FIVE-YEAR
    CONSOLIDATED FINANCIAL HIGHLIGHTS
   Selected Operations Data:

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

2008


2007


2006


2005


2004Total interest income

$
66,512



77,523



67,527



60,281



51,617Total interest expense


32,796



38,823



28,841



24,511



20,993Net interest income


33,716



38,700



38,686



35,770



30,624Provision for loan losses


26,696



3,898



8,878



2,674



2,755Net interest income after provision for loan losses


7,020



34,802



29,808



33,096



27,869Fees and service charges


3,933



3,139



3,111



2,719



2,776Loan servicing fees


955



1,054



1,172



1,210



1,169Securities gains (losses), net


479



0



48



(21
)


(535
)Gain on sales of loans


651



1,514



1,255



1,853



1,703Other non-interest income


936



1,887



856



748



857Total non-interest income


6,954



7,594



6,442



6,509



5,970Total non-interest expense


29,085



23,822



22,596



21,801



20,162Income (loss) before income tax expense (benefit)


(15,111
)


18,574



13,654



17,804



13,677Income tax expense (benefit)


(4,984
)


7,300



5,226



6,736



4,387Net income (loss)


(10,127
)


11,274



8,428



11,068



9,290Preferred stock dividends and discount


(37
)


0



0



0



0Net income (loss) available to common stockholders

$
(10,164
)


11,274



8,428



11,068



9,290Basic earnings (loss) per common share

$
(2.78
)


3.02



2.20



2.89



2.40Diluted earnings (loss) per common share


(2.78
)


2.89



2.10



2.77



2.31Cash dividends per common share


0.75



1.00



0.98



0.92



0.84   Selected Financial Condition
    Data:

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

2008


2007


2006


2005


2004Total assets

$
1,145,480



1,117,054



977,789



991,237



960,673Securities available for sale


175,145



186,188



126,140



119,659



103,672Loans held for sale


2,548



3,261



1,493



1,435



2,712Loans receivable, net


900,889



865,088



768,232



785,678



783,213Deposits


880,505



888,118



725,959



731,537



698,902FHLB advances and Federal Reserve borrowings


142,500



112,500



150,900



160,900



170,900Stockholders equity


112,213



98,128



93,142



90,728



83,771Book value per common share


21.31



23.50



21.58



20.59



18.95Number of full service offices


16



15



14



13



13Number of loan origination offices


2



2



2



3



2Key
    Ratios(1)Stockholders equity to total assets at year end


9.80
%


8.78
%


9.53
%


9.15
%


8.72
%Average stockholders equity to average assets


8.58



8.89



9.70



9.05



9.17Return on stockholders equity
    (ratio of net income (loss) to average equity)


(10.61
)


11.53



8.85



12.42



11.03Return on assets(ratio of net income (loss) to average assets)


(0.91
)


1.03



0.86



1.12



1.01Dividend payout ratio(ratio of dividends paid to net income (loss))


NM



34.72



42.61



38.02



36.36   (1)
    
    Average balances were calculated
    based upon amortized cost without the market value impact of
    SFAS No. 115.NM  not meaningful   4




---



##### 



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 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, 2008.
  OVERVIEW
   5




---



##### 



MANAGEMENT
    DISCUSSION AND ANALYSIS
    Critical
    Accounting Policies
 and/or
  Allowance
    for Loan Losses and Related Provision
    Mortgage
    Servicing Rights
 Accounting for Transfers and Servicing of Financial Assets
    and Extinguishments of Liabilities.
 6




---



##### 



Income
    Taxes
  Accounting
    for Uncertainty in Income Taxes  an
    interpretation of FASB Statement No. 109
  Results
    of Operations
    Net
    Interest Income
  7




---



##### 



MANAGEMENT
    DISCUSSION AND ANALYSIS
    Year Ended December 31,2008


2007


2006Average


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

$
35,494



1,615



4.55
%

$
15,502



727



4.69
%

$
7,045



271



3.85
%Other marketable securities


119,065



5,775



4.85



177,256



9,153



5.16



124,684



5,195



4.17Loans held for sale


2,711



166



6.12



2,391



148



6.19



3,383



216



6.40Loans receivable,
    net(1)(2)


887,836



58,505



6.59



827,597



65,967



7.97



760,990



59,965



7.88FHLB stock


7,192



253



3.52



6,627



341



5.15



8,235



325



3.95Other, including cash equivalents


16,011



198



1.24



24,820



1,187



4.78



32,867



1,555



4.73Total interest-earning assets

$
1,068,309



66,512



6.23


$
1,054,193



77,523



7.35


$
937,204



67,527



7.21Interest-bearing liabilities:NOW accounts

$
126,118



1,542



1.22
%

$
115,572



3,495



3.02
%

$
97,753



2,635



2.70
%Passbooks


40,229



412



1.02



40,401



551



1.36



60,577



1,084



1.79Money market accounts


120,333



2,821



2.34



216,175



8,045



3.72



153,889



5,119



3.33Certificate accounts


247,454



9,582



3.87



236,415



10,577



4.47



233,074



8,652



3.71Brokered deposits


287,771



12,799



4.45



210,164



10,734



5.11



125,055



4,553



3.64FHLB advances and Federal Reserve borrowings


123,938



5,639



4.55



116,721



5,420



4.64



156,399



6,795



4.34Other interest-bearing liabilities


1,135



1



0.08



939



1



0.09



834



3



0.30Total interest-bearing liabilities

$
946,978



32,796



3.46


$
936,387



38,823



4.15


$
827,581



28,841



3.48Net interest income






33,716











38,700











38,686Net interest rate spread










2.77
%










3.20
%










3.73
%Net earning assets

$
121,331










$
117,806










$
109,623Net interest margin










3.16
%










3.67
%










4.13
%Average interest-earning assets to average interest-bearing
    liabilities






112.81
%










112.58
%










113.25
%   (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 $1,014,000 for 2008, $1,015,000 for 2007 and
    $1,248,000 for 2006.(2)
    
    Calculated net of deferred loan
    fees, loan discounts, loans in process and loss reserve.    8




---



##### 



Year Ended December 31,2008 vs. 2007





2007 vs. 2006Increase (Decrease)





Increase (Decrease)Due to


Total


Due to


TotalIncrease





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

$
938



(50
)


888


$
325



131



456Other marketable securities


(3,005
)


(373
)


(3,378
)


2,190



1,768



3,958Loans held for sale


20



(2
)


18



(63
)


(5
)


(68
)Loans receivable, net


4,600



(12,061
)


(7,461
)


5,602



399



6,001Cash equivalents


(421
)


(568
)


(989
)


(381
)


13



(368
)FHLB Stock


29



(117
)


(88
)


(63
)


80



17Total interest-earning assets

$
2,161



(13,171
)


(11,010
)

$
7,610



2,386



9,996Interest-bearing liabilities:NOW accounts

$
320



(2,272
)


(1,952
)

$
864



(5
)


859Passbooks


(2
)


(137
)


(139
)


(410
)


(123
)


(533
)Money market accounts


(4,855
)


(368
)


(5,223
)


116



2,809



2,925Certificates


477



(1,473
)


(996
)


125



1,801



1,926Brokered deposits


3,585



(1,520
)


2,065



3,883



2,298



6,181FHLB advances and Federal Reserve borrowings


330



(111
)


219



(1,816
)


441



(1,375
)Other interest-bearing liabilities


0



0



0



0



(1
)


(1
)Total interest-bearing liabilities

$
(145
)


(5,881
)


(6,026
)

$
2,762



7,220



9,982Net interest income









$
33,716










$
38,700   (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.    At December 31,
    2008
   Weighted average yield on:Securities available for sale:Mortgage-backed and related securities

4.32%Other marketable securities

4.16Loans held for sale

6.27Loans receivable, net

6.34FHLB stock

3.00Other interest-earnings assets

0.09Combined weighted average yield on interest-earning assets

5.92Weighted average rate on:NOW accounts

0.19%Passbooks

0.11Money market accounts

1.59Certificates

3.71FHLB advances and Federal Reserve borrowings

4.31Combined weighted average rate on interest-bearing liabilities

2.81Interest rate spread

3.11  9




---



##### 



MANAGEMENT
    DISCUSSION AND ANALYSIS
   Provision
    for Loan Losses
   (Dollars in thousands)

2008


2007Balance at January 1.

$
12,438


$
9,873Provision


26,696



3,898Charge offs:Commercial business


(13,784
)


(554
)Commercial real estate


(3,454
)


(245
)Consumer


(612
)


(840
)Single family mortgage


(78
)


(42
)Recoveries


51



348Balance at December 31.

$
21,257


$
12,438     Non-Interest
    Income
  PercentageYear Ended December 31,


Increase (Decrease)(Dollars in thousands)

2008


2007


2006


2008/2007


2007/2006Fees and service charges

$
3,933



3,139



3,111



25.3
%


0.9
%Loan servicing fees


955



1,054



1,172



(9.4
)


(10.1
)Securities gains, net


479



0



48



N/A



N/AGain on sales of loans


651



1,514



1,255



(57.0
)


20.6Other non-interest income


936



1,887



856



(50.4
)


120.4Total non-interest income

$
6,954



7,594



6,442



(8.4
)


17.9     10




---



##### 



Non-interest
    Expense
  PercentageYear Ended December 31,


Increase (Decrease)(Dollars in thousands)

2008


2007


2006


2008/2007


2007/2006Compensation and benefits

$
12,464



12,491



11,869



(0.2
)%


5.2
%Occupancy


4,521



4,467



4,435



1.2



0.7Advertising


422



542



475



(22.1
)


14.1Data processing


1,395



1,267



1,183



10.1



7.1Amortization of mortgage servicing rights, net


570



706



848



(19.3
)


(16.7
)Goodwill impairment charge


3,801



0



0



N/A



N/AOther


5,912



4,349



3,786



35.9



14.9Total non-interest expense

$
29,085



23,822



22,596



22.1



5.4      Income
    Taxes
  Accounting for Uncertainty in Income Taxes  an
    interpretation of FASB Statement No. 109
  11




---



##### 



MANAGEMENT
    DISCUSSION AND ANALYSIS
    Net
    Income (Loss) Available to Common Shareholders
   COMPARISON
    OF 2007 WITH 2006
     12




---



##### 



13




---



##### 



MANAGEMENT
    DISCUSSION AND ANALYSIS
   Financial
    Condition
 Loans
    Receivable, Net
    December 31,2008


2007


2006


2005


2004(Dollars in thousands)

Amount


Percent


Amount


Percent


Amount


Percent


Amount


Percent


Amount


PercentReal Estate Loans:One-to-four family

$
161,989



17.51
%

$
152,974



17.33
%

$
134,269



17.10
%

$
127,075



15.82
%

$
139,008



17.34
%Multi-family


29,292



3.17



29,073



3.29



29,863



3.80



40,753



5.07



41,922



5.23Commercial


325,304



35.16



281,822



31.92



294,490



37.49



260,268



32.40



224,945



28.06Construction or development


108,283



11.70



111,034



12.58



60,178



7.66



80,342



10.00



98,397



12.28Total real estate loans


624,868



67.54



574,903



65.12



518,800



66.05



508,438



63.29



504,272



62.91Other Loans:Consumer Loans:Automobile


1,333



0.14



1,730



0.20



3,093



0.39



5,461



0.68



9,496



1.18Home equity line


52,243



5.65



51,317



5.81



54,247



6.91



61,011



7.60



67,140



8.38Home equity


22,912



2.48



20,254



2.30



21,263



2.71



19,076



2.37



20,033



2.50Mobile home


1,316



0.14



1,699



0.19



2,052



0.26



2,299



0.29



2,896



0.36Land/lot loans


2,969



0.32



4,151



0.47



5,501



0.70



9,487



1.18



11,572



1.44Other


5,828



0.63



5,758



0.65



3,692



0.47



3,564



0.44



3,836



0.48Total consumer loans


86,601



9.36



84,909



9.62



89,848



11.44



100,898



12.56



114,973



14.34Commercial business loans


213,775



23.10



222,959



25.26



176,770



22.51



193,962



24.15



182,369



22.75Total other loans


300,376



32.46



307,868



34.88



266,618



33.95



294,860



36.71



297,342



37.09Total loans


925,244



100.00
%


882,771



100.00
%


785,418



100.00
%


803,298



100.00
%


801,614



100.00
%Less:Loans in process


0
**






3,011







5,252







7,008







7,561Unamortized (premiums)discounts


569







(11
)






40







190







63Net deferred loan fees


2,529







2,245







2,021







1,644







1,781Allowance for losses


21,257







12,438







9,873







8,778







8,996Total loans receivable, net

$
900,889






$
865,088






$
768,232






$
785,678






$
783,213   **
    
    - Core data processing systems
    converted in 2008, loan amounts reflected in table are net of
    loan process.    14




---



##### 



and/or
   Allowance
    for Loan Losses
   15




---



##### 



MANAGEMENT
    DISCUSSION AND ANALYSIS
    December 31,(Dollars in thousands)

2008


2007


2006


2005


2004Balance at beginning of year

$
12,438



9,873



8,778



8,996



6,940Provision for losses


26,696



3,898



8,878



2,674



2,755Charge-offs:One-to-four family


(78
)


(42
)


(150
)


(234
)


(331
)Consumer


(612
)


(840
)


(269
)


(228
)


(407
)Commercial business


(13,784
)


(554
)


(188
)


(1,356
)


0Commercial real estate


(3,454
)


(245
)


(7,242
)


(1,259
)


0Recoveries


51



348



66



185



39Net charge-offs


(17,877
)


(1,333
)


(7,783
)


(2,892
)


(699
)Balance at end of year

$
21,257



12,438



9,873



8,778



8,996Year end allowance for loan losses as a percent of year end
    gross loan balance


2.30
%


1.41
%


1.26
%


1.09
%


1.12
%Ratio of net loan charge-offs to average loans outstanding


1.98



0.16



0.98



0.36



0.09       December 31,2008


2007


2006


2005


2004Percent





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


1.75
%


17.51
%


0.27
%


17.33
%


0.22
%


17.10
%


0.21
%


15.82
%


0.17
%


17.34
%Multi-family


0.97



3.17



1.05



3.29



1.49



3.80



1.56



5.07



1.67



5.23Commercial real estate


3.45



35.16



2.10



31.92



1.67



37.49



1.32



32.40



1.60



28.06Construction or development


1.45



11.70



1.34



12.58



1.16



7.66



1.14



10.00



1.07



12.28Consumer loans


1.83



9.36



1.70



9.62



1.59



11.44



0.88



12.56



0.81



14.34Commercial business loans


1.75



23.10



1.28



25.26



1.18



22.51



1.36



24.15



1.36



22.75Total


2.30



100.00
%


1.41



100.00
%


1.26



100.00
%


1.09



100.00
%


1.12



100.00
%      Allowance
    for Real Estate Losses
  16




---



##### 



Non-performing
    Assets
      December 31,(Dollars in thousands)

2008


2007


2006


2005


2004Non-accruing loans:Real estate:One-to-four family

$
7,251



1,196



1,364



626



1,864Commercial real estate


46,953



15,641



5,296



948



1,114Consumer


5,298



1,094



1,254



496



472Commercial business


4,671



1,723



394



259



261Total


64,173



19,654



8,308



2,329



3,711Accruing loans delinquent 90 days or more:One-to-four family


0



0



0



0



628Other assets


25



34



44



178



201Foreclosed and repossessed assets:Real estate:One-to-four family


258



901



1,422



565



141Commercial real estate


10,300



1,313



650



750



0Consumer


0



33



0



61



201Total


10,558



2,247



2,072



1,376



342Total non-performing assets

$
74,756


$
21,935


$
10,424


$
3,883


$
4,882Total as a percentage of total assets


6.53
%


1.96
%


1.07
%


0.39
%


0.51
%Total non-performing loans

$
64,173


$
19,654


$
8,308


$
2,329


$
4,339Total as a percentage of total loans receivable, net


7.12
%


2.27
%


1.08
%


0.30
%


0.55
%Allowance for loan losses to non-performing loans


33.12
%


63.28
%


118.84
%


376.88
%


207.30
%    17




---



##### 



MANAGEMENT
    DISCUSSION AND ANALYSIS
    (Dollars in thousands)
  Principal Amount





Principal Amountof Loan at





of Loan at# of


December 31,


# of


December 31,Property Type

Relationships


2008


Relationships


2007Residential developments


6


$
17,681



5


$
11,496Single family homes


4



898



1



300Condominiums


1



5,440



1



2,546Shopping centers


2



1,237



1



963Commercial buildings


1



169



5



335Hotel


1



4,999



0



0Alternative fuel plants


2



12,492



0



0Elderly care facilities


3



4,037



0



020


$
46,953



13


$
15,640       Liquidity
    and Capital Resources
     18




---



##### 



Contractual
    Obligations and Commercial Commitments
  19




---



##### 



MANAGEMENT
    DISCUSSION AND ANALYSIS
  Payments Due by PeriodLess than 1(Dollars in thousands)

Total


Year


1-3 Years


4-5 Years


After 5 YearsContractual Obligations:Total borrowings

$
142,500



10,000



62,500



70,000



0Annual rental commitments under non-cancelable operating leases


2,191



877



1,269



45



0$
144,691



10,877



63,769



70,045



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

$
39,209



28,633



5,574



2,602



2,400Commitments to lend


65,326



28,509



12,800



9,423



14,594Standby letters of credit


5,933



5,543



390



0



0$
110,468



62,685



18,764



12,025



16,994    Regulatory
    Capital Requirements
   Dividends
   Impact
    of Inflation and Changing Prices
   New
    Accounting Pronouncements
 Noncontrolling Interests in Consolidated Financial
    Statements-an amendment of ARB No. 51. ARB No. 51
 20




---



##### 



Business Combinations. Business Combinations
 Disclosures about Derivative Instruments and Hedging
    Activities-an amendment of FASB Statement No. 133.
 The
    Hierarchy of Generally Accepted Accounting Principles The Meaning of Present Fairly in Conformity
    With Generally Accepted Accounting Principles
  Market
    Risk
  Rate Shock Table
      (Dollars in thousands)

Market ValueBasis point change in interest rates

-100


0


+100


+200Total market risk sensitive assets

$
1,151,348



1,136,959



1,118,088



1,100,806Total market risk sensitive liabilities


1,048,167



1,033,076



1,019,755



1,007,359Off-balance sheet financial instruments


58



0



175



340Net market risk

$
103,123



103,883



98,158



93,107Percentage change from current market value


(0.73
)%


0.00
%


(5.51
)%


(10.37
)%    21




---



##### 



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


Net Interest


Percentin Basis Points


Change


Change+200


$
1,138



3.08
%+100



412



1.110



0



0.00-100



(1,951
)


(5.28
)      22




---



##### 



Off-Balance
    Sheet Arrangements
  23




---



##### 



CONSOLIDATED
    BALANCE SHEETS
   December 31 (Dollars in thousands)

2008


2007ASSETSCash and cash equivalents

$
15,729



23,718Securities available for sale:Mortgage-backed and related securities
    (amortized cost $76,166 and $18,786)


77,327



18,468Other marketable securities
    (amortized cost $95,445 and $165,430)


97,818



167,720175,145



186,188Loans held for sale


2,548



3,261Loans receivable, net


900,889



865,088Accrued interest receivable


5,568



6,893Real estate, net


10,558



2,214Federal Home Loan Bank stock, at cost


7,286



6,198Mortgage servicing rights, net


728



1,270Premises and equipment, net


13,972



12,024Goodwill


0



3,801Prepaid expenses and other assets


4,408



1,680Deferred tax assets, net


8,649



4,719Total assets

$
1,145,480



1,117,054LIABILITIES AND
    STOCKHOLDERS EQUITYDeposits

$
880,505



888,118Federal Home Loan Bank advances and Federal Reserve borrowings


142,500



112,500Accrued interest payable


6,307



9,515Customer escrows


639



866Accrued expenses and other liabilities


3,316



7,927Total liabilities


1,033,267



1,018,926Commitments and contingenciesStockholders equity:Serial preferred stock: ($.01 par value/$1,000 liquidation
    preference)
    Authorized 500,000 shares; issued shares 26,000


23,384



0Common stock ($.01 par value):Authorized 11,000,000; issued shares 9,128,662


91



91Additional paid-in capital


60,687



58,049Retained earnings, subject to certain restrictions


98,067



110,943Accumulated other comprehensive income


2,091



1,167Unearned employee stock ownership plan shares


(3,771
)


(3,965
)Treasury stock, at cost 4,961,032 and 4,953,045 shares


(68,336
)


(68,157
)Total stockholders equity


112,213



98,128Total liabilities and stockholders equity

$
1,145,480



1,117,054   See accompanying notes to
    consolidated financial statements.
 24




---



##### 



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

2008


2007


2006Interest income:Loans receivable

$
58,671



66,115



60,181Securities available for sale:Mortgage-backed and related


1,615



727



271Other marketable


5,775



9,153



5,195Cash equivalents


198



1,187



1,555Other


253



341



325Total interest income


66,512



77,523



67,527Interest expense:Deposits


27,157



33,403



22,046Federal Home Loan Bank advances and Federal Reserve borrowings


5,639



5,420



6,795Total interest expense


32,796



38,823



28,841Net interest income


33,716



38,700



38,686Provision for loan losses


26,696



3,898



8,878Net interest income after provision for loan losses


7,020



34,802



29,808Non-interest income:Fees and service charges


3,933



3,139



3,111Loan servicing fees


955



1,054



1,172Securities gains, net


479



0



48Gain on sales of loans


651



1,514



1,255Other


936



1,887



856Total non-interest income


6,954



7,594



6,442Non-interest expense:Compensation and benefits


12,464



12,491



11,869Occupancy


4,521



4,467



4,435Advertising


422



542



475Data processing


1,395



1,267



1,183Amortization of mortgage servicing rights, net


570



706



848Goodwill impairment charge


3,801



0



0Other


5,912



4,349



3,786Total noninterest expense


29,085



23,822



22,596Income (loss) before income tax expense (benefit)


(15,111
)


18,574



13,654Income tax expense (benefit)


(4,984
)


7,300



5,226Net income (loss)

$
(10,127
)


11,274



8,428Preferred stock dividends and discount


(37
)


0



0Net income (loss) available to common stockholders

$
(10,164
)


11,274



8,428Basic earnings (loss) per common share

$
(2.78
)


3.02



2.20Diluted earnings (loss) per common share

$
(2.78
)


2.89



2.10   See accompanying notes to
    consolidated financial statements.
 25




---



##### 



CONSOLIDATED
    STATEMENTS OF STOCKHOLDERS EQUITY
    AND COMPREHENSIVE INCOME
   Accumulated


UnearnedOther


Employee


UnearnedAdditional





Comprehensive


Stock


Compensation





TotalPreferred


Common


Paid-in


Retained


Income


Ownership


Restricted


Treasury


Stockholders(Dollars in thousands)

Stock


Stock


Capital


Earnings


(Loss)


Plan


Stock


Stock


EquityBalance, December 31, 2005

$
0



91



58,011



98,952



(918
)


(4,351
)


(182
)


(60,875
)


90,728Net income














8,428



















8,428Other comprehensive income, net of tax:Net unrealized gains on securities available for sale


















634















634Total comprehensive income


































9,062Treasury stock purchases






























(3,960
)


(3,960
)Employee stock options exercised










(268
)


















434



166Tax benefits of exercised stock options










56























56Unearned compensation restricted stock awards










(337
)


















337



0Stock compensation expense










64























64Reclassification for FAS 123R adoption










(182
)














182







0Amortization of restricted stock awards










190























190Earned employee stock ownership plan shares










380











193











573Dividends paid














(3,737
)


















(3,737
)Balance, December 31, 2006

$
0



91



57,914



103,643



(284
)


(4,158
)


0



(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
)FIN 48  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











532Dividends paid














(3,724
)


















(3,724
)Balance, December 31, 2007

$
0



91



58,049



110,943



1,167



(3,965
)


0



(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


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











312Dividends paid














(2,749
)


















(2,749
)Balance, December 31, 2008

$
23,384



91



60,687



98,067



2,091



(3,771
)


0



(68,336
)


112,213   See accompanying notes to
    consolidated financial statements.
 26




---



##### 



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

2008


2007


2006Cash flows from operating activities:Net income (loss)

$
(10,127
)


11,274



8,428Adjustments to reconcile net income (loss) to cash provided by
    operating activities:Provision for loan losses


26,696



3,898



8,878Depreciation


1,796



1,903



1,919Amortization of premiums (discounts), net


672



(2,558
)


(1,658
)Amortization of deferred loan fees


(808
)


(1,182
)


(1,587
)Amortization of core deposit intangible


0



106



114Amortization of mortgage servicing rights


570



706



848Capitalized mortgage servicing rights


(27
)


(18
)


(152
)Deferred income tax benefit


(4,568
)


(2,622
)


(750
)Securities gains, net


(479
)


0



(48
)Loss (gain) on sales of real estate


(187
)


(682
)


25Gain on sales of loans


(651
)


(1,514
)


(1,255
)Proceeds from sales of real estate


6,563



7,021



357Proceeds from sales of loans held for sale


60,566



70,407



71,982Origination of loans held for sale


(56,925
)


(56,697
)


(66,819
)Amortization of restricted stock awards


415



334



191Amortization of unearned ESOP shares


194



193



193Earned ESOP shares priced above original cost


118



339



380Stock option compensation expense


33



44



64Decrease (increase) in accrued interest receivable


1,326



(1,832
)


(601
)Increase (decrease) in accrued interest payable


(3,207
)


8,339



(910
)Goodwill impairment charge


3,801



0



0Decrease (increase) in other assets


(2,761
)


834



(979
)Increase (decrease) in other liabilities


(4,618
)


2,034



948Other, net


33



12



136Net cash provided by operating activities


18,425



40,339



19,704Cash flows from investing activities:Proceeds from sales of securities available for sale


10,442



0



2,988Principal collected on securities available for sale


7,246



2,437



752Proceeds collected on maturity of securities available for sale


110,000



165,000



150,500Purchases of securities available for sale


(114,405
)


(223,146
)


(157,528
)Purchase of Federal Home Loan Bank stock


(7,180
)


(2,095
)


(902
)Redemption of Federal Home Loan Bank stock


6,092



3,854



1,311Net (increase) decrease in loans receivable


(78,654
)


(120,063
)


4,853Purchases of premises and equipment


(3,772
)


(2,552
)


(1,370
)Net cash (used) provided by investing activities


(70,231
)


(176,565
)


604Cash flows from financing activities:Increase (decrease) in deposits


(8,484
)


162,822



(6,008
)Purchase of treasury stock


(723
)


(4,913
)


(3,960
)Stock options exercised


0



139



166Excess tax benefit from options exercised


0



99



56Dividends paid to stockholders


(2,749
)


(3,724
)


(3,737
)Preferred stock and warrant issued


26,000



0



0Proceeds from borrowings


631,300



160,000



34,500Repayment of borrowings


(601,300
)


(198,400
)


(44,500
)Increase (decrease) in customer escrows


(227
)


145



(318
)Net cash provided (used) by financing activities


43,817



116,168



(23,801
)Decrease in cash and cash equivalents


(7,989
)


(20,058
)


(3,493
)Cash and cash equivalents, beginning of year


23,718



43,776



47,269Cash and cash equivalents, end of year

$
15,729



23,718



43,776Supplemental cash flow disclosures:Cash paid for interest

$
36,003



30,484



29,750Cash paid for income taxes


5,247



8,696



6,972Supplemental noncash flow disclosures:Loans transferred to loans held for sale


14,727



13,991



3,968Transfer of loans to real estate


2,238



6,499



1,325   See accompanying notes to
    consolidated financial statements.
 27




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
   December 31,
    2008, 2007 and 2006
  Note 1 Description
    of the Business and Summary of Significant Accounting
    Policies
    Use of Estimates
     Cash and Cash Equivalents
  Securities
  Trading Securities
  Securities Held to Maturity
  Securities Available for Sale
  Loans Held for Sale
  Loans Receivable, net
  28




---



##### 



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 Goodwill
    and Other Intangible Assets.
 29




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
    Stock Based Compensation Share-Based Payment
  Income Taxes
  Earnings per Share
  Comprehensive Income
  Segment Information
  New Accounting Pronouncements Noncontrolling Interests in Consolidated Financial
    Statements-an amendment of ARB No. 51. ARB No. 51
 Business Combinations. Business
    Combinations
 Disclosures about Derivative Instruments and Hedging
    Activities - an amendment of FASB Statement
    No. 133.
 The
    Hierarchy of Generally Accepted Accounting Principles
 30




---



##### 



The Meaning of
    Present Fairly in Conformity With Generally Accepted Accounting
    Principles
  Derivative Financial Instruments
  Reclassifications
  NOTE 2 Other
    Comprehensive Income
  For the years ended December 31,2008


2007


2006(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 arising during the period

$
2,040



806



1,234



2,443



992



1,451



1,098



433



665Less reclassification of net gains included in net income


479



169



310



0



0



0



48



17



31Net unrealized gains arising during the period


1,561



637



924



2,443



992



1,451



1,050



416



634Other comprehensive income

$
1,561



637



924



2,443



992



1,451



1,050



416



634   NOTE 3 Securities
    Available for Sale
   Gross


GrossAmortized


Unrealized


Unrealized


Fair(Dollars in thousands)

Cost


Gains


Losses


ValueDecember 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
)


175,145December 31, 2007:Mortgage-backed securities:FHLMC

$
129



4



0



133FNMA


3,833



74



0



3,907GNMA


6



0



0



6Collateralized mortgage obligations:FHLMC


11,792



149



(350
)


11,591FNMA


3,026



0



(195
)


2,83118,786



227



(545
)


18,468Other marketable securities:U.S. Government agency obligations


164,730



2,290



0



167,020Corporate preferred stock


700



0



0



700165,430



2,290



0



167,720$
184,216



2,517



(545
)


186,188  31




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
     Amortized


Fair(Dollars in thousands)

cost


valueDue less than one year

$
94,094



95,549Due after one year through five years


66,571



68,820Due after five years through ten years


9,891



10,078Due after ten years


1,055



698Total

$
171,611



175,145     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
)


1


$
2,530



(319
)

$
11,645



(340
)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
)December 31, 2007Mortgage backed securities:FHLMC


0


$
0



0



1


$
2,513



(350
)

$
2,513



(350
)FNMA


0



0



0



3



2,806



(195
)


2,806



(195
)Total temporarily impaired securities


0


$
0



0



4


$
5,319



(545
)

$
5,319



(545
)   32




---



##### 



NOTE 4 Loans
    Receivable, Net
   (Dollars in thousands)

2008


2007Residential real estate loans:1-4 family conventional

$
161,695



152,6721-4 family conventional  construction


29,998



42,9581-4 family FHA


80



841-4 family VA


214



218191,987



195,932Multi family


29,292



29,073Multi family  construction


35,640



14,207256,919



239,212Commercial real estate:Lodging


45,264



49,590Retail/office


70,158



67,830Nursing home/health care


10,184



10,952Land developments


105,281



109,021Golf courses


15,914



18,869Restaurant/bar/café


6,140



4,972Alternative fuel plants


41,271



27,657Warehouse


26,679



9,512Manufacturing


7,146



5,761Churches/community service


9,130



4,757Other


30,782



26,770367,949



335,691Other loans:Autos


1,333



1,730Home equity line


52,243



51,317Home equity


22,912



20,254Consumer  secured


320



643Commercial business


213,775



222,959Land/lot loans


2,969



4,151Savings


277



358Mobile home


1,316



1,699Consumer  unsecured


5,231



4,757300,376



307,868Total loans


925,244



882,771Less:Unamortized premiums


569



(11
)Net deferred loan fees


2,529



2,245Allowance for loan losses


21,257



12,438Loans in process


0
**


3,011Total loans receivable, net

$
900,889



865,088Commitments to originate or purchase loans

$
10,107



64,700Commitments to deliver loans to secondary market

$
6,737



5,599Weighted average contractual rate of loans in portfolio


5.93
%


7.57
%  **
    Core data processing systems converted in 2008, loan amounts
    reflected in table are net of loans in process.         33




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
    2008


2007Percent





Percent(Dollars in thousands)

Amount


of Total


Amount


of TotalArizona

$
1,802



0.7
%

$
1,765



0.7
%California


221



0.1



4,498



1.9Florida


503



0.2



2,654



1.1Georgia


1,006



0.4



1,662



0.7Iowa


9,240



3.6



10,283



4.3Minnesota


238,675



92.9



211,825



88.6Wisconsin


2,653



1.0



3,947



1.6Other states


2,819



1.1



2,578



1.1Total

$
256,919



100.0
%

$
239,212



100.0
%  Amounts under one million dollars in both years are included
    in Other states.
    2008


2007Percent





Percent(Dollars in thousands)

Amount


of Total


Amount


of TotalArizona

$
10,463



2.8
%

$
3,640



1.1
%California


6,593



1.8



6,662



2.0Florida


2,966



0.8



2,135



0.6Idaho


5,084



1.4



7,861



2.3Indiana


11,778



3.2



932



0.3Iowa


17,829



4.9



19,402



5.8Kansas


2,002



0.5



2,686



0.8Minnesota


290,659



79.0



277,525



82.7Nebraska


4,992



1.4



5,811



1.7North Carolina


7,707



2.1



1,400



0.4Utah


1,823



0.5



1,976



0.6Wisconsin


5,971



1.6



5,444



1.6Other states


82



0.0



217



0.1Total

$
367,949



100.0
%

$
335,691



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, 2005

$
8,778Provision for losses


8,878Charge-offs


(7,849
)Recoveries


66Balance, 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

$
21,257   NOTE 6 Accrued
    Interest Receivable
   Dollars in thousands)

2008


2007Securities available for sale

$
1,340



2,299Loans receivable


4,228



4,594$
5,568



6,893   NOTE 7 Mortgage
    Servicing Rights, Net
   (Dollars in thousands)

2008


2007Mortgage servicing rights:Balance, beginning of year

$
1,270



1,958Originations


28



18Amortization


(570
)


(706
)Balance, end of year


728



1,270Valuation reserve


0



0Mortgage servicing rights, net

$
728



1,270Fair value of mortgage servicing rights

$
2,339



3,261    WeightedWeighted


AverageLoan


Average


Remaining


NumberPrincipal


Interest


Term


of(Dollars in thousands)

Balance


Rate


(months)


LoansOriginal term 30 year fixed rate

$
195,111



5.87
%


284



1,842Original term 15 year fixed rate


98,239



5.17



106



1,652Adjustable rate


1,788



5.43



297



18    Gross





UnamortizedCarrying


Accumulated


Intangible(Dollars in thousands)

Amount


Amortization


AssetsDecember 31,
    2008Mortgage servicing rights

$
3,850



(3,122
)


728December 31, 2007Mortgage servicing rights

$
3,851



(2,581
)


1,270  34




---



##### 



Mortgage(Dollars in thousands)

ServicingYear Ended December 31,

Rights2009

$
3892010


1882011


942012


392013


11    NOTE 8 Real
    Estate
   (Dollars in thousands)

2008


2007Real estate in judgment subject to redemption

$
3,198



1,952Real estate acquired through foreclosure


2,254



73Real estate acquired through deed in lieu of foreclosure


5,000



65Real estate acquired in satisfaction of debt


106



12410,558



2,214Allowance for losses


0



0$
10,558



2,214   NOTE 9 Premises
    and Equipment
   (Dollars in thousands)

2008


2007Land

$
2,364



2,364Office buildings and improvements


11,294



10,207Furniture and equipment


12,614



10,81326,272



23,384Less accumulated depreciation


(12,300
)


(11,360
)$
13,972



12,024   NOTE 10 Deposits
  2008


2007Weighted





Percent


Weighted





Percent(Dollars in thousands)

Average Rate


Amount


of Total


Average Rate


Amount


of TotalNoninterest checking


0.00
%

$
66,905



7.6
%


0.00
%

$
54,998



6.2
%NOW accounts


0.19



126,547



14.4



1.88



118,652



13.4Savings accounts


0.11



28,023



3.2



1.40



39,671



4.5Money market accounts


1.59



97,416



11.0



3.34



182,413



20.5318,891



36.2







395,734



44.6Certificates:0-0.99%






1,068



0.1







555



0.11-1.99%






8,193



1.0







2



0.02-2.99%






81,483



9.3







6,168



0.73-3.99%






344,735



39.0







38,388



4.34-4.99%






114,155



13.0







203,720



22.95-5.99%






11,980



1.4







243,551



27.4Total certificates


3.70



561,614



63.8



4.94



492,384



55.4Total deposits


2.63


$
880,505



100.0
%


3.74


$
888,118



100.0
%   35




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
   2008


2007Weighted





Weighted(Dollars in thousands)




Average





AverageRemaining term to maturity

Amount


Rate


Amount


Rate1-6 months

$
198,511



3.57
%

$
286,259



5.10
%7-12 months


188,735



3.62



154,431



4.7813-36 months


168,912



3.94



46,839



4.44Over 36 months


5,456



3.63



4,855



4.00$
561,614



3.70


$
492,384



4.94     (Dollars in thousands)

2008


2007


2006NOW accounts

$
1,543



3,509



2,636Savings accounts


412



551



1,084Money market accounts


2,821



8,031



5,119Certificates


22,381



21,312



13,207$
27,157



33,403



22,046   NOTE 11 Federal
    Home Loan Bank Advances and Federal Reserve Borrowings
   (Dollars in thousands)

2008


2007Year of Maturity

Amount


Rate


Amount


Rate2008









$
10,000



2.67
%2010

$
10,000



6.48
%


10,000



6.482011


52,500



4.00



7,500



4.842013


70,000



4.77



70,000



4.77132,500



4.59



97,500



4.74Line of Credit  Federal Home Loan Bank


0







15,000



4.04Line of Credit  Federal Reserve


10,000



0.50



0$
142,500



4.31


$
112,500



4.64    Callable QuarterlyYear of Maturity

in 20092010

$
10,0002011


7,5002013


70,000$
87,500   36




---



##### 



NOTE 12 Other
    Borrowed Money
   NOTE 13 Income
    Taxes
   (Dollars in thousands)

2008


2007


2006Current:Federal

$
(415
)


7,702



4,547State


(1
)


2,220



1,429Total current


(416
)


9,922



5,976Deferred:Federal


(3,575
)


(2,044
)


(612
)State


(993
)


(578
)


(138
)Total deferred


(4,568
)


(2,622
)


(750
)$
(4,984
)


7,300



5,226    (Dollars in thousands)

2008


2007


2006Expected federal income tax expense (benefit)

$
(5,138
)


6,501



4,642Items affecting federal income tax:State income taxes, net of federal income tax expense (benefit)


(642
)


1,094



881Tax exempt interest


(490
)


(276
)


(377
)Goodwill impairment charge


1,293



0



0Other, net


(7
)


(19
)


80$
(4,984
)


7,300



5,226    (Dollars in thousands)

2008


2007Deferred tax assets:Allowances for loan and real estate losses

$
8,756



5,153Deferred compensation costs


331



235Deferred ESOP loan asset


629



597Restricted stock expense


160



132FIN 48


210



210Nonaccruing loan interest


1,555



847Other


88



83Total gross deferred tax assets


11,729



7,257Deferred tax liabilities:Net unrealized gain on securities available for sale


1,443



806Deferred loan fees and costs


246



541Premises and equipment basis difference


987



525Originated mortgage servicing rights


297



519Other


107



147Total gross deferred tax liabilities


3,080



2,538Net deferred tax assets

$
8,649



4,719    Accounting for Uncertainty in Income Taxes
    (FIN 48)
 37




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
    NOTE 14 Employee
    Benefits
    93-6, Employers Accounting for Employee Stock Ownership
    Plans
 38




---



##### 



2008


2007


2006Shares allocated to participants beginning of the year


296,086



294,631



286,018Shares allocated to participants


24,379



24,317



24,317Shares purchased with dividends from allocated shares


12,078



8,843



9,223Shares distributed to participants


(11,606
)


(31,705
)


(24,927
)Shares allocated to participants end of year


320,937



296,086



294,631Unreleased shares beginning of the year


498,782



523,099



547,416Shares released during year


(24,379
)


(24,317
)


(24,317
)Unreleased shares end of year


474,403



498,782



523,099Total ESOP shares end of year


795,340



794,868



817,730Fair value of unreleased shares at December 31

$
1,983,005



12,245,098



18,052,146     Unvested optionsShares


Restricted





Award Value/





Weighted AverageAvailable for


Shares


Options


Weighted Average





Grant Date


VestingGrant


Outstanding


Outstanding


Exercise Price


Number


Fair Value


Period1995 PlanDecember 31, 2005


0







124,000


$
12.18



6,000



1.85Options exercised










(7,226
)


13.00Vested


















(3,000
)


1.85December 31, 2006


0







116,774



12.13



3,000



1.85Options exercised










(11,274
)


12.30Vested


















(3,000
)


1.85December 31, 2007


0







105,500



12.12



0



0.00Options exercised










0



0.00Vested


















0



0.00December 31, 2008


0







105,500



12.12



0



0.002001 PlanDecember 31, 2005


164,605



8,629



226,766



18.81



210,871



1.70Granted January 24, 2006


(7,895
)


7,895



0



N/A










3 yearsGranted January 26, 2006


(2,583
)


2,583



0



N/A










3 yearsOptions exercised










(6,466
)


16.13Vested






(2,901
)










(12,429
)


2.59December 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



1.55Total both plans


155,353



34,293



289,648



16.77



141,088



1.55  39




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
     Weighted AverageWeighted











Years OverAverage








Unrecognized


Which UnrecognizedExercise


Number


Remaining Contractual


Number


Number


Compensation


Compensation willPrice


Outstanding


Life in Years


Exercisable


Unexercisable


Expense


be Recognized11.50



65,000



0.3



65,000



0



0



N/A11.25



25,500



1.4



25,500



0



0



N/A16.13



133,608



3.4



1,520



132,088



59,290



3.016.25



15,000



3.4



15,000



0



0



N/A27.64



5,000



5.2



5,000



0



0



N/A27.66



15,540



5.2



15,540



0



0



N/A26.98



15,000



5.6



12,000



3,000



1,319



0.630.00



15,000



6.4



9,000



6,000



4,066



1.4289,648







148,560



141,088


$
64,675       NOTE 15 Earnings
    (Loss) per Common Share
   Year Ended December 31,(Dollars in thousands, except per share data)

2008


2007


2006Weighted average number of common shares outstanding used in
    basic earnings per common share calculation


3,655,078



3,738,457



3,822,189Net dilutive effect of :Options


0



145,503



174,883Restricted stock awards


0



17,828



12,770Weighted average number of common shares outstandingadjusted for effect of dilutive securities


3,655,078



3,901,788



4,009,842Net income (loss) available to common shareholders

$
(10,164
)


11,274



8,428Basic earnings (loss) per common share

$
(2.78
)


3.02



2.20Diluted earnings (loss) per common share

$
(2.78
)


2.89



2.10   NOTE 16 Stockholders
    Equity
  40




---



##### 



QuarterlyDividend


DividendRecord date

Payable date

per Share


Payout RatioFebruary 17, 2006

March 7, 2006

$
0.24



27.59
%May 19, 2006

June 7, 2006

$
0.24



35.29
%August 25, 2006

September 8, 2006

$
0.25



34.25
%November 24, 2006

December 13, 2006

$
0.25



NMFebruary 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
    41




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
     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, 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



10.00December 31, 2007Tier I or core capital

$
88,366



7.96
%

$
44,427



4.00
%

$
43,939



3.96
%

$
55,534



5.00
%Tier I risk-based capital


88,366



10.34



34,195



4.00



54,171



6.34



51,292



6.00Risk-based capital to risk-weighted assets


96,796



11.32



68,390



8.00



28,406



3.32



85,487



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
    December 31,Contract amount(Dollars in thousands)

2008


2007Financial instruments whose contract amount represents credit
    risk:Commitments to originate, fund or purchase loans:1-4 family mortgages

$
4,472



4,034Multi- family mortgages


0



10,116Commercial real estate mortgages


0



29,370Non-mortgage loans


5,635



21,180Undisbursed balance of loans closed


68,334



84,512Unused lines of credit


95,549



131,276Letters of credit


5,933



8,016Total commitments to extend credit

$
179,923



288,504Forward commitments

$
6,737



5,599  case-by-case
 42




---



##### 



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
  Carrying value at December 31, 2008(Dollars in thousands)

Total


Level 1


Level 2


Level 3Securities available for sale

$
175,145



12,584



162,561



0Mortgage loan commitments


(14
)


0



(14
)


0Total

$
175,131



12,584



162,547



0   43




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  Year EndedCarrying Value at December 31, 2008


December 31, 2008(Dollars in thousands)

Total


Level 1


Level 2


Level 3


Total Gains (Losses)Loans held for sale

$
2,548



0



2,548



0



(10
)Mortgage servicing rights


728



0



728



0



0Loans(1)


70,051



0



70,051



0



(9,146
)Real estate,
    net(2)


10,558



0



10,558



0



0Total

$
83,885



0



83,885



0



(9,156
)   (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
   December 31,2008


2007Carrying


Estimated


Contract


Carrying


Estimated


Contract(Dollars in thousands)

Amount


Fair Value


Amount


Amount


Fair Value


AmountFinancial assets:Cash and cash equivalents

$
15,729



15,729







23,718



23,718Securities available for sale


175,145



175,145







186,188



186,188Loans held for sale


2,548



2,548







3,261



3,261Loans receivable, net


900,889



923,034







865,088



874,062Federal Home Loan Bank stock


7,286



7,286







6,198



6,198Accrued interest receivable


5,568



5,568







6,893



6,893Financial liabilities:Deposits


880,505



880,505







888,118



888,118Federal Home Loan Bank advances


132,500



141,812







112,500



116,574Federal Reserve line of credit


10,000



9,999







0



0Accrued interest payable


6,307



6,307







9,515



9,515Off-balance sheet financial instruments:Commitments to extend credit


0



0



179,923



32



32



288,504Commitments to sell loans


(24
)


(24
)


6,737



(17
)


(17
)


5,599  Cash and Cash Equivalents
 Securities Available for Sale
 Loans Held for Sale
 44




---



##### 



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

2008


2007


2006Condensed Balance SheetsAssets:Cash and cash equivalents

$
638



1,022Investment in subsidiaries


107,604



93,372Loans receivable, net


4,400



4,000Accrued interest receivable


0



20Prepaid expenses and other assets


10



3Deferred tax asset


392



408Total assets

$
113,044



98,825Liabilities and Stockholders Equity:Accrued expenses and other liabilities

$
831



697Total liabilities


831



697Serial preferred stock


23,384



0Common stock


91



91Additional paid-in capital


60,687



58,049Retained earnings


98,067



110,943Net unrealized gain on securities available for sale


2,091



1,167Unearned employee stock ownership plan shares


(3,771
)


(3,965
)Treasury stock, at cost, 4,961,032 and 4,953,045 shares


(68,336
)


(68,157
)Total stockholders equity


112,213



98,128Total liabilities and stockholders equity

$
113,044



98,825 45




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  (Dollars in thousands)

2008


2007


2006Condensed Statements of IncomeInterest income

$
98



171



121Interest expense


0



0



(3
)Equity earnings (losses) of subsidiaries


(9,693
)


11,151



8,838Other income


2



739



1Compensation and benefits


(243
)


(233
)


(236
)Occupancy


(24
)


(24
)


(21
)Data processing


(6
)


(6
)


(4
)Other


(466
)


(459
)


(503
)Income (loss) before income tax expense (benefit)


(10,332
)


11,339



8,193Income tax expense (benefit)


(205
)


65



(235
)Net income (loss)

$
(10,127
)


11,274



8,428Condensed Statements of Cash FlowsCash flows from operating activities:Net income (loss)

$
(10,127
)


11,274



8,428Adjustments to reconcile net income (loss) to cash provided by
    operating activities:Equity (earnings) losses of subsidiaries


9,693



(11,151
)


(8,838
)Provision for loan losses


0



0



100Deferred income tax expense (benefit)


16



(25
)


22Gain on sales of real estate


0



(639
)


0Proceeds from sales of real estate


0



1,389



0Earned employee stock ownership shares priced above original cost


118



339



380Stock option compensation


33



44



64Amortization of restricted stock awards


415



334



191Decrease in unearned ESOP shares


194



193



193Decrease (increase) in accrued interest receivable


20



(20
)


0Increase in accrued expenses and other liabilities


134



53



11Decrease in other assets


(7
)


(13
)


(220
)Other, net


(1
)


(99
)


0Net cash provided by operating activities


488



1,679



331Cash flows from investing activities:Investment in subsidiary


(25,000
)


0



0Increase in loans receivable, net


(400
)


(4,000
)


0Net cash used by investing activities


(25,400
)


(4,000
)


0Cash flows from financing activities:Purchase of treasury stock


(723
)


(4,913
)


(3,960
)Stock options exercised


0



139



166Excess tax benefit from options exercised


0



99



56Dividends paid to stockholders


(2,749
)


(3,724
)


(3,737
)Proceeds from preferred stock and warrant issued


26,000



0



0Proceeds from dividends on Bank stock


2,000



6,000



8,000Net cash provided (used) by financing activities


24,528



(2,399
)


525Increase (decrease) in cash and cash equivalents


(384
)


(4,720
)


856Cash and cash equivalents, beginning of year


1,022



5,742



4,886Cash and cash equivalents, end of year

$
638



1,022



5,742   NOTE 23
    Business
    Segments    46




---



##### 



Home Federal








Consolidated(Dollars in thousands)

Savings Bank


Other


Eliminations


TotalAt or for the year ended December 31, 2008:Interest income - external customers

$
66,496



16



0



66,512Non-interest income - external customers


6,959



3



0



6,962Loss 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


27,942



747



(174
)


28,515Income 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


6,855



739



0



7,594Intersegment 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


22,560



730



(174
)


23,116Income 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
)


1,117,054At or for the year ended December 31, 2006:Interest income -  external customers

$
67,418



109



0



67,527Non-interest income -  external customers


6,441



1



0



6,442Intersegment interest income


4



12



(16
)


0Intersegment non-interest income


144



8,838



(8,982
)


0Interest expense


28,853



4



(16
)


28,841Amortization of mortgage servicing rights, net


848



0



0



848Other non-interest expense


21,120



772



(144
)


21,748Income tax expense (benefit)


5,463



(237
)


0



5,226Net income


8,844



8,422



(8,838
)


8,428Goodwill


3,801



0



0



3,801Total assets


970,941



93,831



(86,983
)


977,789  47




---



##### 



Report
    of Independent Registered Public Accounting Firm
  
  The Board of Directors and
    Stockholders
 HMN Financial, Inc.:
        Internal Control  Integrated Framework
    
     48




---



##### 



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

2008


2007


2006Maximum Balance:Federal Home Loan Bank advances

$
165,000



168,200



162,900Federal Home Loan Bank short-term borrowings


43,000



57,300



52,000Average Balance:Federal Home Loan Bank advances


122,338



116,406



155,972Federal Home Loan Bank short-term borrowings


11,249



18,993



28,513    December 31,2008


2007


2006Weighted





Weighted





WeightedAverage





Average





Average(Dollars in thousands)

Amount


Rate


Amount


Rate


Amount


RateFHLB short-term borrowings

$
0



0
%

$
25,000



3.49
%

$
40,000



2.91
%FRB short term borrowings


10,000



0.50



0







0FHLB long-term advances


132,500



4.59



87,500



4.97



110,900



4.76Total

$
142,500



4.31


$
112,500



4.64


$
150,900



4.27  49




---



##### 



SELECTED
    QUARTERLY FINANCIAL DATA
  December 31,


September 30,


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

2008


2008


2008Selected Operations Data (3 months ended):Interest income

$
16,094



16,374



16,253Interest expense


7,805



7,806



8,078Net interest income


8,289



8,568



8,175Provision for loan losses


8,216



15,790



1,130Net interest income (loss) after provision for loan losses


73



(7,222
)


7,045Noninterest income:Fees and service charges


1,065



1,077



998Loan servicing fees


233



240



240Securities gains, net


0



479



0Gain on sales of loans


208



59



228Other noninterest income


220



99



290Total noninterest income


1,726



1,954



1,756Noninterest expense:Compensation and benefits


3,058



3,010



3,036Occupancy


1,097



1,131



1,161Advertising


111



95



92Data processing


318



399



336Amortization of mortgage servicing rights, net


114



142



154Goodwill impairment charge


0



0



3,801Other noninterest expense


1,773



1,785



1,220Total noninterest expense


6,471



6,562



9,800Income (loss) before income tax expense (benefit)


(4,672
)


(11,830
)


(999
)Income tax expense (benefit)


(2,134
)


(4,779
)


1,026Net income (loss)

$
(2,538
)


(7,051
)


(2,025
)Preferred stock dividends and discount


(37
)


0



0Net income (loss) available to common stockholders

$
(2,575
)


(7,051
)


(2,025
)Basic earnings (loss) per common share

$
(0.70
)


(1.93
)


(0.56
)Diluted earnings (loss) per common share

$
(0.70
)


(1.93
)


(0.56
)Financial Ratios:Return on average assets(1)


(0.88
)%


(2.54
)


(0.75
)Return on average equity(1)


(11.43
)


(29.14
)


(8.27
)Average equity to average assets


8.58



8.90



8.99Dividend payout ratio


NM



NM



64.10Net interest
    margin(1)(2)


2.99



3.21



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

$
1,145,480



1,128,900



1,076,163Securities available for sale:Mortgage-backed and related securities


77,327



74,595



16,659Other marketable securities


97,818



111,463



107,167Loans held for sale


2,548



4,222



3,699Loans receivable, net


900,889



873,156



895,713Deposits


880,505



888,848



832,316Federal Home Loan Bank advances and Federal Reserve borrowing


142,500



141,500



137,900Stockholders equity


112,213



86,576



95,052   (1)
    
    Annualized(2)
    
    Net interest income divided by
    average interest-earning assets. NM  Not meaningful
 50




---



##### 



March 31,


December 31,


September 30,


June 30,


March 31,2008


2007


2007


2007


200717,791



19,338



20,278



19,628



18,2799,107



10,090



10,465



9,773



8,4958,684



9,248



9,813



9,855



9,7841,560



1,494



921



1,028



4557,124



7,754



8,892



8,827



9,329793



833



829



781



696242



265



253



265



2710



0



0



0



0156



325



204



189



796327



1,163



362



57



3051,518



2,586



1,648



1,292



2,0683,360



2,721



3,147



3,262



3,3611,132



1,144



1,127



1,112



1,084124



118



123



195



106342



326



325



321



295160



166



169



189



1820



0



0



0



01,134



1,295



1,062



1,070



9226,252



5,770



5,953



6,149



5,9502,390



4,570



4,587



3,970



5,447903



1,795



1,806



1,520



2,1791,487



2,775



2,781



2,450



3,2680



0



0



0



01,487



2,775



2,781



2,450



3,2680.41



0.75



0.74



0.65



0.870.39



0.73



0.71



0.62



0.820.54



0.98



0.97



0.89



1.286.06



11.11



11.19



10.09



13.798.93



8.89



8.92



9.05



9.2634.25



35.21



36.76



30.49



37.313.28



3.39



3.58



3.75



4.011,104,769



1,117,054



1,147,413



1,127,426



1,117,04317,716



18,468



18,927



14,417



11,110139,679



167,720



191,251



189,511



179,9313,090



3,261



2,153



4,454



1,412877,756



865,088



846,201



843,221



798,502892,977



888,118



936,419



925,511



871,92997,500



112,500



97,500



97,500



140,90099,388



98,128



97,300



94,716



94,813  51




---



##### 



COMMON
    STOCK INFORMATION
    December 31,


September 30,


June 30,


March 31,


December 31,


September 28,


June 29,


March 30,2008


2008


2008


2008


2007


2007


2007


2007HIGH

$
12.93



17.52



23.99



25.49



29.89



35.25



35.55



34.95LOW


3.00



11.01



15.28



21.18



22.55



28.54



32.25



32.77CLOSE


4.18



12.38



15.50



23.08



24.55



29.63



35.15



33.84   
  Period EndingIndex

12/31/03


12/31/04


12/31/05


12/31/06


12/31/07


12/31/08HMN Financial, Inc.


100.00



140.01



128.93



155.28



114.17



20.24NASDAQ Composite


100.00



108.59



110.08



120.56



132.39



78.72SNL Bank NASDAQ


100.00



114.61



111.12



124.75



97.94



71.13  52