2008, Midwest Federal Savings’ capital exceeded all applicable
requirements.




Midwest
Federal Savings’ regulatory capital amounts and ratios are presented in the
table below.


Actual
                                                      
                                                      
                                                      For
      Capital Adequacy
                                                        Purposes
                                                      
                                                      
                                                      To
      Be Well Capitalized
                                                        Under
      Prompt Corrective
                                                        Action
      ProvisionsAmount
                                                      
                                                      
                                                      Ratio
                                                      
                                                      
                                                      Amount
                                                      
                                                      
                                                      Ratio
                                                      
                                                      
                                                      Amount
                                                      
                                                      
                                                      RatioAs
      of December 31, 2008:Total
      capital (to risk-weighted assets)
                                                      
                                                      $
                                                      5,451,000
                                                      
                                                      
                                                      
                                                      65.5
                                                      %
                                                      
                                                      $
                                                      665,000
                                                      
                                                      
                                                      
                                                      8.0
                                                      %
                                                      
                                                      $
                                                      832,000
                                                      
                                                      
                                                      
                                                      10.0
                                                      %Tier
      I capital (to risk-weighted assets)
                                                      
                                                      
                                                      5,429,000
                                                      
                                                      
                                                      
                                                      65.3
                                                      %
                                                      
                                                      
                                                      N/A
                                                      
                                                      
                                                      
                                                      N/A
                                                      
                                                      
                                                      
                                                      499,000
                                                      
                                                      
                                                      
                                                      6.0
                                                      %Tier
      I capital (to average assets)
                                                      
                                                      
                                                      5,429,000
                                                      
                                                      
                                                      
                                                      25.0
                                                      %
                                                      
                                                      
                                                      869,000
                                                      
                                                      
                                                      
                                                      4.0
                                                      %
                                                      
                                                      
                                                      1,086,000
                                                      
                                                      
                                                      
                                                      5.0
                                                      %Tangible
      capital (to adjusted tangible assets)
                                                      
                                                      
                                                      5,429,000
                                                      
                                                      
                                                      
                                                      25.0
                                                      %
                                                      
                                                      
                                                      326,000
                                                      
                                                      
                                                      
                                                      1.5
                                                      %
                                                      
                                                      
                                                      N/A
                                                      
                                                      
                                                      
                                                      N/AAs
      of December 31, 2007:Total
      capital (to risk-weighted assets)
                                                      
                                                      $
                                                      5,518,000
                                                      
                                                      
                                                      
                                                      85.3
                                                      %
                                                      
                                                      $
                                                      518,000
                                                      
                                                      
                                                      
                                                      8.0
                                                      %
                                                      
                                                      $
                                                      647,000
                                                      
                                                      
                                                      
                                                      10.0
                                                      %Tier
      I capital (to risk-weighted assets)
                                                      
                                                      
                                                      5,500,000
                                                      
                                                      
                                                      
                                                      85.0
                                                      %
                                                      
                                                      
                                                      N/A
                                                      
                                                      
                                                      
                                                      N/A
                                                      
                                                      
                                                      
                                                      388,000
                                                      
                                                      
                                                      
                                                      6.0
                                                      %Tier
      I capital (to average assets)
                                                      
                                                      
                                                      5,500,000
                                                      
                                                      
                                                      
                                                      30.0
                                                      %
                                                      
                                                      
                                                      733,000
                                                      
                                                      
                                                      
                                                      4.0
                                                      %
                                                      
                                                      
                                                      916,000
                                                      
                                                      
                                                      
                                                      5.0
                                                      %Tangible
      capital (to adjusted tangible assets)
                                                      
                                                      
                                                      5,500,000
                                                      
                                                      
                                                      
                                                      30.0
                                                      %
                                                      
                                                      
                                                      275,000
                                                      
                                                      
                                                      
                                                      1.5
                                                      %
                                                      
                                                      
                                                      N/A
                                                      
                                                      
                                                      
                                                      N/A




22




Loans-to-One
Borrower.Generally, a federal savings association may not make a loan or extend
credit to a single or related group of borrowers in excess of 15% of unimpaired
capital and surplus. An additional amount may be loaned, equal to 10% of
unimpaired capital and surplus, if the loan is secured by readily marketable
collateral, which generally does not include real estate. As of December 31,
2008, Midwest Federal Savings’ largest lending relationship with a single or
related group of borrowers totaled $544,000, which represented 9.9% of
unimpaired capital and surplus. Therefore, Midwest Federal Savings was in
compliance with the loans-to-one borrower
limitations.




Qualified
Thrift Lender Test.As a federal savings association, Midwest Federal Savings must satisfy
the qualified thrift lender, or “QTL,” test. Under the QTL test, Midwest Federal
Savings must maintain at least 65% of its “portfolio assets” in “qualified
thrift investments” (primarily residential mortgages and related investments,
including mortgage-backed securities) in at least nine months of the most recent
12-month period. “Portfolio assets” generally means total assets of a savings
institution, less the sum of specified liquid assets up to 20% of total assets,
goodwill and other intangible assets, and the value of property used in the
conduct of the savings association’s business.




Midwest
Federal Savings also may satisfy the QTL test by qualifying as a “domestic
building and loan association” as defined in the Internal Revenue
Code.




A
savings association that fails the qualified thrift lender test must either
convert to a bank charter or operate under specified restrictions set forth in
the Home Owners’ Loan Act. At December 31, 2008, Midwest Federal Savings
maintained approximately 76.6% of its portfolio assets in qualified thrift
investments and, therefore, satisfied the QTL test.




Capital
Distributions.Office of Thrift Supervision regulations govern capital distributions by
a federal savings association, which include cash dividends, stock repurchases
and other transactions charged to the capital account. A savings association
must file an application for approval of a capital distribution
if:


●
              the
      total capital distributions for the applicable calendar year exceed the
      sum of the savings association’s net income for that year to date plus the
      savings association’s retained net income for the preceding two
      years;●
              the
      savings association would not be at least adequately capitalized following
      the distribution;●
              the
      distribution would violate any applicable statute, regulation, agreement
      or Office of Thrift Supervision-imposed condition; or●
              the
      savings association is not eligible for expedited treatment of its
      filings.




Even
if an application is not otherwise required, every savings association that is a
subsidiary of a holding company must still file a notice with the Office of
Thrift Supervision at least 30 days before the Board of Directors declares a
dividend or approves a capital distribution.




The
Office of Thrift Supervision may disapprove a notice or application
if:


●
              the
      savings association would be undercapitalized following the
      distribution;●
              the
      proposed capital distribution raises safety and soundness concerns;
      or●
              the
      capital distribution would violate a prohibition contained in any statute,
      regulation or agreement.




In
addition, the Federal Deposit Insurance Act provides that an insured depository
institution shall not make any capital distribution, if after making such
distribution the institution would be undercapitalized.


23




Liquidity.A federal savings association is required to maintain a sufficient amount
of liquid assets to ensure its safe and sound operation. We seek to maintain a
ratio of 4% or greater of liquid assets to total assets. For the year ended
December 31, 2008, our liquidity ratio averaged
45.6%.




Community
Reinvestment Act and Fair Lending Laws.All savings associations have a responsibility under the Community
Reinvestment Act and related regulations of the Office of Thrift Supervision to
help meet the credit needs of their communities, including low- and
moderate-income borrowers. In connection with its examination of a federal
savings association, the Office of Thrift Supervision is required to assess the
savings association’s record of compliance with the Community Reinvestment Act.
In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit
lenders from discriminating in their lending practices on the basis of
characteristics specified in those statutes. A savings association’s failure to
comply with the provisions of the Community Reinvestment Act could, at a
minimum, result in denial of certain corporate applications such as branches or
mergers, or in restrictions on its activities. The failure to comply with the
Equal Credit Opportunity Act and the Fair Housing Act could result in
enforcement actions by the Office of Thrift Supervision, as well as other
federal regulatory agencies and the Department of Justice. Midwest Federal
Savings received a satisfactory Community Reinvestment Act rating in its most
recent federal examination.




Transactions
with Related Parties.A federal savings association’s authority to engage in transactions with
its affiliates is limited by Office of Thrift Supervision regulations and by
Sections 23A and 23B of the Federal Reserve Act and its implementing Regulation
W promulgated by the Board of Governors of the Federal Reserve System. An
affiliate is a company that controls, is controlled by, or is under common
control with an insured depository institution such as Midwest Federal Savings.
St. Joseph Bancorp, Inc. is an affiliate of Midwest Federal Savings. In general,
loan transactions between an insured depository institution and its affiliates
are subject to certain quantitative and collateral requirements. In this regard,
transactions between an insured depository institution and its affiliates are
limited to 10% of the institution’s unimpaired capital and unimpaired surplus
for transactions with any one affiliate and 20% of unimpaired capital and
unimpaired surplus for transactions in the aggregate with all affiliates.
Collateral of specific types and in specified amounts ranging from 100% to 130%
of the amount of the transaction must usually be provided by affiliates in order
to receive loans from the savings association. In addition, Office of Thrift
Supervision regulations prohibit a savings association from lending to any of
its affiliates that are engaged in activities that are not permissible for bank
holding companies and from purchasing the securities of any affiliate, other
than a subsidiary. Finally, transactions with affiliates must be consistent with
safe and sound banking practices, not involve low-quality assets and be on terms
that are as favorable to the institution as comparable transactions with
non-affiliates. The Office of Thrift Supervision requires savings associations
to maintain detailed records of all transactions with
affiliates.




Midwest
Federal Savings’ authority to extend credit to its directors, executive officers
and 10% stockholders, as well as to entities controlled by such persons, is
currently governed by the requirements of Sections 22(g) and 22(h) of the
Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other
things, these provisions generally require that extensions of credit to
insiders:


(i)
              be
      made on terms that are substantially the same as, and follow credit
      underwriting procedures that are not less stringent than, those prevailing
      for comparable transactions with unaffiliated persons and that do not
      involve more than the normal risk of repayment or present other
      unfavorable features; and(ii)
              not
      exceed certain limitations on the amount of credit extended to such
      persons, individually and in the aggregate, which limits are based, in
      part, on the amount of Midwest Federal Savings’
  capital.




In
addition, extensions of credit in excess of certain limits must be approved by
Midwest Federal Savings’ Board of Directors.




Enforcement.The Office of Thrift Supervision has primary enforcement responsibility
over federal savings institutions and has the authority to bring enforcement
action against all “institution-affiliated parties,” including stockholders, and
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 by the Office of Thrift Supervision may range from the
issuance of a capital directive or cease and desist order, to removal of
officers and/or directors of the institution and the appointment of a receiver
or conservator. Civil penalties cover a wide range of violations and actions,
and range up to $25,000 per day, unless a finding of reckless disregard is made,
in which case penalties may be as high as $1 million per day. The Federal
Deposit Insurance Corporation also has the authority to terminate deposit
insurance or to recommend to the Director of the Office of Thrift Supervision
that enforcement action be taken with respect to a particular savings
institution. If action is not taken by the Director, the Federal Deposit
Insurance Corporation has authority to take action under specified
circumstances.


24




Standards
for Safety and Soundness.Federal law requires each federal banking agency to prescribe certain
standards for all insured depository institutions. These standards relate to,
among other things, internal controls, information systems and audit systems,
loan documentation, credit underwriting, interest rate risk exposure, asset
growth, compensation, and other operational and managerial standards as the
agency deems appropriate. The federal banking agencies adopted Interagency
Guidelines Prescribing Standards for Safety and Soundness to implement the
safety and soundness standards required under federal law. 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 appropriate federal banking agency determines
that an institution fails to meet any standard prescribed by the guidelines, the
agency may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard. If an institution fails to meet these
standards, the appropriate federal banking agency may require the institution to
submit a compliance plan.




Prompt
Corrective Action Regulations.Under the prompt corrective action regulations, the Office of Thrift
Supervision is required and authorized to take supervisory actions against
undercapitalized savings associations. For this purpose, a savings association
is placed in one of the following five categories based on the savings
association’s capital:


●
              well-capitalized
      (at least 5% leverage capital, 6% Tier 1 risk-based capital and 10% total
      risk-based capital);●
              adequately
      capitalized (at least 4% leverage capital, 4% Tier 1 risk-based capital
      and 8% total risk-based capital);●
              undercapitalized
      (less than 8% total risk-based capital, 4% Tier 1 risk-based capital or 3%
      leverage capital);●
              significantly
      undercapitalized (less than 6% total risk-based capital, 3% Tier 1
      risk-based capital or 3% leverage capital); and●
              critically
      undercapitalized (less than 2% tangible
  capital).




Generally,
the banking regulator is required to appoint a receiver or conservator for a
savings association that is “critically undercapitalized” within specific time
frames. The regulations also provide that a capital restoration plan must be
filed with the Office of Thrift Supervision within 45 days of the date a savings
association receives notice that it is “undercapitalized,” “significantly
undercapitalized” or “critically undercapitalized.” The criteria for an
acceptable capital restoration plan include, among other things, the
establishment of the methodology and assumptions for attaining adequately
capitalized status on an annual basis, procedures for ensuring compliance with
restrictions imposed by applicable federal regulations, the identification of
the types and levels of activities in which the savings association will engage
while the capital restoration plan is in effect, and assurances that the capital
restoration plan will not appreciably increase the current risk profile of the
savings association. Any holding company for the savings association required to
submit a capital restoration plan must guarantee the lesser of an amount equal
to 5% of the savings association’s assets at the time it was notified or deemed
to be undercapitalized by the Office of Thrift Supervision, or the amount
necessary to restore the savings association to adequately capitalized status.
This guarantee remains in place until the Office of Thrift Supervision notifies
the savings association that it has maintained adequately capitalized status for
each of four consecutive calendar quarters, and the Office of Thrift Supervision
has the authority to require payment and collect payment under the guarantee.
Failure by a holding company to provide the required guarantee will result in
certain operating restrictions on the savings association, such as restrictions
on the ability to declare and pay dividends, pay executive compensation and
management fees, and increase assets or expand operations. The Office of Thrift
Supervision may also take any one of a number of discretionary supervisory
actions against undercapitalized associations, including the issuance of a
capital directive and the replacement of senior executive officers and
directors.


25




At
December 31, 2008, Midwest Federal Savings met the criteria for being considered
“well-capitalized.”




Insurance
of Deposit Accounts.Midwest
Federal Savings is a member of the Deposit Insurance Fund, which is administered
by the Federal Deposit Insurance Corporation. Deposit accounts at Midwest
Federal Savings are insured by the Federal Deposit Insurance Corporation,
generally up to a maximum of $100,000 for each separately insured depositor and
up to a maximum of $250,000 for self-directed retirement accounts. However, the
Federal Deposit Insurance Corporation increased the deposit insurance available
on all deposit accounts to $250,000, effective until December 31, 2009. In
addition, certain noninterest-bearing transaction accounts maintained with
financial institutions participating in the Federal Deposit Insurance
Corporation’s Temporary Liquidity Guarantee Program are fully insured regardless
of the dollar amount until December 31, 2009. Midwest Federal Savings has opted
not to participate in the Federal Deposit Insurance Corporation’s Temporary
Liquidity Guarantee Program. See “—Temporary Liquidity Guarantee
Program.”




The
Federal Deposit Insurance Corporation imposes an assessment against all
depository institutions for deposit insurance. This assessment is based on the
risk category of the institution and, prior to 2009, ranged from five to 43
basis points of the institution’s deposits. On February 27, 2009, the Federal
Deposit Insurance Corporation published a final rule raising the current deposit
insurance assessment rates to a range from 12 to 45 basis points beginning April
1, 2009. Additionally, on February 27, 2009, the Federal Deposit Insurance
Corporation issued an interim final rule that would impose a special 20 basis
points special assessment on all insured deposits as of June 30, 2009, which
would be payable on September 30, 2009. In addition, the Federal Deposit
Insurance Corporation may assess additional special premiums in the
future.




Insurance
of deposits may be terminated by the Federal Deposit Insurance Corporation upon
a finding that an institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the Federal
Deposit Insurance Corporation. We do not currently know of any practice,
condition or violation that might lead to termination of our deposit
insurance.




In
addition to the Federal Deposit Insurance Corporation assessments, the Financing
Corporation (“FICO”) is authorized to impose and collect, with the approval of
the Federal Deposit Insurance Corporation, assessments for anticipated payments,
issuance costs and custodial fees on bonds issued by the FICO in the 1980s to
recapitalize the former Federal Savings and Loan Insurance Corporation. The
bonds issued by the FICO are due to mature in 2017 through 2019. For the quarter
ended December 31, 2008, the annualized FICO assessment was equal to 1.10 basis
points for each $100 in domestic deposits maintained at an
institution.




Temporary
Liquidity Guarantee Program. On October 14, 2008, the Federal Deposit
Insurance Corporation announced a new program – the Temporary Liquidity
Guarantee Program. This program has two components. One guarantees newly issued
senior unsecured debt of a participating organization, up to certain limits
established for each institution, issued between October 14, 2008 and June 30,
2009. The Federal Deposit Insurance Corporation will pay the unpaid principal
and interest on a Federal Deposit Insurance Corporation-guaranteed debt
instrument upon the uncured failure of the participating entity to make a timely
payment of principal or interest in accordance with the terms of the instrument.
The guarantee will remain in effect until June 30, 2012. In return for the
Federal Deposit Insurance Corporation’s guarantee, participating institutions
will pay the Federal Deposit Insurance Corporation a fee based on the amount and
maturity of the debt. We opted not to participate in this component of the
Temporary Liquidity Guarantee Program.




The
other component of the program provides full federal deposit insurance coverage
for non-interest bearing transaction deposit accounts, regardless of dollar
amount, until December 31, 2009. An annualized 10 basis point assessment on
balances in noninterest-bearing transaction accounts that exceed the existing
deposit insurance limit of $250,000 will be assessed on a quarterly basis to
insured depository institutions that have not opted out of this component of the
Temporary Liquidity Guarantee Program. We opted not to participate in this
component of the Temporary Liquidity Guarantee Program.


26




U.S.
Treasury’s Troubled Asset Relief Program Capital Purchase Program. On
October 3, 2008, the Emergency Economic Stabilization Act of 2008 was enacted
that provides the U.S. Secretary of the Treasury with broad authority to
implement certain actions to help restore stability and liquidity to U.S.
markets. One of the provisions resulting from the legislation is the Troubled
Asset Relief Program Capital Purchase Program (“CPP”), which provides direct
equity investment in perpetual preferred stock by the U.S. Treasury Department
in qualified financial institutions. The program is voluntary and requires an
institution to comply with a number of restrictions and provisions, including
limits on executive compensation, stock redemptions and declaration of
dividends. The CPP provides for a minimum investment of one percent of total
risk-weighted assets and a maximum investment equal to the lesser of three
percent of total risk-weighted assets or $25 billion. Participation in the
program is not automatic and is subject to approval by the U.S. Treasury
Department. We opted not to participate in the CPP.




Prohibitions
Against Tying Arrangements.Federal savings associations are prohibited, subject to some exceptions,
from extending credit to 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.




Federal
Home Loan Bank System.Midwest Federal Savings is a member of the Federal Home Loan Bank System,
which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan
Bank System provides a central credit facility primarily for member
institutions. As a member of the Federal Home Loan Bank of Des Moines, Midwest
Federal Savings is required to acquire and hold shares of capital stock in the
Federal Home Loan Bank in an amount at least equal to 1% of the aggregate
principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, 1/20th of its borrowings from the
Federal Home Loan Bank, or 0.3% of assets, whichever is greater. As of December
31, 2008, Midwest Federal Savings was in compliance with this
requirement.




Other
Regulations




Interest
and other charges collected or contracted for by Midwest Federal Savings are
subject to state usury laws and federal laws concerning interest rates. Midwest
Federal Savings’ operations are also subject to federal laws applicable to
credit transactions, such as the:


●
              Truth-In-Lending
      Act, governing disclosures of credit terms to consumer
      borrowers;●
              Home
      Mortgage Disclosure Act, 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;●
              Equal
      Credit Opportunity Act, prohibiting discrimination on the basis of race,
      creed or other prohibited factors in extending credit;●
              Fair
      Credit Reporting Act, governing the use and provision of information to
      credit reporting agencies;●
              Fair
      Debt Collection Act, governing the manner in which consumer debts may be
      collected by collection agencies;●
              Truth
      in Savings Act; and●
              rules
      and regulations of the various federal agencies charged with the
      responsibility of implementing such federal
  laws.




The
operations of Midwest Federal Savings also are subject to the:


●
              Right
      to Financial Privacy Act, which imposes a duty to maintain confidentiality
      of consumer financial records and prescribes procedures for complying with
      administrative subpoenas of financial
records;




27




●
              Electronic
      Funds Transfer Act and Regulation E promulgated thereunder, which govern
      automatic deposits to and withdrawals from deposit accounts and customers’
      rights and liabilities arising from the use of automated teller machines
      and other electronic banking services;●
              Check
      Clearing for the 21st Century Act (also known as “Check 21”), which gives
      “substitute checks,” such as digital check images and copies made from
      that image, the same legal standing as the original paper
      check;●
              Title
      III of The Uniting and Strengthening America by Providing Appropriate
      Tools Required to Intercept and Obstruct Terrorism Act of 2001 (referred
      to as the “USA PATRIOT Act”), which significantly expanded the
      responsibilities of financial institutions, including savings and loan
      associations, in preventing the use of the American financial system to
      fund terrorist activities. Among other provisions, the USA PATRIOT Act and
      the related regulations of the Office of Thrift Supervision require
      savings associations operating in the United States to develop new
      anti-money laundering compliance programs, due diligence policies and
      controls to ensure the detection and reporting of money laundering. Such
      required compliance programs are intended to supplement existing
      compliance requirements, also applicable to financial institutions, under
      the Bank Secrecy Act and the Office of Foreign Assets Control regulations;
      and●
              The
      Gramm-Leach-Bliley Act, which places limitations on the sharing of
      consumer financial information by financial institutions with unaffiliated
      third parties. Specifically, the Gramm-Leach-Bliley Act requires all
      financial institutions offering financial products or services to retail
      customers to provide such customers with the financial institution’s
      privacy policy and provide such customers the opportunity to “opt out” of
      the sharing of certain personal financial information with unaffiliated
      third parties.




Holding
Company Regulation




General.St. Joseph Bancorp, Inc. is a non-diversified savings and loan holding
company within the meaning of the Home Owners’ Loan Act. As such, St. Joseph
Bancorp, Inc. is registered with the Office of Thrift Supervision and subject to
Office of Thrift Supervision regulations, examinations, supervision and
reporting requirements. In addition, the Office of Thrift Supervision has
enforcement authority over St. Joseph Bancorp, Inc. and its subsidiaries. Among
other things, this authority permits the Office of Thrift Supervision to
restrict or prohibit activities that are determined to be a serious risk to the
subsidiary savings institution. Unlike bank holding companies, federal savings
and loan holding companies are not subject to any regulatory capital
requirements or to supervision by the Federal Reserve
Board.




Permissible
Activities.Under present law, the business activities of St. Joseph Bancorp, Inc.
are generally limited to those activities permissible for financial holding
companies under Section 4(k) of the Bank Holding Company Act of 1956, as
amended, or for multiple savings and loan holding companies. A financial holding
company may engage in activities that are financial in nature, including
underwriting equity securities and insurance as well as activities that are
incidental to financial activities or complementary to a financial activity. A
multiple savings and loan holding company is generally limited to activities
permissible for bank holding companies under Section 4(c)(8) of the Bank Holding
Company Act, subject to the prior approval of the Office of Thrift Supervision,
and certain additional activities authorized by Office of Thrift Supervision
regulations.




Federal
law prohibits a savings and loan holding company, including St. Joseph Bancorp,
Inc., directly or indirectly, or through one or more subsidiaries, from
acquiring more than 5% of another savings institution or holding company
thereof, without prior written approval of the Office of Thrift Supervision. It
also prohibits the acquisition or retention of, with certain exceptions, more
than 5% of a nonsubsidiary company engaged in activities that are not closely
related to banking or financial in nature, or acquiring or retaining control of
an institution that is not federally insured. In evaluating applications by
holding companies to acquire savings institutions, the Office of Thrift
Supervision must consider the financial and managerial resources, future
prospects of the company and institution involved, the effect of the acquisition
on the risk to the federal deposit insurance fund, the convenience and needs of
the community and competitive factors.




28




The
Office of Thrift Supervision 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, subject to two exceptions:


(i)
              the
      approval of interstate supervisory acquisitions by savings and loan
      holding companies; and(ii)
              the
      acquisition of a savings institution in another state if the laws of the
      state of the target savings institution specifically permit such
      acquisition.




The
states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.




Federal
Securities Laws




Our
common stock is registered with the Securities and Exchange Commission under the
Securities Exchange Act of 1934. We are subject to the information, proxy
solicitation, insider trading restrictions and other requirements under the
Securities Exchange Act of 1934.




The
registration under the Securities Act of 1933 of shares of common stock issued
in the stock offering does not cover the resale of those shares. Shares of
common stock purchased by persons who are not our affiliates may be resold
without registration. Shares purchased by our affiliates will be subject to the
resale restrictions of Rule 144 under the Securities Act of 1933. If we meet the
current public information requirements of Rule 144 under the Securities Act of
1933, each affiliate of ours that complies with the other conditions of Rule
144, including those that require the affiliate’s sale to be aggregated with
those of other persons, would be able to sell in the public market, without
registration, a number of shares not to exceed, in any three-month period, the
greater of 1% of our outstanding shares, or the average weekly volume of trading
in the shares during the preceding four calendar weeks. In the future, we may
permit affiliates to have their shares registered for sale under the Securities
Act of 1933.




Sarbanes-Oxley
Act of 2002




The
Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance,
auditing and accounting, executive compensation, and enhanced and timely
disclosure of corporate information. As directed by the Sarbanes-Oxley Act, our
Chief Executive Officer and Chief Financial Officer will be required to certify
that our quarterly and annual reports do not contain any untrue statement of a
material fact. The rules adopted by the Securities and Exchange Commission under
the Sarbanes-Oxley Act have several requirements, including having these
officers certify that: they are responsible for establishing, maintaining and
regularly evaluating the effectiveness of our internal control over financial
reporting; they have made certain disclosures to our auditors and the audit
committee of the Board of Directors about our internal control over financial
reporting; and they have included information in our quarterly and annual
reports about their evaluation and whether there have been changes in our
internal control over financial reporting or in other factors that could
materially affect internal control over financial reporting. We will be subject
to further reporting and audit requirements beginning with the year ending
December 31, 2008 under the requirements of the Sarbanes-Oxley Act. We will
prepare policies, procedures and systems designed to ensure compliance with
these regulations.


ITEM
      1A.Risk
      Factors




Not
applicable to a smaller reporting company.


ITEM
      1B.Unresolved
      Staff
Comments




Not
applicable to a smaller reporting company.


ITEM
      2.Properties




We
conduct our operations from our sole office located at 1901 Frederick Avenue,
St. Joseph, Missouri 64501. In addition to our main office, which we own, we
also own a parcel of vacant land adjacent to our office which is available for
future expansion. There are no expansion plans respecting that property at the
present time. We expect to open a branch office in St. Joseph during 2010. The
net book value of our premises, land and equipment was $394,000 at December 31,
2008.




29




For
information regarding the Company’s investment in mortgages and mortgage-related
securities, see “Item 1. Business” herein.


ITEM
      3.Legal
      Proceedings




St.
Joseph Bancorp and Midwest Federal Savings are subject to various legal actions
arising in the normal course of business. At December 31, 2008, we were not
involved in any legal proceedings, the outcome of which we believe would be
material to our financial condition or results of operations.


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




No
matters were submitted to a vote of stockholders during the fourth quarter of
the year under report.




PART
II


ITEM
      5.Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Securities




(a)          Our
common stock is traded on the OTC Electronic Bulletin Board under the symbol
“SJBA”. The approximate number of holders of record of St. Joseph Bancorp’s
common stock as of March 20, 2009 was 110. Certain shares of St. Joseph Bancorp
are held in “nominee” or “street” name and accordingly, the number of beneficial
owners of such shares is not known or included in the foregoing number. There is
no market price information for our common stock for the two-year period ended
December 31, 2008. St. Joseph Bancorp began trading on the Electronic Bulletin
Board on February 2, 2009.




The
Board of Directors has the authority to declare cash dividends on shares of
common stock, subject to statutory and regulatory requirements. However, no
decision has been made with respect to the payment of cash dividends. In
determining whether and in what amount to pay a cash dividend, the Board is
expected to take into account a number of factors, including capital
requirements, our consolidated financial condition and results of operations,
tax considerations, statutory and regulatory limitations and general economic
conditions. No assurances can be given that any cash dividends will be paid or
that, if paid, will not be reduced or eliminated in the future.




Dividend
payments by St. Joseph Bancorp are dependent primarily on dividends it receives
from Midwest Federal Savings, because St. Joseph Bancorp will have no source of
income other than dividends from Midwest Federal Savings, earnings from the
investment of proceeds from the sale of shares of common stock retained by St.
Joseph Bancorp, and interest payments with respect to St. Joseph Bancorp’s loan
to the Employee Stock Ownership Plan. Federal law imposes limitations on
dividends by Federal stock savings banks. See “Supervision and
Regulation—Capital Distributions.”




At
December 31, 2008, there were no compensation plans under which equity
securities of St. Joseph Bancorp, Inc. were authorized for issuance other than
the Employee Stock Ownership Plan.




In
addition, reference is made to the “Stockholder Information—Stock Listing”
section of St. Joseph Bancorp’s 2008 Annual Report to Stockholders, which is
incorporated herein by reference.




(b)          On
September 17, 2008, St. Joseph Bancorp filed a Registration Statement on Form
S-1 with the Securities and Exchange Commission in connection with the stock
conversion of Midwest Federal Savings and the related offering of common stock
by St. Joseph Bancorp. The Registration Statement (File No. 333-153541) was
declared effective by the Securities and Exchange Commission on November 12,
2008. St. Joseph Bancorp registered 562,063 shares pursuant to the Registration
Statement, for an aggregate offering price of $5,620,630. The stock offering
commenced on November 22, 2008, and ended on January 22, 2009.




30




Sandler
O’Neill & Partners, L.P. was engaged to assist in the marketing of the
common stock. For their services, Sandler O’Neill & Partners, L.P. received
a fee of $140,000. Sandler O’Neill & Partners, L.P. was also reimbursed
$48,000 for its reasonable out-of-pocket expenses, inclusive of its legal fees
and expenses.




The
stock offering resulted in gross proceeds of $3,769,180, through the sale of
376,918 shares at a price of $10.00 per share. Expenses related to the offering
were approximately $790,000, including $188,000 paid to Sandler O’Neill &
Partners, L.P. Net proceeds of the offering were approximately $3.0
million.




St.
Joseph Bancorp contributed $1.5 million of the net proceeds of the offering to
Midwest Federal Savings. $301,530 of the net proceeds were used to fund the loan
to the employee stock ownership plan, and $1.2 million of the net proceeds were
retained by St. Joseph Bancorp. The net proceeds contributed to Midwest Federal
Savings have been invested in short term instruments and used to make loans, and
the net proceeds retained by St. Joseph Bancorp have been deposited with Midwest
Federal Savings.




(c)          During
the fourth quarter of 2008, the Company did not repurchase any shares of its
common stock.


ITEM
      6.Selected
      Financial
Data




Not
applicable to a smaller reporting company.


ITEM
      7.Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations




The
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” section of St. Joseph Bancorp’s 2008 Annual Report to Stockholders
is incorporated herein by reference.


ITEM
      7A.Quantitative
      and Qualitative Disclosures About Market
  Risk




The
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” section of St. Joseph Bancorp’s 2008 Annual Report to Stockholders
is incorporated herein by reference.


ITEM
      8.Financial
      Statements and Supplementary
Data




The
consolidated financial statements included in St. Joseph Bancorp’s 2008 Annual
Report to Stockholders are incorporated herein by reference.


ITEM
      9.Changes
      In and Disagreements With Accountants on Accounting and Financial
      Disclosure




None.


ITEM
      9A. (T)Controls
      and
Procedures




(a)          Evaluation
of disclosure controls and procedures.




Under
the supervision and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934) as of the end of the period covered by this report. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, as of the end of the period covered by this report, our disclosure
controls and procedures were effective to ensure that information required to be
disclosed in the reports that the Company files or submits under the Securities
Exchange Act of 1934, is recorded, processed, summarized and reported, within
the time periods specified in the SEC’s rules and forms.




31




(b)          Management’s
Report on Internal Control over Financial Reporting




This
Annual Report does not include a report of management’s assessment regarding
internal control over financial reporting or an attestation report of the
company’s registered public accounting firm due to a transition period
established by rules of the Securities and Exchange Commission for newly public
companies.




(c)          Changes
in internal control.




There
has been no change in the Company’s internal control over financial reporting
during the Company’s fourth quarter of fiscal year 2008 that has materially
affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting.


ITEM
      9B.Other
      Information




None.




PART
III


ITEM
      10.Directors,
      Executive Officers, and Corporate
  Governance




St.
Joseph Bancorp has adopted a Code of Ethics that applies to St. Joseph Bancorp’s
principal executive officer, principal financial officer, principal accounting
officer or controller or persons performing similar functions. The Code of
Ethics is filed as Exhibit 14 to St. Joseph Bancorp’s Form 10-K for the year
ended December 31, 2008.




Information
concerning Directors and executive officers of St. Joseph Bancorp is
incorporated herein by reference from our definitive Proxy Statement (the “Proxy
Statement”), specifically the section captioned “Proposal I—Election of
Directors.” Information concerning corporate governance matters is incorporated
herein by reference from our Proxy Statement, specifically the section captioned
“Proposal I – Election of Directors.”


ITEM
      11.Executive
      Compensation




Information
concerning executive compensation is incorporated herein by reference from our
Proxy Statement, specifically the section captioned “Proposal I — Election of
Directors.”


ITEM
      12.Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder
Matters




Information
concerning security ownership of certain owners and management is incorporated
herein by reference from our Proxy Statement, specifically the sections
captioned “Voting Securities and Principal Holders Thereof” and “Proposal I —
Election of Directors.”


ITEM
      13.Certain
      Relationships and Related Transactions, and Director
      Independence




Information
concerning relationships and transactions, and director independence, is
incorporated herein by reference from our Proxy Statement, specifically the
sections captioned “Transactions with Certain Related Persons” and “Board
Independence,” respectively.


ITEM
      14.Principal
      Accountant Fees and
Services




Information
concerning principal accountant fees and services is incorporated herein by
reference from our Proxy Statement, specifically the section captioned “Proposal
II—Ratification of Appointment of Independent Registered Public Accounting
Firm.”




32




PART
IV


ITEM
      15.Exhibits
      and Financial Statement
Schedules




Financial
      Statements(A)
                      Report
      of Independent Registered Public Accounting Firm(B)
                      Consolidated
      Balance Sheets(C)
                      Consolidated
      Statements of Income(D)
                      Consolidated
      Statements of Equity(E)
                      Consolidated
      Statements of Cash Flows(F)
                      Notes
      to Consolidated Financial StatementsFinancial
      Statement SchedulesNone.Exhibits3.1
                      Articles
      of Incorporation of St. Joseph Bancorp*3.2
                      Bylaws
      of St. Joseph Bancorp, as amended **4
                      Form
      of Common Stock Certificate of St. Joseph Bancorp*10.1
                      Form
      of Employee Stock Ownership Plan*10.2
                      Form
      of Employment Agreement with Ralph Schank*13
                      Annual
      Report to Stockholders14
                      Code
      of Ethics21
                      Subsidiaries
      of Registrant*31.1
                      Certification
      of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities
      Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of
      the Sarbanes-Oxley Act of 200231.2
                      Certification
      of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities
      Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of
      the Sarbanes-Oxley Act of 200232
                      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







*
                    Incorporated
      by reference to the Registration Statement on Form S-1 of St. Joseph
      Bancorp (file no. 333-153541), originally filed with the Securities and
      Exchange Commission on September 17, 2008.**
                    Incorporated
      by reference to the Form 8-K of St. Joseph Bancorp (file no. 000-53573),
      filed with the Securities and Exchange Commision on March 31,
    2009.


33




SIGNATURES




Pursuant
to the requirements of Section 13 of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.


ST.
      JOSEPH BANCORP, INC.Date:
      March 30, 2009
            
            By:
            /s/
      Ralph E. SchankRalph
      E. SchankPresident
      and Chief Executive Officer(Duly
      Authorized Representative)




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


Signatures
            
            
            
            
            Title
            
            
            
            Date/s/
      Ralph E. Schank
            
            
            President
      and Chief Executive
              Officer
      (Principal Executive and
              Financial
      Officer), Director
            
            March
      30, 2009Ralph
      E. Schank/s/
      Barbara Elder
            
            
            Chief
      Accounting Officer(Principal Accounting Officer)
            
            March
      30, 2009Barbara
      Elder/s/
      Kirby O. Brooner
            
            
            Director
            
            March
      30, 2009Kirby
      O. Brooner/s/
      Billy D. Cole
            
            
            Executive
      Vice President and Director
            
            March
      30, 2009Billy
      D. Cole/s/
      George T. Hopkins
            
            
            Director
            
            March
      30, 2009George
      T. Hopkins/s/
      James L. Rockwell, Jr.
            
            
            Director
            
            March
      30, 2009James
      L. Rockwell, Jr./s/
      John R. Wray
            
            
            Director
            
            March
      30, 2009John
      R. Wray








34