FIVE-YEAR
    CONSOLIDATED FINANCIAL HIGHLIGHTS   Selected Operations Data:

Year Ended December 31,(Dollars in thousands, except per share data)

2009


2008


2007


2006


2005Total interest income

$
57,771



66,512



77,523



67,527



60,281Total interest expense


23,868



32,796



38,823



28,841



24,511Net interest income


33,903



33,716



38,700



38,686



35,770Provision for loan losses


26,699



26,696



3,898



8,878



2,674Net interest income after provision for loan losses


7,204



7,020



34,802



29,808



33,096Fees and service charges


4,137



4,269



3,139



3,111



2,719Loan servicing fees


1,042



955



1,054



1,172



1,210Securities gains (losses), net


5



479



0



48



(21
)Gain on sales of loans


2,273



651



1,514



1,255



1,853Other non-interest income


625



749



1,205



856



748Total non-interest income


8,082



7,103



6,912



6,442



6,509Total non-interest expense


31,689



29,234



23,140



22,596



21,801Income (loss) before income tax expense (benefit)


(16,403
)


(15,111
)


18,574



13,654



17,804Income tax expense (benefit)


(5,607
)


(4,984
)


7,300



5,226



6,736Net income (loss)


(10,796
)


(10,127
)


11,274



8,428



11,068Preferred stock dividends and discount


(1,747
)


(37
)


0



0



0Net income (loss) available to common shareholders

$
(12,543
)


(10,164
)


11,274



8,428



11,068Basic earnings (loss) per common share

$
(3.39
)


(2.78
)


3.02



2.20



2.89Diluted earnings (loss) per common share


(3.39
)


(2.78
)


2.89



2.10



2.77Cash dividends per common share


0.00



0.75



1.00



0.98



0.92   Selected Financial Condition
    Data:

December 31,(Dollars in thousands, except per share data)

2009


2008


2007


2006


2005Total assets

$
1,036,241



1,145,480



1,117,054



977,789



991,237Securities available for sale


159,602



175,145



186,188



126,140



119,659Loans held for sale


2,965



2,548



3,261



1,493



1,435Loans receivable, net


799,256



900,889



865,088



768,232



785,678Deposits


796,011



880,505



888,118



725,959



731,537FHLB advances and Federal Reserve borrowings


132,500



142,500



112,500



150,900



160,900Stockholders equity


99,938



112,213



98,128



93,142



90,728Book value per common share


17.94



21.31



23.50



21.58



20.59Number of full service offices


14



16



15



14



13Number of loan origination offices


2



2



2



2



3Key
    Ratios(1)Stockholders equity to total assets at year end


9.64
%


9.80
%


8.78
%


9.53
%


9.15
%Average stockholders equity to average assets


9.73



8.58



8.89



9.70



9.05Return (loss) on stockholders equity
    (ratio of net income (loss) to average equity)


(10.33
)


(10.61
)


11.53



8.85



12.42Return (loss) on assets
      (ratio of net income (loss) to average assets)


(1.00
)


(0.91
)


1.03



0.86



1.12Dividend payout ratio
      (ratio of dividends paid to net income (loss))


NM



NM



34.72



42.61



38.02   (1)
    
    Average balances were calculated
    based upon amortized cost without the market value impact of ASC
    320.NM  Not meaningful   3




---



##### 



MANAGEMENT
    DISCUSSION AND ANALYSIS
  This Annual Report, other reports filed by the Company with
    the Securities and Exchange Commission, and the Companys
    proxy statement may contain forward-looking statements within
    the meaning of the Private Securities Litigation Reform Act of
    1995. These statements are often identified by such
    forward-looking terminology as expect,
    intent, look, believe,
    anticipate, estimate,
    project, seek, may,
    will, would, could,
    should, trend, target, and
    goal or similar statements or variations of such
    terms and include, but are not limited to those relating to the
    adequacy of available liquidity to the Bank, the Companys
    liquidity requirements, changes in the size of the Banks
    loan portfolio, future losses on non-performing loans, the
    future outlook for the Company, and the Companys
    compliance with regulatory standards. A number of factors could
    cause actual results to differ materially from the
    Companys assumptions and expectations. These include but
    are not limited to the adequacy and marketability of real estate
    securing loans to borrowers, possible legislative and regulatory
    changes and adverse economic, business and competitive
    developments such as shrinking interest margins; reduced
    collateral values; deposit outflows; reduced demand for
    financial services and loan products; changes in accounting
    policies and guidelines, or monetary and fiscal policies of the
    federal government or tax laws; international economic
    developments, changes in credit or other risks posed by the
    Companys loan and investment portfolios; technological,
    computer-related or operational difficulties; adverse changes in
    securities markets; results of litigation; the Companys
    use of the proceeds from the sale of securities to the
    U.S. Treasury Department or other significant
    uncertainties. Additional factors that may cause actual results
    to differ from the Companys assumptions and expectations
    include those set forth in the Companys most recent
    filings on
    Form 10-K
    with the Securities and Exchange Commission. All forward-looking
    statements are qualified by, and should be considered in
    conjunction with, such cautionary statements. For additional
    discussion of the risks and uncertainties applicable to the
    Company, see the Risk Factors section of the
    Companys Annual Report on
    Form 10-K
    for the year ended December 31, 2009.
  Overview
  4




---



##### 



Critical
    Accounting Estimates
 and/or
  Allowance
    for Loan Losses and Related Provision
    Income
    Taxes
  5




---



##### 



MANAGEMENT
    DISCUSSION AND ANALYSIS
      Results
    of Operations
   Net
    Interest Income
   6




---



##### 



Year Ended December 31,2009


2008


2007Average


Interest


Average


Average


Interest


Average


Average


Interest


AverageOutstanding


Earned/


Yield/


Outstanding


Earned/


Yield/


Outstanding


Earned/


Yield/(Dollars in thousands)

Balance


Paid


Rate


Balance


Paid


Rate


Balance


Paid


RateInterest-earning assets:Securities available for sale:Mortgage-backed and related securities

$
63,725



2,768



4.34
%

$
35,494



1,615



4.55
%

$
15,502



727



4.69
%Other marketable securities


82,758



3,039



3.67



119,065



5,775



4.85



177,256



9,153



5.16Loans held for sale


3,161



163



5.16



2,711



166



6.12



2,391



148



6.19Loans receivable,
    net(1)(2)


848,696



51,713



6.09



887,836



58,505



6.59



827,597



65,967



7.97FHLB stock


7,286



87



1.19



7,192



253



3.52



6,627



341



5.15Other, including cash equivalents


12,212



1



0.01



16,011



198



1.24



24,820



1,187



4.78Total interest-earning assets

$
1,017,838



57,771



5.68


$
1,068,309



66,512



6.23


$
1,054,193



77,523



7.35Interest-bearing liabilities:NOW accounts

$
106,360



132



0.12
%

$
126,118



1,542



1.22
%

$
115,572



3,495



3.02
%Passbooks


30,401



38



0.12



40,229



412



1.02



40,401



551



1.36Money market accounts


105,854



1,430



1.35



120,333



2,821



2.34



216,175



8,045



3.72Certificate accounts


257,085



7,652



2.98



247,454



9,582



3.87



236,415



10,577



4.47Brokered deposits


232,829



8,327



3.58



287,771



12,799



4.45



210,164



10,734



5.11FHLB advances and Federal Reserve borrowings


155,681



6,289



4.04



123,938



5,639



4.55



116,721



5,420



4.64Other interest-bearing liabilities


1,219



0



0.02



1,135



1



0.08



939



1



0.09Total interest-bearing liabilities

$
889,429










$
946,978










$
936,387Noninterest checking


70,364











56,164











55,002Total interest-bearing liabilities and noninterest bearing
    deposits

$
959,793



23,868



2.49


$
1,003,142



32,796



3.27


$
991,389



38,823



3.92Net interest income






33,903











33,716











38,700Net interest rate spread










3.19
%










2.96
%










3.43
%Net earning assets

$
58,045










$
65,167










$
62,804Net interest margin










3.33
%










3.16
%










3.67
%Average interest-earning assets to average interest-bearing
    liabilities and noninterest bearing deposits






106.05
%










106.50
%










106.33
%   (1)
    
    Tax exempt income was not
    significant; therefore, the yield was not presented on a tax
    equivalent basis for any of the years presented. The tax-exempt
    income was $0.7 million for 2009 and $1.0 million for
    both 2008 and 2007.(2)
    
    Calculated net of deferred loan
    fees, loan discounts, loans in process and loss reserve.   7




---



##### 



MANAGEMENT
    DISCUSSION AND ANALYSIS
    Year Ended December 31,2009 vs. 2008





2008 vs. 2007Increase (Decrease)


Total


Increase (Decrease)


TotalDue to


Increase


Due to


Increase(Dollars in thousands)

Volume(1)


Rate(1)


(Decrease)


Volume(1)


Rate(1)


(Decrease)Interest-earning assets:Securities available for sale:Mortgage-backed and related securities

$
1,285



(132
)


1,153



938



(50
)


888Other marketable securities


(1,761
)


(975
)


(2,736
)


(3,005
)


(373
)


(3,378
)Loans held for sale


27



(30
)


(3
)


20



(2
)


18Loans receivable, net


(2,510
)


(4,282
)


(6,792
)


4,600



(12,061
)


(7,461
)Cash equivalents


(47
)


(150
)


(197
)


(421
)


(568
)


(989
)FHLB stock


3



(169
)


(166
)


29



(117
)


(88
)Total interest-earning assets

$
(3,003
)


(5,738
)


(8,741
)


2,161



(13,171
)


(11,010
)Interest-bearing liabilities:NOW accounts

$
(405
)


(1,005
)


(1,410
)


320



(2,272
)


(1,952
)Passbooks


(101
)


(273
)


(374
)


(2
)


(137
)


(139
)Money market accounts


(422
)


(969
)


(1,391
)


(4,855
)


(368
)


(5,223
)Certificates


373



(2,303
)


(1,930
)


477



(1,473
)


(996
)Brokered deposits


(2,446
)


(2,026
)


(4,472
)


3,585



(1,520
)


2,065FHLB advances and Federal Reserve borrowings


426



112



538



330



(111
)


219Other interest-bearing liabilities


127



(16
)


111



0



0



0Total interest-bearing liabilities


(2,448
)


(6,480
)


(8,928
)


(145
)


(5,881
)


(6,026
)Increase (decrease) in net interest income

$
(555
)


742



187



2,306



(7,290
)


4,984   (1)
    
    For purposes of this table, changes
    attributable to both rate and volume which cannot be segregated,
    have been allocated proportionately to the change due to volume
    and the change due to rate. 8




---



##### 



At December 31,
    2009
   Weighted average yield on:Securities available for sale:Mortgage-backed and related securities

4.26%Other marketable securities

2.33Loans held for sale

5.29Loans receivable, net

5.91Federal Home Loan Bank stock

2.00Other interest-earnings assets

0.01Combined weighted average yield on interest-earning assets

5.33Weighted average rate on:NOW accounts

0.08%Passbooks

0.13Money market accounts

1.25Certificates

2.80Federal Home Loan Bank advances

4.59Combined weighted average rate on interest-bearing liabilities

2.21Interest rate spread

3.12   Provision
    for Loan Losses
  (Dollars in thousands)Non-performing loansDecember 31, 2008

$
64,173Classified as non-performing


44,632Charge offs


(25,031
)Principal payments received


(4,322
)Classified as accruing


(1,106
)Transferred to real estate owned


(17,219
)December 31, 2009

$
61,127Foreclosed and repossessed asset activityDecember 31, 2008

$
10,583Transferred from non-performing loans


17,219Other foreclosures/repossessions


1,237Real estate sold


(9,819
)Net gain on sale of assets


1,436Write downs


(4,394
)December 31, 2009

$
16,262   9




---



##### 



MANAGEMENT
    DISCUSSION AND ANALYSIS
     (Dollars in thousands)

2009


2008Balance at January 1,

$
21,257



12,438Provision


26,699



26,696Charge offs:Commercial


(9,421
)


(13,784
)Commercial real estate


(13,548
)


(3,454
)Consumer


(1,980
)


(612
)One-to-four family


(82
)


(78
)Recoveries


887



51Balance at December 31,

$
23,812



21,257     Non-Interest
    Income
  PercentageYear Ended December 31,


Increase (Decrease)(Dollars in thousands)

2009


2008


2007


2009/2008


2008/2007Fees and service charges

$
4,137



4,269



3,139



(3.1
)%


36.0
%Loan servicing fees


1,042



955



1,054



9.1



(9.4
)Securities gains, net


5



479



0



(99.0
)


N/AGain on sales of loans


2,273



651



1,514



249.2



(57.0
)Other non-interest income


625



749



1,205



(16.6
)


(37.8
)Total non-interest income

$
8,082



7,103



6,912



13.8



2.8      Non-Interest
    Expense
  PercentageYear Ended December 31,


Increase (Decrease)(Dollars in thousands)

2009


2008


2007


2009/2008


2008/2007Compensation and benefits

$
13,432



12,464



12,491



7.8
%


(0.2
)%Losses (gains) on real estate owned


3,873



(187
)


(682
)


2,171.1



72.6Occupancy


4,084



4,521



4,467



(9.7
)


1.2Deposit insurance


1,973



678



113



191.0



500.0Data processing


1,182



1,731



1,267



(31.7
)


36.6Goodwill impairment charge


0



3,801



0



N/A



N/AOther


7,145



6,226



5,484



14.8



13.5Total non-interest expense

$
31,689



29,234



23,140



8.4



26.3     10




---



##### 



Income
    Taxes
    Net
    Loss Available to Common Shareholders
    Comparison
    of 2008 With 2007
    11




---



##### 



MANAGEMENT
    DISCUSSION AND ANALYSIS
       12




---



##### 



Financial
    Condition
 Loans
    Receivable, Net
    December 31,2009


2008


2007


2006


2005(Dollars in thousands)

Amount


Percent


Amount


Percent


Amount


Percent


Amount


Percent


Amount


PercentReal Estate Loans:One-to-four
    family

$
144,631



17.54
%

$
161,989



17.51
%

$
152,974



17.33
%

$
134,269



17.10
%

$
127,075



15.82
%Multi-family


59,266



7.18



29,292



3.17



29,073



3.29



29,863



3.80



40,753



5.07Commercial


312,714



37.92



325,304



35.16



281,822



31.92



294,490



37.49



260,268



32.40Construction or development


40,412



4.90



108,283



11.70



111,034



12.58



60,178



7.66



80,342



10.00Total real estate loans


557,023



67.54



624,868



67.54



574,903



65.12



518,800



66.05



508,438



63.29Other Loans:Consumer Loans:Automobile


902



0.11



1,333



0.14



1,730



0.20



3,093



0.39



5,461



0.68Home equity line


50,369



6.11



52,243



5.65



51,317



5.81



54,247



6.91



61,011



7.60Home equity


21,088



2.55



22,912



2.48



20,254



2.30



21,263



2.71



19,076



2.37Mobile home


977



0.12



1,316



0.14



1,699



0.19



2,052



0.26



2,299



0.29Land/lot loans


3,190



0.39



2,969



0.32



4,151



0.47



5,501



0.70



9,487



1.18Other


5,689



0.69



5,828



0.63



5,758



0.65



3,692



0.47



3,564



0.44Total consumer loans


82,215



9.97



86,601



9.36



84,909



9.62



89,848



11.44



100,898



12.56Commercial business loans


185,525



22.49



213,775



23.10



222,959



25.26



176,770



22.51



193,962



24.15Total other loans


267,740



32.46



300,376



32.46



307,868



34.88



266,618



33.95



294,860



36.71Total loans


824,763



100.00
%


925,244



100.00
%


882,771



100.00
%


785,418



100.00
%


803,298



100.00
%Less:Loans in process **


0







0







3,011







5,252







7,008Unamortized (premiums) discounts


177







569







(11
)






40







190Net deferred loan fees


1,518







2,529







2,245







2,021







1,644Allowance for losses


23,812







21,257







12,438







9,873







8,778Total loans receivable, net

$
799,256






$
900,889






$
865,088






$
768,232






$
785,678   **
    
    Core systems converted in 2008,
    thus loans in process are reflected in loan amounts in table.    13




---



##### 



MANAGEMENT
    DISCUSSION AND ANALYSIS
   One-to-four one-to-four
  and/or
    Allowance
    for Loan Losses
   14




---



##### 



December 31,(Dollars in thousands)

2009


2008


2007


2006


2005Balance at beginning of year

$
21,257



12,438



9,873



8,778



8,996Provision for losses


26,699



26,696



3,898



8,878



2,674Charge-offs:One-to-four
    family


(82
)


(78
)


(42
)


(150
)


(234
)Consumer


(1,980
)


(612
)


(840
)


(269
)


(228
)Commercial business


(9,421
)


(13,784
)


(554
)


(188
)


(1,356
)Commercial real estate


(13,548
)


(3,454
)


(245
)


(7,242
)


(1,259
)Recoveries


887



51



348



66



185Net charge-offs


(24,144
)


(17,877
)


(1,333
)


(7,783
)


(2,892
)Balance at end of year

$
23,812



21,257



12,438



9,873



8,778Year end allowance for loan losses as a percent of year end
    gross loan balance


2.89
%


2.30
%


1.41
%


1.26
%


1.09
%Ratio of net loan charge-offs to average loans outstanding


2.83



1.98



0.16



0.98



0.36       December 31,2009


2008


2007


2006


2005Percent





Percent





Percent





Percent





PercentAllocated


of loans


Allocated


of loans


Allocated


of loans


Allocated


of loans


Allocated


of loansallowance


in each


allowance


in each


allowance


in each


allowance


in each


allowance


in eachas a %


category


as a %


category


as a %


category


as a %


category


as a %


categoryof loan


to total


of loan


to total


of loan


to total


of loan


to total


of loan


to totalcategory


loans


category


loans


category


loans


category


loans


category


loansReal estate loans:One-to-four
    family


0.69
%


17.54
%


1.75
%


17.51
%


0.27
%


17.33
%


0.22
%


17.10
%


0.21
%


15.82
%Multi-family


1.79



7.18



0.97



3.17



1.05



3.29



1.49



3.80



1.56



5.07Commercial real estate


3.83



37.92



3.45



35.16



2.10



31.92



1.67



37.49



1.32



32.40Construction or development


3.21



4.90



1.45



11.70



1.34



12.58



1.16



7.66



1.14



10.00Consumer loans


1.55



9.97



1.83



9.36



1.70



9.62



1.59



11.44



0.88



12.56Commercial business loans


3.88



22.49



1.75



23.10



1.28



25.26



1.18



22.51



1.36



24.15Total


2.89



100.00
%


2.30



100.00
%


1.41



100.00
%


1.26



100.00
%


1.09



100.00
%    one-to-four
  Allowance
    for Real Estate Losses
  15




---



##### 



MANAGEMENT
    DISCUSSION AND ANALYSIS
    Non-performing
    Assets
      December 31,(Dollars in thousands)

2009


2008


2007


2006


2005Non-accruing loans:Real estate:One-to-four
    family

$
2,132



7,251



1,196



1,364



626Commercial real estate


37,122



46,953



15,641



5,296



948Consumer


4,086



5,298



1,094



1,254



496Commercial business


17,787



4,671



1,723



394



259Total


61,127



64,173



19,654



8,308



2,329Other assets


0



25



34



44



178Foreclosed and repossessed assets:Real estate:One-to-four
    family


1,011



258



901



1,422



565Commercial real estate


15,246



10,300



1,313



650



750Consumer


5



0



33



0



61Total


16,262



10,558



2,247



2,072



1,376Total non-performing assets

$
77,389


$
74,756


$
21,935


$
10,424


$
3,883Total as a percentage of total assets


7.47
%


6.53
%


1.96
%


1.07
%


0.39
%Total non-performing loans

$
61,127


$
64,173


$
19,654


$
8,308


$
2,329Total as a percentage of total loans receivable, net


7.65
%


7.12
%


2.27
%


1.08
%


0.30
%Allowance for loan losses to non-performing loans


38.95
%


33.12
%


63.28
%


118.84
%


376.88
%    16




---



##### 



(Dollars in thousands)
  Principal Amount



Principal Amount



Principal Amountof Loans at



of Loans at



of Loans at# of

December 31,

# of

December 31,

# of

December 31,Property Type

relationships

2009

relationships

2008

relationships

2007Residential developments


7


$
12,030



6


$
17,681



5


$
11,496One to-four
    family


2



3,088



4



898



1



300Condominiums


0



0



1



5,440



1



2,547Hotels


1



4,999



1



4,999



0



0Alternative fuel plants


2



12,834



2



12,492



0



0Shopping centers/retail


2



1,136



2



1,237



1



963Elderly care facilities


0



0



3



4,037



0



0Restaurants/bar


4



2,436



0



0



0



0Office building


1



599



1



169



5



33519


$
37,122



20


$
46,953



13


$
15,641     non-performing
  Liquidity
    and Capital Resources
    17




---



##### 



MANAGEMENT
    DISCUSSION AND ANALYSIS
             18




---



##### 



Contractual
    Obligations and Commercial Commitments
   Payments Due by Period(Dollars in thousands)

Total


Less than 1 Year


1-3 Years


4-5 Years


After 5 YearsContractual Obligations:Total borrowings

$
132,500



10,000



52,500



70,000



0Annual rental commitments under non-cancellable operating leases


1,509



830



590



35



54$
134,009



10,830



53,090



70,035



54   Amount of Commitments -Expiring by PeriodOther Commercial Commitments:Commercial lines of credit

$
46,995



24,821



6,818



3,356



12,000Commitments to lend


16,728



9,866



3,663



1,221



1,928Standby letters of credit


3,823



3,575



247



1



0$
67,546



38,262



10,728



4,628



13,928    Regulatory
    Capital Requirements
   Dividends
  19




---



##### 



MANAGEMENT
    DISCUSSION AND ANALYSIS
    Impact
    of Inflation and Changing Prices
   New
    Accounting Pronouncements
 The FASB Accounting Standards Codification and the Hierarchy
    of Generally Accepted Accounting Principles  a
    replacement of FASB Statement No. 162, The Hierarchy of
    Generally Accepted Accounting Principles
 Amendments to FASB Interpretation No. 46(R).
 Accounting for Transfers of Financial Assets  an
    amendment of FASB Statement No. 140. Consolidation of Variable Interest Entities,
 Subsequent Events. 10-K
 FAS No. 115-2 FAS 124-2 Recognition and Presentation of
    Other-Than-Temporary
    Impairments FAS No. 115-2 FAS 124-2). other-than-temporary other-than-temporary
 20




---



##### 



other-than-temporary FAS No. 115-2 FAS 124-2
  Market
    Risk
  Rate Shock Table
      (Dollars in thousands)

Market ValueBasis point change in interest rates

-100


0


+100


+200Total
    market-risk
    sensitive assets

$
1,012,533



1,000,314



986,386



971,013Total
    market-risk
    sensitive liabilities


928,930



914,774



900,514



886,654Off-balance-sheet
    financial instruments


90



0



(263)



(490)Net market risk

$
83,693



85,540



85,609



83,869Percentage change from current market value


(2.16)%



0.00%



0.08%



(1.95)%      21




---



##### 



MANAGEMENT
    DISCUSSION AND ANALYSIS
    Asset/Liability
    Management
    Rate Shock Table(Dollars in thousands)Rate Shock

Net Interest

Percentin Basis Points

Change

Change+200



$2,624



8.18
%+100



1,417



4.420



0



0.00-100



(2,142
)


(6.67
)      one-to-four
  Off-Balance
    Sheet Arrangements
  22




---



##### 



CONSOLIDATED
    BALANCE SHEETS   December 31 (Dollars in thousands)

2009


2008ASSETSCash and cash equivalents

$
16,418



15,729Securities available for sale:Mortgage-backed and related securities 
    (amortized cost $51,840 and $76,166)


53,559



77,327Other marketable securities 
    (amortized cost $105,723 and $95,445)


106,043



97,818159,602



175,145Loans held for sale


2,965



2,548Loans receivable, net


799,256



900,889Accrued interest receivable


4,024



5,568Real estate, net


16,257



10,558Federal Home Loan Bank stock, at cost


7,286



7,286Mortgage servicing rights, net


1,315



728Premises and equipment, net


10,766



13,972Prepaid expenses and other assets


6,762



4,408Deferred tax assets, net


11,590



8,649Total assets

$
1,036,241



1,145,480LIABILITIES AND
    STOCKHOLDERS EQUITYDeposits

$
796,011



880,505Federal Home Loan Bank advances and Federal Reserve borrowings


132,500



142,500Accrued interest payable


2,108



6,307Customer escrows


1,427



639Accrued expenses and other liabilities


4,257



3,316Total liabilities


936,303



1,033,267Commitments and contingenciesStockholders equity:Serial preferred stock: ($.01 par value) 
    Authorized 500,000 shares; issued shares 26,000


23,785



23,384Common stock ($.01 par value):Authorized 11,000,000; issued shares 9,128,662


91



91Additional paid-in capital


58,576



60,687Retained earnings, subject to certain restrictions


86,115



98,067Accumulated other comprehensive income


1,230



2,091Unearned employee stock ownership plan shares


(3,577
)


(3,771
)Treasury stock, at cost 4,883,378 and 4,961,032 shares


(66,282
)


(68,336
)Total stockholders equity


99,938



112,213Total liabilities and stockholders equity

$
1,036,241



1,145,480   See accompanying notes to
    consolidated financial statements.
 23




---



##### 



CONSOLIDATED
    STATEMENTS OF INCOME
   Years ended December 31 (Dollars in thousands)

2009


2008


2007Interest income:Loans receivable

$
51,876



58,671



66,115Securities available for sale:Mortgage-backed and related


2,768



1,615



727Other marketable


3,039



5,775



9,153Cash equivalents


1



198



1,187Other


87



253



341Total interest income


57,771



66,512



77,523Interest expense:Deposits


17,579



27,157



33,403Federal Home Loan Bank advances and Federal Reserve borrowings


6,289



5,639



5,420Total interest expense


23,868



32,796



38,823Net interest income


33,903



33,716



38,700Provision for loan losses


26,699



26,696



3,898Net interest income after provision for loan losses


7,204



7,020



34,802Non-interest income:Fees and service charges


4,137



4,269



3,139Loan servicing fees


1,042



955



1,054Securities gains, net


5



479



0Gain on sales of loans


2,273



651



1,514Other


625



749



1,205Total non-interest income


8,082



7,103



6,912Non-interest expense:Compensation and benefits


13,432



12,464



12,491Losses (gains) on real estate owned


3,873



(187
)


(682
)Occupancy


4,084



4,521



4,467Deposit insurance


1,973



678



113Data processing


1,182



1,731



1,267Goodwill impairment charge


0



3,801



0Other


7,145



6,226



5,484Total noninterest expense


31,689



29,234



23,140Income (loss) before income tax expense (benefit)


(16,403
)


(15,111
)


18,574Income tax expense (benefit)


(5,607
)


(4,984
)


7,300Net income (loss)

$
(10,796
)


(10,127
)


11,274Preferred stock dividends and discount


(1,747
)


(37
)


0Net income (loss) available to common stockholders

$
(12,543
)


(10,164
)


11,274Basic income (loss) per common share

$
(3.39
)


(2.78
)


3.02Diluted income (loss) per common share

$
(3.39
)


(2.78
)


2.89   See accompanying notes to
    consolidated financial statements.
 24




---



##### 



CONSOLIDATED
    STATEMENTS OF STOCKHOLDERS EQUITY 
    AND COMPREHENSIVE INCOME
   Accumulated


UnearnedOther


EmployeeAdditional





Comprehensive


Stock





TotalPreferred


Common


Paid-in


Retained


Income


Ownership


Treasury


Stockholders(Dollars in thousands)

Stock


Stock


Capital


Earnings


(Loss)


Plan


Stock


EquityBalance, December 31, 2006

$
0



91



57,914



103,643



(284
)


(4,158
)


(64,064
)


93,142Net income














11,274















11,274Other comprehensive income, net of tax:Net unrealized gains on securities available for sale


















1,451











1,451Total comprehensive income






























12,725Treasury stock purchases


























(4,913
)


(4,913
)ASC 740  cumulative effect adjustment














(250
)














(250
)Employee stock options exercised










(246
)














385



139Tax benefits of exercised stock options










99



















99Unearned compensation restricted stock awards










(469
)














469



0Restricted stock awards forfeited










34















(34
)


0Stock compensation expense










44



















44Amortization of restricted stock awards










334



















334Earned employee stock ownership plan shares










339











193







532Common stock dividends paid














(3,724
)














(3,724
)Balance, December 31, 2007

$
0



91



58,049



110,943



1,167



(3,965
)


(68,157
)


98,128Net loss














(10,127
)














(10,127
)Other comprehensive loss, net of tax:Net unrealized gains on securities available for sale


















924











924Total comprehensive loss






























(9,203
)Preferred stock and warrant issued amortization


23,384







2,616



















26,000Treasury stock purchases


























(723
)


(723
)Unearned compensation restricted stock awards










(550
)














550



0Restricted stock awards forfeited










6















(6
)


0Stock compensation expense










33



















33Amortization of restricted stock awards










415



















415Earned employee stock ownership plan shares










118











194







312Common stock dividends paid














(2,749
)














(2,749
)Balance, December 31, 2008

$
23,384



91



60,687



98,067



2,091



(3,771
)


(68,336
)


112,213Net loss














(10,796
)














(10,796
)Other comprehensive loss, net of tax:Net unrealized losses on securities available for sale


















(861
)










(861
)Total comprehensive loss






























(11,657
)Preferred stock discount amortization


401







(401
)


















0Unearned compensation restricted stock awards










(2,181
)














2,181



0Restricted stock awards forfeited










127















(127
)


0Restricted stock awards dividend forfeited














7















7Stock compensation expense










27



















27Amortization of restricted stock awards










373



















373Earned employee stock ownership plan shares










(56
)










194







138Preferred stock dividends paid














(1,163
)














(1,163
)Balance, December 31, 2009

$
23,785



91



58,576



86,115



1,230



(3,577
)


(66,282
)


99,938   See accompanying notes to
    consolidated financial statements.
 25




---



##### 



CONSOLIDATED
    STATEMENTS OF CASH FLOWS
   Years Ended December 31 (Dollars in thousands)

2009


2008


2007Cash flows from operating activities:Net income (loss)

$
(10,796
)


(10,127
)


11,274Adjustments to reconcile net income (loss) to cash provided by
    operating activities:Provision for loan losses


26,699



26,696



3,898Provision for real estate losses


4,877



0



0Depreciation


1,837



1,796



1,903Amortization of premiums (discounts), net


465



672



(2,558
)Amortization of deferred loan fees


(972
)


(808
)


(1,182
)Amortization of core deposit intangible


0



0



106Amortization of mortgage servicing rights


556



570



706Capitalized mortgage servicing rights


(1,143
)


(28
)


(18
)Deferred income tax benefit


(2,516
)


(4,568
)


(2,622
)Securities gains, net


(5
)


(479
)


0Gain on sales of real estate and premises


(1,146
)


(187
)


(682
)Gain on sales of loans


(2,273
)


(651
)


(1,514
)Proceeds from sales of loans held for sale


122,491



60,566



70,407Disbursements on loans held for sale


(119,475
)


(56,925
)


(56,697
)Amortization of restricted stock awards


373



415



334Amortization of unearned ESOP shares


194



194



193Earned ESOP shares priced above (below) original cost


(56
)


118



339Stock option compensation expense


27



33



44Decrease (increase) in accrued interest receivable


1,544



1,326



(1,832
)Increase (decrease) in accrued interest payable


(4,199
)


(3,207
)


8,339Goodwill impairment charge


0



3,801



0Decrease (increase) in other assets


(2,041
)


(2,761
)


834Increase (decrease) in other liabilities


912



(4,618
)


2,034Other, net


95



34



12Net cash provided by operating activities


15,448



11,862



33,318Cash flows from investing activities:Proceeds from sales of securities available for sale


2,141



10,442



0Principal collected on securities available for sale


22,213



7,246



2,437Proceeds collected on maturity of securities available for sale


78,350



110,000



165,000Purchases of securities available for sale


(88,446
)


(114,405
)


(223,146
)Purchase of Federal Home Loan Bank stock


0



(7,180
)


(2,095
)Redemption of Federal Home Loan Bank stock


0



6,092



3,854Proceeds from sales of real estate and premises


10,749



6,563



7,021Net (increase) decrease in loans receivable


56,329



(78,654
)


(120,063
)Purchases of premises and equipment


(558
)


(3,772
)


(2,552
)Net cash provided (used) by investing activities


80,778



(63,668
)


(169,544
)Cash flows from financing activities:Increase (decrease) in deposits


(85,162
)


(8,484
)


162,822Purchase of treasury stock


0



(723
)


(4,913
)Stock options exercised


0



0



139Excess tax benefit from options exercised


0



0



99Dividends paid to common stockholders


0



(2,749
)


(3,724
)Dividends paid to preferred stockholder


(1,163
)


0



0Preferred stock and warrant issued


0



26,000



0Proceeds from borrowings


1,099,000



631,300



160,000Repayment of borrowings


(1,109,000
)


(601,300
)


(198,400
)Increase (decrease) in customer escrows


788



(227
)


145Net cash (used) provided by financing activities


(95,537
)


43,817



116,168Increase (decrease) in cash and cash equivalents


689



(7,989
)


(20,058
)Cash and cash equivalents, beginning of year


15,729



23,718



43,776Cash and cash equivalents, end of year

$
16,418



15,729



23,718Supplemental cash flow disclosures:Cash paid for interest

$
28,067



36,003



30,484Cash paid for income taxes


33



5,247



8,696Supplemental noncash flow disclosures:Loans transferred to loans held for sale


1,234



2,238



13,991Transfer of loans to real estate


18,342



14,727



6,499   See accompanying notes to
    consolidated financial statements.
 26




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS    December 31,
    2009, 2008 and 2007
  NOTE 1 Description
    of the Business and Summary of Significant Accounting
    Policies
   10-K
  Use of Estimates
   Cash and Cash Equivalents
  Securities
  Trading Securities
  Securities Held to Maturity
  Securities Available for Sale
   Loans Held for Sale
 27




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
     Loans Receivable, net
      Mortgage Servicing Rights
  Real Estate, net
  Premises and Equipment
   Impairment of Long-Lived Assets and for Long-Lived Assets
    to Be Disposed Of
  Investment in Limited Partnerships
  Intangible Assets
 28




---



##### 



Goodwill and
    Other Intangible Assets.
  Stock Based Compensation
  Employee Stock Ownership Plan
    (ESOP) Employers Accounting for
    Employee Stock Ownership Plans
  Income Taxes
  Preferred Stock Dividends and
    Discount Accounting for
    Convertible Debt Issued with Stock Purchase Warrants.
  Earnings (Loss) per Share
  Comprehensive Income
    (Loss)
  Segment Information
  New Accounting Pronouncements The
    FASB Accounting Standards Codification and the Hierarchy of
    Generally Accepted Accounting Principles  a
    replacement of FASB Statement No. 162, The Hierarchy of
    Generally Accepted Accounting Principles
 29




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
    Amendments to FASB Interpretation No. 46(R).
 Accounting for Transfers of Financial Assets  an
    amendment of FASB Statement No. 140. Consolidation of Variable Interest
    Entities,
 Subsequent Events.
 FAS No. 115-2 FAS 124-2 Recognition and Presentation of
    Other-Than-Temporary Impairments FAS No. 115-2 FAS 124-2). FAS No. 115-2 FAS 124-2
  Derivative Financial Instruments
  Reclassifications
  NOTE 2 Other
    Comprehensive Income (Loss)
    30




---



##### 



For the years ended December 31,2009


2008


2007(Dollars in thousands)

Before


Tax


Net


Before


Tax


Net


Before


Tax


NetSecurities available for sale:

Tax


Effect


of Tax


Tax


Effect


of Tax


Tax


Effect


of TaxGross unrealized gains (losses) arising during the period

$
(1,490
)


(632
)


(858
)


2,040



806



1,234



2,443



992



1,451Less reclassification of net gains included in net income (loss)


5



2



3



479



169



310



0



0



0Net unrealized gains (losses) arising during the period


(1,495
)


(634
)


(861
)


1,561



637



924



2,443



992



1,451Other comprehensive income (loss)

$
(1,495
)


(634
)


(861
)


1,561



637



924



2,443



992



1,451   NOTE 3 Securities
    Available for Sale
   Gross


GrossAmortized


Unrealized


Unrealized


Fair(Dollars in thousands)

Cost


Gains


Losses


ValueDecember 31, 2009:Mortgage-backed securities:FHLMC

$
26,209



933



0



27,142FNMA


19,399



796



0



20,195Collateralized mortgage obligations:FHLMC


5,846



137



(159
)


5,824FNMA


386



12



0



39851,840



1,878



(159
)


53,559Other marketable securities:U.S. Government agency obligations


105,023



881



(36
)


105,868Corporate preferred stock


700



0



(525
)


175105,723



881



(561
)


106,043$
157,563



2,759



(720
)


159,602December 31, 2008:Mortgage-backed securities:FHLMC

$
36,144



694



(21
)


36,817FNMA


27,225



695



0



27,920GNMA


5



0



0



5Collateralized mortgage obligations:FHLMC


10,149



181



(319
)


10,011FNMA


2,643



6



(75
)


2,57476,166



1,576



(415
)


77,327Other marketable securities:U.S. Government agency obligations


94,745



2,723



0



97,468Corporate preferred stock


700



0



(350
)


35095,445



2,723



(350
)


97,818$
171,611



4,299



(765
)


175,145     Amortized

Fair(Dollars in thousands)

cost

valueDue less than one year

$
117,427



118,508Due after one year through five years


35,077



36,394Due after five years through ten years


4,359



4,525Due after ten years


700



175Total

$
157,563



159,602   31




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
    Less than twelve months


Twelve months or more


Total# of


Fair


Unrealized


# of


Fair


Unrealized


Fair


Unrealized(Dollars in thousands)

Investments


Value


Losses


Investments


Value


Losses


Value


LossesDecember 31, 2009Collateralized mortgage obligations:FHLMC


1


$
1,248



(159
)


0


$
0



0


$
1,248



(159
)Other marketable securities:U.S. Government agency obligations


6



30,000



(36
)


0



0



0



30,000



(36
)Corporate preferred stock


0



0



0



1



175



(525
)


175



(525
)Total temporarily impaired securities


7


$
31,248



(195
)


1


$
175



(525
)

$
31,423



(720
)   Less than twelve months


Twelve months or more


Total# of


Fair


Unrealized


# of


Fair


Unrealized


Fair


Unrealized(Dollars in thousands)

Investments


Value


Losses


Investments


Value


Losses


Value


LossesDecember 31, 2008Mortgage backed securities:FHLMC


2


$
9,115



(21
)


0


$
0



0


$
9,115



(21
)Collateralized mortgage obligations:FHLMC


0



0



0



1



2,530



(319
)


2,530



(319
)FNMA


0



0



0



2



2,175



(75
)


2,175



(75
)Corporate preferred stock


1



350



(350
)


0



0



0



350



(350
)Total temporarily impaired securities


3


$
9,465



(371
)


3


$
4,705



(394
)

$
14,170



(765
)    32




---



##### 



NOTE 4
    Loans Receivable, Net
   (Dollars in thousands)

2009

2008Residential real estate loans:1-4 family conventional

$
144,368



161,6951-4 family conventional  construction


14,562



29,9981-4 family FHA


212



801-4 family VA


51



214159,193



191,987Multi family


59,266



29,292Multi family  construction


9,678



35,640228,137



256,919Commercial real estate:Lodging


37,732



45,264Retail/office


70,741



70,158Nursing home/health care


5,841



10,184Land developments


91,020



105,281Golf courses


10,477



15,914Restaurant/bar/café


5,001



6,140Alternative fuel plants


42,053



41,271Warehouse


29,733



26,679Manufacturing


10,315



7,146Churches/community service


4,369



9,130Other


21,604



30,782328,886



367,949Other loans:Autos


902



1,333Home equity line


50,369



52,243Home equity


21,088



22,912Consumer  secured


1,083



320Commercial business


185,525



213,775Land/lot loans


3,190



2,969Savings


324



277Mobile home


977



1,316Consumer  unsecured


4,282



5,231267,740



300,376Total loans


824,763



925,244Less:Unamortized premiums


177



569Net deferred loan fees


1,518



2,529Allowance for loan losses


23,812



21,257Total loans receivable, net

$
799,256



900,889Commitments to originate or purchase loans

$
7,330



10,107Commitments to deliver loans to secondary market

$
6,278



6,737Weighted average contractual rate of loans in portfolio


5.78
%


5.93
%        (Dollars in thousands)

2009

2008Commercial real estate

$
4,315



8,1561-4 family


608



0Home equity


131



0Land/lot


251



0Other consumer


19



0$
5,324



8,156    33




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
       2009

2008Percent



Percent(Dollars in thousands)

Amount

of Total

Amount

of TotalArizona

$
959



0.4
%

$
1,802



0.7
%Georgia


698



0.3



1,006



0.4Iowa


6,701



2.9



9,240



3.6Minnesota


214,484



94.0



238,675



92.9Wisconsin


2,241



1.0



2,653



1.0Other states


3,054



1.4



3,543



1.4Total

$
228,137



100.0
%

$
256,919



100.0
%  Amounts under one million dollars in both years are included
    in Other states.
    2009

2008Percent



Percent(Dollars in thousands)

Amount

of Total

Amount

of TotalArizona

$
6,691



2.0
%

$
10,463



2.8
%California


4,662



1.4



6,593



1.8Florida


2,908



0.9



2,966



0.8Idaho


5,040



1.5



5,084



1.4Indiana


11,692



3.6



11,778



3.2Iowa


14,992



4.6



17,829



4.9Kansas


1,855



0.6



2,002



0.5Minnesota


261,226



79.4



290,659



79.0Nebraska


4,992



1.5



4,992



1.4North Carolina


7,512



2.3



7,707



2.1Utah


1,727



0.5



1,823



0.5Wisconsin


5,589



1.7



5,971



1.6Other states


0



0.0



82



0.0Total

$
328,886



100.0
%

$
367,949



100.0
%  Amounts under one million dollars in both years are included
    in Other states.
   NOTE 5 Allowance
    for Loan Losses
   (Dollars in thousands)Balance, December 31, 2006

$
9,873Provision for losses


3,898Charge-offs


(1,681
)Recoveries


348Balance, December 31, 2007


12,438Provision for losses


26,696Charge-offs


(17,928
)Recoveries


51Balance, December 31, 2008


21,257Provision for losses


26,699Charge-offs


(25,031
)Recoveries


887Balance, December 31, 2009

$
23,812   NOTE 6 Accrued
    Interest Receivable
   (Dollars in thousands)

2009

2008Securities available for sale

$
916



1,340Loans receivable


3,108



4,228$
4,024



5,568   NOTE 7
    Mortgage
    Servicing Rights, Net   (Dollars in thousands)

2009

2008Mortgage servicing rights:Balance, beginning of year

$
728


$
1,270Originations


1,143



28Amortization


(556
)


(570
)Balance, end of year


1,315



728Valuation reserve


0



0Mortgage servicing rights, net

$
1,315


$
728Fair value of mortgage servicing rights

$
2,138


$
2,339  34




---



##### 



WeightedWeighted

AverageLoan

Average

RemainingPrincipal

Interest

Term

Number(Dollars in thousands)

Balance

Rate

(months)

of LoansOriginal term 30 year fixed rate

$
219,958



5.49
%


299



1,929Original term 15 year fixed rate


99,748



4.97



115



1,580Adjustable rate


1,266



4.23



306



11    Gross



UnamortizedCarrying

Accumulated

Intangible(Dollars in thousands)

Amount

Amortization

AssetsDecember 31, 2009Mortgage servicing rights

$
4,172



(2,857
)


1,315Total

$
4,172



(2,857
)


1,315December 31, 2008Mortgage servicing rights

$
3,850



(3,122
)


728Total

$
3,850



(3,122
)


728    Mortgage(Dollars in thousands)

ServicingYear Ended December 31,

Rights2010

$
3412011


2492012


2082013


1852014


153Thereafter


279$
1,315    NOTE 8
    Real Estate
   (Dollars in thousands)

2009

2008Real estate in judgment subject to redemption

$
1,637



3,198Real estate acquired through foreclosure


12,666



2,254Real estate acquired through deed in lieu of foreclosure


6,725



5,000Real estate acquired in satisfaction of debt


106



10621,134



10,558Allowance for losses


(4,877
)


0$
16,257



10,558   NOTE 9
    Premises and Equipment
   (Dollars in thousands)

2009

2008Land

$
2,070



2,364Office buildings and improvements


9,148



11,294Furniture and equipment


12,796



12,61424,014



26,272Less accumulated depreciation


(13,248
)


(12,300
)$
10,766



13,972   35




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
    NOTE 10 Deposits
   2009


2008Weighted





Percent


Weighted





Percent(Dollars in thousands)

average rate


Amount


of total


average rate


Amount


of totalNoninterest checking


0.00
%

$
80,330



10.1
%


0.00
%

$
66,905



7.6
%NOW accounts


0.08



103,998



13.0



0.19



126,547



14.4Savings accounts


0.13



31,068



3.9



0.11



28,023



3.2Money market accounts


1.25



125,008



15.7



1.59



97,416



11.0340,404



42.7







318,891



36.2Certificates:0-0.99%






16,615



2.1







1,068



0.11-1.99%






113,916



14.3







8,193



1.02-2.99%






135,311



17.0







81,483



9.33-3.99%






138,152



17.4







344,735



39.04-4.99%






47,692



6.0







114,155



13.05-5.99%






3,921



0.5







11,980



1.4Total certificates


2.81



455,607



57.3



3.70



561,614



63.8Total deposits


1.82


$
796,011



100.0
%


2.63


$
880,505



100.0
%    2009


2008Weighted





Weighted(Dollars in thousands)




average





averageRemaining term to maturity

Amount


rate


Amount


rate1-6 months

$
124,050



3.07
%

$
198,511



3.57
%7-12 months


138,389



2.77



188,735



3.6213-36 months


186,929



2.66



168,912



3.94Over 36 months


6,239



2.96



5,456



3.63$
455,607



2.81


$
561,614



3.70     (Dollars in thousands)

2009


2008


2007NOW accounts

$
132



1,543



3,509Savings accounts


38



412



551Money market accounts


1,430



2,821



8,031Certificates


15,979



22,381



21,312$
17,579



27,157



33,403  36




---



##### 



NOTE 11 Federal
    Home Loan Bank Advances and Federal Reserve Borrowings
   (Dollars in thousands)

2009


2008Year of Maturity

Amount


Rate


Amount


Rate2010

$
10,000



6.48
%

$
10,000



6.48
%2011


52,500



4.00



52,500



4.002013


70,000



4.77



70,000



4.77132,500



4.59



132,500



4.59Lines of Credit  Federal Reserve


0



0.00



10,000



0.50$
132,500



4.59


$
142,500



4.31    (Dollars in thousands)

Callable QuarterlyYear of Maturity

in 20102010

$
10,0002011


7,5002013


70,000$
87,500    NOTE 12 Other
    Borrowed Money
   NOTE 13 Income
    Taxes
   (Dollars in thousands)

2009

2008

2007Current:Federal

$
(4,551
)


(415
)


7,702State


1,460



(1
)


2,220Total current


(3,091
)


(416
)


9,922Deferred:Federal


(1,213
)


(3,575
)


(2,044
)State


(1,303
)


(993
)


(578
)Total deferred


(2,516
)


(4,568
)


(2,622
)$
(5,607
)


(4,984
)


7,300    (Dollars in thousands)

2009

2008

2007Expected federal income tax expense (benefit)

$
(5,741
)


(5,138
)


6,501Items affecting federal income tax:State income taxes, net of federal income tax expense (benefit)


170



(642
)


1,094Tax exempt interest


(235
)


(490
)


(276
)Goodwill impairment charge


0



1,293



0Other, net


199



(7
)


(19
)$
(5,607
)


(4,984
)


7,300    (Dollars in thousands)

2009

2008Balance at January 1

$
600



600Increases for tax positions related to prior years


1,610



0Balance at December 31

$
2,210



600   37




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
        (Dollars in thousands)

2009

2008Deferred tax assets:Allowances for loan and real estate losses

$
9,724



8,756Deferred compensation costs


337



331Deferred ESOP loan asset


657



629Restricted stock expense


139



160ASC 740


0



210Nonaccruing loan interest


2,620



1,555State net operating loss carry forward


891



0Other


49



88Total gross deferred tax assets


14,417



11,729Deferred tax liabilities:Net unrealized gain on securities available for sale


809



1,443Deferred loan fees and costs


258



246Premises and equipment basis difference


950



987Originated mortgage servicing rights


537



297Other


273



107Total gross deferred tax liabilities


2,827



3,080Net deferred tax assets

$
11,590



8,649      NOTE 14 Employee
    Benefits
  38




---



##### 



93-6, Employers Accounting for Employee Stock Ownership Plans
   2009

2008

2007Shares allocated to participants beginning of the year


320,937



296,086



294,631Shares allocated to participants


24,317



24,379



24,317Shares purchased with dividends from allocated shares


0



12,078



8,843Shares distributed to participants


(11,576
)


(11,606
)


(31,705
)Shares allocated to participants end of year


333,678



320,937



296,086Unreleased shares beginning of the year


474,403



498,782



523,099Shares released during year


(24,317
)


(24,379
)


(24,317
)Unreleased shares end of year


450,086



474,403



498,782Total ESOP shares end of year


783,764



795,340



794,868Fair value of unreleased shares at December 31

$
1,890,361



1,983,005



12,245,098      39




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
     Unvested OptionsShares

Restricted



Award value/



Weighted AverageAvailable

Shares

Options

Weighted Average



Grant Date

Vestingfor Grant

Outstanding

Outstanding

Exercise Price

Number

Fair Value

Period1995 PlanDecember 31, 2006


0



0



116,774


$
12.13



3,000


$
1.85Options exercised










(11,274
)


12.30Vested


















(3,000
)


1.85December 31, 2007


0



0



105,500



12.12



0Options exercised










0December 31, 2008


0



0



105,500



12.12



0Options exercised










0Forfeited/expired










(65,000
)


11.50



0December 31, 2009


0



0



40,500



13.10



02001 PlanDecember 31, 2006


154,127



16,206



220,300


$
18.89



198,442


$
1.64Granted January 25, 2007


(13,967
)


13,967



0



N/A











3 yearsForfeited


31,459



(1,054
)


(30,405
)


16.13



(30,405
)


1.43Vested






(6,348
)










(12,432
)


2.59December 31, 2007


171,619



22,771



189,895



19.33



155,605



1.61Granted January 25, 2008


(22,182
)


22,182



0



N/A











3 yearsForfeited


5,916



(169
)


(5,747
)


16.13



(5,747
)


1.43Vested






(10,491
)










(8,770
)


2.67December 31, 2008


155,353



34,293



184,148



19.43



141,088



1.55Options exercisedForfeited/expired






(4,734
)


(33,777
)


16.13



(32,257
)


1.43Forfeited/expired










(5,000
)


27.64







2.10Termination of new awards under plan


(155,353
)Vested






(15,044
)










(6,000
)


3.11December 31, 2009


0



14,515



145,371



19.91



102,831



1.492009 PlanApril 28, 2009


350,000Granted May 6, 2009


(15,000
)






15,000


$
4.77



15,000


$
4.41



5 yearsGranted May 6, 2009


(98,866
)


82,388







N/A











3 yearsDecember 31, 2009


236,134



82,388



15,000



4.77



15,000



4.41Total all plans


236,134



96,903



200,871


$
17.41



117,831


$
1.86  40




---



##### 



WeightedWeighted







averageaverage







years over whichremaining





Unrecognized

unrecognizedNumber

contractual life

Number

Number

compensation

compensation willExercise price

outstanding

in years

exercisable

unexercisable

expense

be recognized$
11.25



25,500



0.4



25,500



0


$
0



N/A16.13



99,831



2.4



0



99,831



37,115



2.016.25



15,000



2.4



15,000



0



0



N/A27.66



15,540



4.2



15,540



0



0



N/A26.98



15,000



4.6



15,000



0



0



N/A30.00



15,000



5.4



12,000



3,000



850



0.44.77



15,000



9.4



0



15,000



66,150



4.4200,871







83,040



117,831


$
104,115      2009Risk-free interest rate


3.15%Expected life


9 yearsExpected volatility


114.0%Expected dividends


0.0%   NOTE 15 Earnings
    (Loss) per Common Share
   Year Ended December 31,(Dollars in thousands, except per share data)

2009

2008

2007Weighted average number of common shares outstanding used in
    basic earnings per common share calculation


3,695,827



3,655,078



3,738,457Net dilutive effect of :Options


0



0



145,503Restricted stock awards


0



0



17,828Weighted average number of common shares outstanding adjusted
    for effect of dilutive securities


3,695,827



3,655,078



3,901,788Net income (loss) available to common shareholders

$
(12,543
)


(10,164
)


11,274Basic earnings (loss) per common share

$
(3.39
)


(2.78
)


3.02Diluted earnings (loss) per common share

$
(3.39
)


(2.78
)


2.89   41




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
    NOTE 16 Stockholders
    Equity
    QuarterlyDividend

DividendRecord date

Payable date

per share

Payout RatioFebruary 16, 2007

March 7, 2007


$0.25



37.31%May 18, 2007

June 7, 2007


$0.25



30.49%August 24, 2007

September 7, 2007


$0.25



36.76%November 23, 2007

December 12, 2007


$0.25



35.21%February 15, 2008

March 7, 2008


$0.25



34.25%May 16, 2008

June 6, 2008


$0.25



64.10%August 25, 2008

September 8, 2008


$0.25



NMNM  not meaningful        NOTE 17 Federal
    Home Loan Bank Investment and Regulatory Capital
    Requirements
   42




---



##### 



To Be Well CapitalizedRequired to be



Under PromptAdequately



Corrective ActionActual

Capitalized

Excess Capital

ProvisionsPercent of



Percent of



Percent of



Percent of(Dollars in thousands)

Amount

Assets(1)

Amount

Assets(1)

Amount

Assets(1)

Amount

Assets(1)December 31, 2009Tier I or core capital

$
88,723



8.64
%

$
41,054



4.00
%

$
47,669



4.64
%

$
51,317



5.00
%Tier I risk-based capital


88,723



10.87



32,648



4.00



56,075



6.87



48,972



6.00Risk-based capital to risk-weighted assets


98,925



12.12



65,296



8.00



33,629



4.12



81,620



10.00December 31, 2008Tier I or core capital

$
105,274



9.23
%

$
45,643



4.00
%

$
59,631



5.23
%

$
57,054



5.00
%Tier I risk-based capital


105,274



11.63



36,220



4.00



69,054



7.63



54,331



6.00Risk-based capital to risk-weighted assets


114,765



12.67



72,441



8.00



42,324



4.67



90,551



10.00   (1)
    
    Based upon the Banks adjusted
    total assets for the purpose of the Tier I or core capital
    ratios and risk-weighted assets for the purpose of the
    risk-based capital ratio.    NOTE 18 Financial
    Instruments with Off-Balance Sheet Risk
    43




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
   December 31,Contract amount(Dollars in thousands)

2009

2008Financial instruments whose contract amount represents credit
    risk:Commitments to originate, fund or purchase loans:1-4 family mortgages

$
3,263



4,472Commercial real estate mortgages


4,067



0Non-mortgage loans


0



5,635Undisbursed balance of loans closed


20,179



68,334Unused lines of credit


102,011



95,549Letters of credit


3,823



5,933Total commitments to extend credit

$
133,343



179,923Forward commitments

$
6,278



6,737  case-by-case
    NOTE 19 Derivative
    Instruments and Hedging Activities
 Accounting for
    Derivative Instruments and Hedging Activities
    NOTE 20 Fair
    Value Measurement
 Fair Value Measurements
 Level 1
 Level 2
 Level 3
  44




---



##### 



Carrying value at December 31, 2009(Dollars in thousands)

Total


Level 1


Level 2


Level 3Securities available for sale

$
159,602



6,222



153,380



0Mortgage loan commitments


(53
)


0



(53
)


0Total

$
159,549



6,222



153,327



0  lower-of-cost-or
 Year EndedCarrying value at December 31, 2009


December 31, 2009(Dollars in thousands)

Total


Level 1


Level 2


Level 3


Total gains (losses)Loans held for sale

$
2,965



0



2,965



0



(50
)Mortgage servicing rights


1,315



0



1,315



0



0Loans(1)


61,127



0



61,127



0



(6,493
)Real estate,
    net(2)


16,257



0



16,257



0



(3,873
)Total

$
81,664



0



81,664



0



(10,416
)   (1)
    
    Represents carrying value and
    related specific reserves on loans for which adjustments are
    based on the appraised value of the collateral. The carrying
    value of loans fully charged-off is zero.(2)
    
    Represents the fair value and
    related losses of foreclosed real estate and other collateral
    owned that were measured at fair value subsequent to their
    initial classification as foreclosed assets.   NOTE 21 Fair
    Value of Financial Instruments
 Disclosures about Fair Values of Financial Instruments
    45




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
   December 31,2009


2008Carrying


Estimated


Contract


Carrying


Estimated


Contract(Dollars in thousands)

Amount


Fair Value


Amount


Amount


Fair Value


AmountFinancial assets:Cash and cash equivalents

$
16,418



16,418







15,729



15,729Securities available for sale


159,602



159,602







175,145



175,145Loans held for sale


2,965



2,965







2,548



2,548Loans receivable, net


799,256



799,849







900,889



923,034Federal Home Loan Bank stock


7,286



7,286







7,286



7,286Accrued interest receivable


4,024



4,024







5,568



5,568Financial liabilities:Deposits


796,011



796,011







880,505



880,505Federal Home Loan Bank advances


132,500



141,791







132,500



141,812Federal Reserve line of credit


0



0







10,000



9,999Accrued interest payable


2,108



2,108







6,307



6,307Off-balance sheet financial instruments:Commitments to extend credit


103



103



133,343



0



0



179,923Commitments to sell loans


(53
)


(53
)


6,278



(24
)


(24
)


6,737  Cash and Cash Equivalents
 Securities Available for Sale
 Loans Held for Sale
 Loans Receivable
 Federal Home Loan Bank Stock
 Accrued Interest Receivable
 Deposits
  Federal Home Loan Bank Advances
 Accrued Interest Payable
 Commitments to Extend Credit
 Commitments to Sell Loans
  46




---



##### 



NOTE 22 HMN
    Financial, Inc. Financial Information (Parent Company
    Only)
   (Dollars in thousands)

2009


2008


2007Condensed Balance SheetsAssets:Cash and cash equivalents

$
199



638Investment in subsidiaries


96,575



107,604Loans receivable, net


2,700



4,400Prepaid expenses and other assets


839



10Deferred tax asset


172



392Total assets

$
100,485



113,044Liabilities and Stockholders Equity:Accrued expenses and other liabilities

$
547



831Total liabilities


547



831Serial preferred stock


23,785



23,384Common stock


91



91Additional paid-in capital


58,576



60,687Retained earnings


86,115



98,067Net unrealized gain on securities available for sale


1,230



2,091Unearned employee stock ownership plan shares


(3,577
)


(3,771
)Treasury stock, at cost, 4,883,378 and 4,961,032 shares


(66,282
)


(68,336
)Total stockholders equity


99,938



112,213Total liabilities and stockholders equity

$
100,485



113,044Condensed Statements of IncomeInterest income

$
15



98



171Equity earnings (losses) of subsidiaries


(10,168
)


(9,693
)


11,151Other income


2



2



739Compensation and benefits


(236
)


(243
)


(233
)Occupancy


(24
)


(24
)


(24
)Data processing


(6
)


(6
)


(6
)Other


(470
)


(466
)


(459
)Income (loss) before income tax expense (benefit)


(10,887
)


(10,332
)


11,339Income tax expense (benefit)


(91
)


(205
)


65Net income (loss)

$
(10,796
)


(10,127
)


11,274Condensed Statements of Cash FlowsCash flows from operating activities:Net income (loss)

$
(10,796
)


(10,127
)


11,274Adjustments to reconcile net income (loss) to cash provided by
    operating activities:Equity (earnings) losses of subsidiaries


10,168



9,693



(11,151
)Deferred income tax expense (benefit)


220



16



(25
)Gain on sales of real estate


0



0



(639
)Proceeds from sales of real estate


0



0



1,389Earned employee stock ownership shares priced above (below)
    original cost


(56
)


118



339Stock option compensation


27



33



44 47




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
   (Dollars in thousands)

2009


2008


2007Amortization of restricted stock awards


373



415



334Decrease in unearned ESOP shares


194



194



193Decrease (increase) in accrued interest receivable


0



20



(20
)Increase (decrease) in accrued expenses and other liabilities


(284
)


134



53Decrease in other assets


(829
)


(7
)


(13
)Other, net


7



(1
)


(99
)Net cash (used) provided by operating activities


(976
)


488



1,679Cash flows from investing activities:Investment in subsidiary


0



(25,000
)


0Decrease (increase) in loans receivable, net


1,700



(400
)


(4,000
)Net cash provided (used) by investing activities


1,700



(25,400
)


(4,000
)Cash flows from financing activities:Purchase of treasury stock


0



(723
)


(4,913
)Stock options exercised


0



0



139Excess tax benefit from options exercised


0



0



99Dividends paid to common stockholders


0



(2,749
)


(3,724
)Dividends paid to preferred stockholder


(1,163
)


0



0Proceeds from preferred stock and warrant issued


0



26,000



0Proceeds from dividends on Bank stock


0



2,000



6,000Net cash (used) provided by financing activities


(1,163
)


24,528



(2,399
)Decrease in cash and cash equivalents


(439
)


(384
)


(4,720
)Cash and cash equivalents, beginning of year


638



1,022



5,742Cash and cash equivalents, end of year

$
199



638



1,022   NOTE 23 Business
    Segments
     48




---



##### 



Home Federal








Consolidated(Dollars in thousands)

Savings Bank


Other


Eliminations


TotalAt or for the year ended December 31, 2009:Interest income   external customers

$
57,770



1



0



57,771Non-interest income   external customers


8,134



2



0



8,136Loss on limited partnerships


(54
)


0



0



(54
)Intersegment interest income


0



15



(15
)


0Intersegment non-interest income


174



(10,168
)


9,994



0Interest expense


23,883



0



(15
)


23,868Amortization of mortgage servicing rights, net


556



0



0



556Other non-interest expense


30,563



744



(174
)


31,133Income tax benefit


(5,513
)


(94
)


0



(5,607
)Net loss


(10,163
)


(10,801
)


10,168



(10,796
)Total assets


1,035,152



100,515



(99,426
)


1,036,241At or for the year ended December 31, 2008:Interest income   external customers

$
66,496



16



0



66,512Non-interest income   external customers


7,108



3



0



7,111Loss on limited partnerships


(8
)


0



0



(8
)Intersegment interest income


0



81



(81
)


0Intersegment non-interest income


174



(9,693
)


9,519



0Interest expense


32,877



0



(81
)


32,796Amortization of mortgage servicing rights, net


570



0



0



570Other non-interest expense


28,091



747



(174
)


28,664Income tax benefit


(4,776
)


(208
)


0



(4,984
)Net loss


(9,688
)


(10,132
)


9,693



(10,127
)Total assets


1,144,738



113,078



(112,336
)


1,145,480At or for the year ended December 31, 2007:Interest income   external customers

$
77,457



66



0



77,523Non-interest income   external customers


6,173



739



0



6,912Intersegment interest income


0



105



(105
)


0Intersegment non-interest income


174



11,151



(11,325
)


0Interest expense


38,928



0



(105
)


38,823Amortization of mortgage servicing rights, net


706



0



0



706Other non-interest expense


21,878



730



(174
)


22,434Income tax expense


7,238



62



0



7,300Net income


11,156



11,269



(11,151
)


11,274Goodwill


3,801



0



0



3,801Total assets


1,115,857



98,865



(97,668
)


1,117,054  49




---



##### 



Report
    of Independent Registered Public Accounting Firm  
  The Board of Directors and
    Stockholders
 HMN Financial, Inc.:
        Internal Control  Integrated Framework
    
     50




---



##### 



OTHER
    FINANCIAL DATA   Year Ended December 31,(Dollars in thousands)

2009


2008


2007Maximum Balance:FHLB and FRB advances and borrowings

$
210,500



165,000



168,200FHLB and FRB short-term borrowings


78,000



43,000



57,300Average Balance:FHLB and FRB advances and borrowings


155,574



122,338



116,406FHLB and FRB short-term borrowings


26,288



11,249



18,993   December 31,2009


2008


2007Weighted





Weighted





WeightedAverage





Average





Average(Dollars in thousands)

Amount


Rate


Amount


Rate


Amount


RateFHLB and FRB short-term borrowings

$
10,000



6.48
%

$
10,000



0.50
%

$
25,000



3.49
%FHLB long-term advances


122,500



4.44



132,500



4.59



87,500



4.97Total

$
132,500



4.59


$
142,500



4.31


$
112,500



4.64   51




---



##### 



SELECTED
    QUARTERLY FINANCIAL DATA  December 31,


September 30,


June 30,(Dollars in thousands, except per share data)

2009


2009


2009Selected Operations Data (3 months ended):Interest income

$
13,304



14,325



14,789Interest expense


5,260



5,735



6,302Net interest income


8,044



8,590



8,487Provision for loan losses


3,445



3,381



13,304Net interest income (loss) after provision for loan losses


4,599



5,209



(4,817
)Noninterest income:Fees and service charges


1,066



1,034



1,010Loan servicing fees


272



262



256Securities gains, net


0



0



5Gain on sales of loans


415



493



942Other noninterest income


327



94



73Total noninterest income


2,080



1,883



2,286Noninterest expense:Compensation and benefits


3,119



3,180



3,284Losses (gains) on real estate owned


61



(357
)


3,066Occupancy


1,013



970



1,009Deposit insurance


445



371



826Data processing


294



298



311Goodwill impairment charge


0



0



0Other noninterest expense


1,690



1,574



2,107Total noninterest expense


6,622



6,036



10,603Income (loss) before income tax expense (benefit)


57



1,056



(13,134
)Income tax expense (benefit)


(92
)


175



(3,930
)Net income (loss)


149



881



(9,204
)Preferred stock dividends and discount


(441
)


(438
)


(439
)Net income (loss) available to common stockholders

$
(292
)


443



(9,643
)Basic earnings (loss) per common share

$
(0.08
)


0.12



(2.62
)Diluted earnings (loss) per common share

$
(0.08
)


0.12



(2.62
)Financial Ratios:Return (loss) on average
    assets(1)


0.06
%


0.34
%


(3.37
)%Return (loss) on average common
    equity(1)


0.59



3.52



(34.23
)Average equity to average assets


9.73



9.73



9.83Dividend payout ratio


NM



NM



NMNet interest
    margin(1)(2)


3.28



3.46



3.29(Dollars in thousands)Selected Financial Condition Data:Total assets

$
1,036,241



1,032,717



1,053,618Securities available for sale:Mortgage-backed and related securities


53,559



58,737



64,144Other marketable securities


106,043



76,847



71,722Loans held for sale


2,965



3,279



5,029Loans receivable, net


799,256



818,897



836,493Deposits


796,011



781,574



809,965Federal Home Loan Bank advances and Federal Reserve borrowing


132,500



142,500



132,500Stockholders equity


99,938



100,446



99,716   (1)
    
    Annualized(2)
    
    Net interest income divided by
    average interest-earning assets. NM  Not meaningful
 52




---



##### 



March 31,


December 31,


September 30,


June 30,


March 31,2009


2008


2008


2008


200815,353



16,094



16,374



16,253



17,7916,571



7,805



7,806



8,078



9,1078,782



8,289



8,568



8,175



8,6846,569



8,216



15,790



1,130



1,5602,213



73



(7,222
)


7,045



7,1241,027



1,155



1,163



1,082



869252



233



240



240



2420



0



479



0



0423



208



59



228



156131



193



163



223



1701,833



1,789



2,104



1,773



1,4373,849



3,057



3,010



3,036



3,3611,103



(27
)


65



(68
)


(157
)1,092



1,097



1,131



1,161



1,132331



174



203



193



108279



408



485



421



4170



0



0



3,801



01,774



1,825



1,818



1,273



1,3108,428



6,534



6,712



9,817



6,171(4,382
)


(4,672
)


(11,830
)


(999
)


2,390(1,760
)


(2,134
)


(4,779
)


1,026



903(2,622
)


(2,538
)


(7,051
)


(2,025
)


1,487(429
)


(37
)


0



0



0(3,051
)


(2,575
)


(7,051
)


(2,025
)


1,487(0.83
)


(0.70
)


(1.93
)


(0.56
)


0.41(0.83
)


(0.70
)


(1.93
)


(0.56
)


0.39(0.94
)%


(0.88
)%


(2.54
)%


(0.75
)%


0.54
%(9.57
)


(11.43
)


(29.14
)


(8.27
)


6.069.81



8.58



8.90



8.99



8.93NM



NM



NM



64.10



34.253.30



2.99



3.21



3.15



3.281,113,359



1,145,480



1,128,900



1,076,163



1,104,76972,702



77,327



74,595



16,659



17,71687,167



97,818



111,463



107,167



139,6793,880



2,548



4,222



3,699



3,090877,309



900,889



873,156



895,713



877,756798,369



880,505



888,848



832,316



892,977192,500



142,500



141,500



137,900



97,500109,381



112,213



86,576



95,052



99,388  53




---



##### 



COMMON
    STOCK INFORMATION   December 31,


September 30,


June 30,


March 31,


December 31,


September 30,


June 30,


March 31,2009


2009


2009


2009


2008


2008


2008


2008HIGH

$
6.85



5.79



6.00



4.76



12.93



17.52



23.99



25.49LOW


3.20



3.35



3.05



1.52



3.00



11.01



15.28



21.18CLOSE


4.20



3.75



3.51



3.10



4.18



12.38



15.50



23.08   
  Period EndingIndex

12/31/04


12/31/05


12/31/06


12/31/07


12/31/08


12/31/09HMN Financial, Inc


100.00



92.09



110.91



81.55



14.46



14.53NASDAQ Composite


100.00



101.37



111.03



121.92



72.49



104.31SNL Bank NASDAQ Index


100.00



96.95



108.85



85.45



62.06



50.34  54