##### 



FIVE-YEAR
    CONSOLIDATED FINANCIAL HIGHLIGHTS
   Selected Operations Data:

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

2007


2006


2005


2004


2003Total interest income

$
77,523



67,527



60,281



51,617



44,937Total interest expense


38,823



28,841



24,511



20,993



20,289Net interest income


38,700



38,686



35,770



30,624



24,648Provision for loan losses


3,898



8,878



2,674



2,755



2,610Net interest income after provision for loan losses


34,802



29,808



33,096



27,869



22,038Fees and service charges


3,139



3,111



2,719



2,776



2,304Loan servicing fees


1,054



1,172



1,210



1,169



998Securities gains (losses), net


0



48



(21
)


(535
)


1,275Gain on sales of loans


1,514



1,255



1,853



1,703



5,240Other non-interest income


1,887



856



748



854



438Total non-interest income


7,594



6,442



6,509



5,967



10,255Total non-interest expense


23,822



22,596



21,801



20,162



19,653Income tax expense


7,300



5,226



6,736



4,387



4,038Income before minority interest


11,274



8,428



11,068



9,287



8,602Minority interest


0



0



0



(3
)


(3
)Net income

$
11,274



8,428



11,068



9,290



8,605Per common share and common share equivalents:Basic

$
3.02



2.20



2.89



2.40



2.26Diluted


2.89



2.10



2.77



2.31



2.16   Selected Financial Condition
    Data:

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

2007


2006


2005


2004


2003Total assets

$
1,117,054



977,789



991,237



960,673



866,726Securities available for sale


186,188



126,140



119,659



103,672



104,664Loans held for sale


3,261



1,493



1,435



2,712



6,543Loans receivable, net


865,088



768,232



785,678



783,213



688,951Deposits


888,118



725,959



731,537



698,902



551,688Federal Home Loan Bank advances


112,500



150,900



160,900



170,900



203,900Stockholders equity


98,128



93,142



90,728



83,771



80,931Book value per share


23.50



21.58



20.59



18.95



17.93Number of full service offices


15



14



13



13



12Number of loan origination offices


2



2



3



2



6Key
    Ratios(1)Stockholders equity to total assets at year end


8.78
%


9.53
%


9.15
%


8.72
%


9.34
%Average stockholders equity to average assets


8.89



9.70



9.05



9.17



10.15Return on stockholders equity(ratio of net income to average equity)


11.53



8.85



12.42



11.03



10.85Return on assets(ratio of net income to average assets)


1.03



0.86



1.12



1.01



1.10Dividend payout ratio
    (ratio of dividends paid to net income)


34.72



42.61



38.02



36.36



39.58   (1)
    
    Average balances were calculated
    based upon amortized cost without the market value impact of
    SFAS No. 115.   5




---



##### 



MANAGEMENTS
    DISCUSSION AND ANALYSIS
    MANAGEMENTS
    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 that deal with future results, plans or performance.
    In addition, the Companys management may make these
    statements orally to the media, or to securities analysts,
    investors or others. Forward-looking statements deal with
    matters that do not relate strictly to historical facts. Words
    such as anticipate, believe,
    expect, intend, would,
    could and similar expressions, as they relate to us,
    are intended to identify such forward-looking statements. The
    Companys future results may differ materially from
    historical performance and forward-looking statements about the
    Companys expected financial results or other plans are
    subject to a number of risks and uncertainties. These include
    but are not limited to possible legislative changes and adverse
    economic, business and competitive developments such as
    shrinking interest margins; 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; changes in credit and other risks posed by
    the Companys loan and investment portfolios; changes in
    loan repayment and prepayment patterns; changes in loan terms
    and conditions; technological, computer-related or operational
    difficulties; adverse changes in securities markets; results of
    litigation or other significant uncertainties.
  OVERVIEW
    Critical
    Accounting Policies
 and/or
  Allowance
    for Loan Losses and Related Provision
  6




---



##### 



Mortgage
    Servicing Rights
 Accounting for Transfers and Servicing of Financial Assets
    and Extinguishments of Liabilities.
  Income
    Taxes
  7




---



##### 



MANAGEMENTS
    DISCUSSION AND ANALYSIS
   Accounting
    for Uncertainty in Income Taxes  an interpretation of
    FASB Statement No. 109
  Results
    of Operations
    Net
    Interest Income
  8




---



##### 



Year Ended December 31,2007


2006


2005Average


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

$
15,502



727



4.69
%

$
7,045



271



3.85
%

$
8,509



326



3.83
%Other marketable securities


177,256



9,153



5.16



124,684



5,195



4.17



95,193



2,744



2.88Loans held for sale


2,391



148



6.19



3,383



216



6.40



3,308



189



5.71Loans receivable,
    net(1)(2)


827,597



65,967



7.97



760,990



59,965



7.88



802,637



56,189



7.00Federal Home Loan Bank stock


6,627



341



5.15



8,235



325



3.95



8,960



253



2.82Other, including cash equivalents


24,820



1,187



4.78



32,867



1,555



4.73



21,714



580



2.67Total interest-earning assets

$
1,054,193



77,523



7.35


$
937,204



67,527



7.21


$
940,321



60,281



6.41Interest-bearing liabilities:Noninterest checking

$
55,002



0



0.00
%

$
51,017



0



0.00
%

$
45,263



0



0.00
%NOW accounts


115,572



3,495



3.02



97,753



2,635



2.70



104,271



1,770



1.70Passbooks


40,401



551



1.36



60,577



1,084



1.79



48,297



435



0.90Money market accounts


216,175



8,045



3.72



153,889



5,119



3.33



106,819



2,273



2.13Certificate accounts


236,415



10,577



4.47



233,074



8,652



3.71



243,853



7,093



2.91Brokered deposits


210,164



10,734



5.11



125,055



4,553



3.64



167,181



5,660



3.39Federal Home Loan Bank advances


116,721



5,420



4.64



156,399



6,795



4.34



170,914



7,278



4.26Other interest-bearing liabilities


939



1



0.00



834



3



0.00



866



2



0.00Total interest-bearing liabilities

$
991,389



38,823



3.91


$
878,598



28,841



3.28


$
887,464



24,511



2.76Net interest income






38,700











38,686











35,770Net interest rate spread










3.44
%










3.93
%










3.65
%Net earning assets

$
62,804










$
58,606










$
52,857Net interest margin










3.67
%










4.13
%










3.80
%Average interest-earning assets to average interest-bearing
    liabilities






106.33
%










106.67
%










105.96
%   (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 $789,000 for 2007 and $1.1 million for 2006 and
    2005.(2)
    
    Calculated net of deferred loan
    fees, loan discounts, loans in process and loss reserve.     9




---



##### 



MANAGEMENTS
    DISCUSSION AND ANALYSIS
   Year Ended December 31,2007 vs. 2006





2006 vs. 2005Increase (Decrease)





Increase (Decrease)Due to


Total


Due toIncrease





Total 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

$
325



131



456


$
(56
)


1



(55
)Other marketable securities


2,190



1,768



3,958



850



1,601



2,451Loans held for sale


(63
)


(5
)


(68
)


4



23



27Loans receivable, net


5,602



399



6,001



(2,832
)


6,608



3,776Cash equivalents


(381
)


13



(368
)


298



677



975Other


(63
)


80



17



(21
)


92



71Total interest-earning assets

$
7,610



2,386



9,996


$
(1,757
)


9,002



7,245Interest-bearing liabilities:NOW accounts

$
864



(5
)


859


$
(81
)


947



866Passbooks


(410
)


(123
)


(533
)


111



538



649Money market accounts


116



2,809



2,925



1,292



1,552



2,844Certificates


125



1,801



1,926



(313
)


1,873



1,560Brokered deposits


3,883



2,298



6,181



(1,426
)


319



(1,107
)Federal Home Loan Bank advances


(1,816
)


441



(1,375
)


(618
)


135



(483
)Other interest-bearing liabilities


0



(1
)


(1
)


0



0



0Total interest-bearing liabilities

$
2,762



7,220



9,982


$
(1,035
)


5,364



4,329Net interest income









$
38,700










$
38,686   (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,
    2007
   Weighted average yield on:Securities available for sale:Mortgage-backed and related securities

4.76%Other marketable securities

5.07Loans held for sale

5.90Loans receivable, net

7.57Federal Home Loan Bank stock

4.25Other interest-earnings assets

2.65Combined weighted average rate on
    interest-earning assets

7.04Weighted average rate on:NOW accounts

1.88%Passbooks

1.40Money market accounts

3.34Certificates

4.94Federal Home Loan Bank advances

4.64Combined weighted average yield on
    interest-bearing liabilities

3.84Interest rate spread

3.20   Provision
    for Loan Losses
  10




---



##### 



Non-Interest
    Income
  PercentageYear Ended December 31,


Increase (Decrease)(Dollars in thousands)

2007


2006


2005


2007/2006


2006/2005Fees and service charges

$
3,139



3,111



2,719



0.9
%


14.4
%Loan servicing fees


1,054



1,172



1,210



(10.1
)


(3.1
)Securities gains (losses), net


0



48



(21
)


(100.0
)


328.6Gain on sales of loans


1,514



1,255



1,853



20.6



(32.3
)Other non-interest income


1,887



856



748



120.4



14.4Total non-interest income

$
7,594



6,442



6,509



17.9



(1.0
)         11




---



##### 



MANAGEMENTS
    DISCUSSION AND ANALYSIS
   Non-Interest
    Expense
   PercentageYear Ended December 31,


Increase (Decrease)(Dollars in thousands)

2007


2006


2005


2007/2006


2006/2005Compensation and benefits

$
12,491



11,869



11,140



5.2
%


6.5
%Occupancy


4,467



4,435



4,081



0.7



8.7Advertising


542



475



384



14.1



23.7Data processing


1,267



1,183



1,032



7.1



14.6Amortization of mortgage servicing rights, net


706



848



1,020



(16.7
)


(16.9
)Other


4,349



3,786



4,144



14.9



(8.6
)Total non-interest expense

$
23,822



22,596



21,801



5.4



3.6      Income
    Taxes
  Accounting for Uncertainty in Income Taxes  an
    interpretation of FASB Statement No. 109
  12




---



##### 



COMPARISON
    OF 2006 WITH 2005
       13




---



##### 



MANAGEMENTS
    DISCUSSION AND ANALYSIS
      14




---



##### 



Financial
    Condition
 Loans
    Receivable, Net
    December 31,2007


2006


2005


2004


2003(Dollars in thousands)

Amount


Percent


Amount


Percent


Amount


Percent


Amount


Percent


Amount


PercentReal Estate Loans:One-to-four family

$
152,974



17.33
%

$
134,269



17.10
%

$
127,075



15.82
%

$
139,008



17.34
%

$
144,315



20.37
%Multi-family


29,073



3.29



29,863



3.80



40,753



5.07



41,922



5.23



31,540



4.45Commercial


281,822



31.92



294,490



37.49



260,268



32.40



224,945



28.06



199,124



28.10Construction or development


111,034



12.58



60,178



7.66



80,342



10.00



98,397



12.28



95,346



13.45Total real estate loans


574,903



65.12



518,800



66.05



508,438



63.29



504,272



62.91



470,325



66.37Other Loans:Consumer Loans:Automobile


1,730



0.20



3,093



0.39



5,461



0.68



9,496



1.18



14,754



2.08Home equity line


51,317



5.81



54,247



6.91



61,011



7.60



67,140



8.38



54,193



7.64Home equity


20,254



2.30



21,263



2.71



19,076



2.37



20,033



2.50



18,974



2.68Mobile home


1,699



0.19



2,052



0.26



2,299



0.29



2,896



0.36



3,665



0.52Land/lot loans


4,151



0.47



5,501



0.70



9,487



1.18



11,572



1.44



10,486



1.48Other


5,758



0.65



3,692



0.47



3,564



0.44



3,836



0.48



3,833



0.54Total consumer loans


84,909



9.62



89,848



11.44



100,898



12.56



114,973



14.34



105,905



14.94Commercial business loans


222,959



25.26



176,770



22.51



193,962



24.15



182,369



22.75



132,459



18.69Total other loans


307,868



34.88



266,618



33.95



294,860



36.71



297,342



37.09



238,364



33.63Total loans


882,771



100.00
%


785,418



100.00
%


803,298



100.00
%


801,614



100.00
%


708,689



100.00
%Less:Loans in process


3,011







5,252







7,008







7,561







11,298Unamortized (premiums) discounts


(11
)






40







190







63







166Net deferred loan fees


2,245







2,021







1,644







1,781







1,334Allowance for losses


12,438







9,873







8,778







8,996







6,940Total loans receivable, net

$
865,088






$
768,232






$
785,678






$
783,213






$
688,951     15




---



##### 



MANAGEMENTS
    DISCUSSION AND ANALYSIS
      Allowance
    for Loan Losses
   16




---



##### 



December 31,(Dollars in thousands)

2007


2006


2005


2004


2003Balance at beginning of year

$
9,873



8,778



8,996



6,940



4,824Provision for losses


3,898



8,878



2,674



2,755



2,610Charge-offs:One-to-four family


(42
)


(150
)


(234
)


(331
)


(69
)Consumer


(840
)


(269
)


(228
)


(407
)


(226
)Commercial business and real estate


(799
)


(7,430
)


(2,615
)


0



(255
)Recoveries


348



66



185



39



56Net charge-offs


(1,333
)


(7,783
)


(2,892
)


(699
)


(494
)Balance at end of year

$
12,438



9,873



8,778



8,996



6,940Year end allowance for loan losses as a percent of year end
    gross loan balance


1.41
%


1.26
%


1.09
%


1.12
%


0.98
%Ratio of net loan charge-offs to average loans outstanding


0.16



0.98



0.36



0.09



0.08       December 31,2007


2006


2005


2004


2003Percent





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


0.27
%


17.33
%


0.22
%


17.10
%


0.21
%


15.82
%


0.17
%


17.34
%


0.12
%


20.36
%Multi-family


1.05



3.29



1.49



3.80



1.56



5.07



1.67



5.23



1.34



4.45Commercial real estate


2.10



31.92



1.67



37.49



1.32



32.40



1.60



28.06



1.42



28.10Construction or development


1.34



12.58



1.16



7.66



1.14



10.00



1.07



12.28



0.92



13.45Consumer loans


1.70



9.62



1.59



11.44



0.88



12.56



0.81



14.34



0.98



14.95Commercial business loans


1.28



25.26



1.18



22.51



1.36



24.15



1.36



22.75



1.20



18.69Total


1.41



100.00
%


1.26



100.00
%


1.09



100.00
%


1.12



100.00
%


0.98



100.00
%      Allowance
    for Real Estate Losses
  17




---



##### 



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

2007


2006


2005


2004


2003Non-accruing loans:Real estate:One-to-four family

$
1,196



1,364



626



1,864



1,177Commercial real estate


15,641



5,296



948



1,114



2,162Consumer


1,094



1,254



496



472



1,050Commercial business


1,723



394



259



261



186Total


19,654



8,308



2,329



3,711



4,575Accruing loans delinquent 90 days or more:One-to-four family


0



0



0



628



114Other assets


34



44



178



201



211Foreclosed and repossessed assets:Real estate:One-to-four family


901



1,422



565



141



73Commercial real estate


1,313



650



750



0



0Consumer


33



0



61



201



62Total


2,247



2,072



1,376



342



135Total non-performing assets

$
21,935


$
10,424


$
3,883


$
4,882


$
5,035Total as a percentage of total assets


1.96
%


1.07
%


0.39
%


0.51
%


0.58
%Total non-performing loans

$
19,654


$
8,308


$
2,329


$
4,339


$
4,689Total as a percentage of total loans receivable, net


2.27
%


1.08
%


0.30
%


0.55
%


0.68
%Allowance for loan losses to non-performing loans


63.28
%


118.84
%


376.88
%


207.30
%


147.99
%      18




---



##### 



Liquidity
    and Capital Resources
          19




---



##### 



MANAGEMENTS
    DISCUSSION AND ANALYSIS
     Contractual
    Obligations and Commercial Commitments
    Payments Due by PeriodLess than 1








After(Dollars in thousands)

Total


year


1-3 Years


4-5 Years


5 YearsContractual Obligations:Total borrowings

$
112,500



25,000



10,000



7,500



70,000Annual rental commitments under non-cancelable operating leases


2,856



876



1,508



472



0$
115,356



25,876



11,508



7,972



70,000   Amount of Commitments - Expiring by PeriodOther Commercial Commitments:Commercial lines of credit

$
76,059



52,533



12,222



615



10,689Commitments to lend


189,463



25,999



33,189



458



129,817Standby letters of credit


8,728



8,116



612



0



0$
274,250



86,648



46,023



1,073



140,506    Regulatory
    Capital Requirements
   Dividends
   Impact
    of Inflation and Changing Prices
   New
    Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes  an
    interpretation of FASB Statement No. 109
 20




---



##### 



Fair Value Measurements
 The
    Fair Value Option for Financial Assets and Financial
    Liabilities, Including an amendment of FASB Statement
    No. 115
 Noncontrolling Interests in Consolidated Financial
    Statements-an amendment of ARB No. 51 ARB No. 51
 Business Combinations Business Combinations
  Market
    Risk
  Rate Shock
   21




---



##### 



MANAGEMENTS
    DISCUSSION AND ANALYSIS
     (Dollars in thousands)

Market ValueBasis point change in interest rates

-200


-100


0


+100


+200Total market risk sensitive assets

$
1,131,779



1,121,448



1,108,743



1,093,485



1,077,476Total market risk sensitive liabilities


1,010,653



999,327



988,572



979,235



971,447Off-balance sheet financial instruments


(133
)


(62
)


0



204



394Net market risk

$
121,259



122,183



120,171



114,046



105,635Percentage change from current market value


0.91
%


1.67
%


0.00
%


(5.10
)%


(12.10
)%       Asset/Liability
    Management
    Rate Shock Table(Dollars in thousands)Rate Shock


Net Interest


Percentin Basis Points


Change


Change+200


$
(1,755
)


(4.84
)%+100



(333
)


(0.92
)0



0



0.00-100



373



1.03-200



377



1.04   22




---



##### 



Off-Balance
    Sheet Arrangements
  23




---



##### 



CONSOLIDATED
    BALANCE SHEETS
   December 31 (Dollars in thousands)

2007


2006ASSETSCash and cash equivalents

$
23,718



43,776Securities available for sale:Mortgage-backed and related securities
    (amortized cost $18,786 and $6,671)


18,468



6,178Other marketable securities
    (amortized cost $165,430 and $119,940)


167,720



119,962186,188



126,140Loans held for sale


3,261



1,493Loans receivable, net


865,088



768,232Accrued interest receivable


6,893



5,061Real estate, net


2,214



2,072Federal Home Loan Bank stock, at cost


6,198



7,956Mortgage servicing rights, net


1,270



1,958Premises and equipment, net


12,024



11,372Goodwill


3,801



3,801Core deposit intangible, net


0



106Prepaid expenses and other assets


1,680



2,943Deferred tax assets, net


4,719



2,879Total assets

$
1,117,054



977,789LIABILITIES AND
    STOCKHOLDERS EQUITYDeposits

$
888,118



725,959Federal Home Loan Bank advances


112,500



150,900Accrued interest payable


9,515



1,176Customer escrows


866



721Accrued expenses and other liabilities


7,927



5,891Total liabilities


1,018,926



884,647Commitments and contingenciesStockholders equity:Serial preferred stock: ($.01 par value)Authorized 500,000 shares; none issued or outstanding


0



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


91



91Additional paid-in capital


58,049



57,914Retained earnings, subject to certain restrictions


110,943



103,643Accumulated other comprehensive income (loss)


1,167



(284
)Unearned employee stock ownership plan shares


(3,965
)


(4,158
)Treasury stock, at cost 4,953,045 and 4,813,232 shares


(68,157
)


(64,064
)Total stockholders equity


98,128



93,142Total liabilities and stockholders equity

$
1,117,054



977,789   See accompanying notes to
    consolidated financial statements.
 24




---



##### 



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

2007


2006


2005Interest income:Loans receivable

$
66,115



60,181



56,377Securities available for sale:Mortgage-backed and related


727



271



326Other marketable


9,153



5,195



2,744Cash equivalents


1,187



1,555



580Other


341



325



254Total interest income


77,523



67,527



60,281Interest expense:Deposits


33,403



22,046



17,233Federal Home Loan Bank advances


5,420



6,795



7,278Total interest expense


38,823



28,841



24,511Net interest income


38,700



38,686



35,770Provision for loan losses


3,898



8,878



2,674Net interest income after provision for loan losses


34,802



29,808



33,096Non-interest income:Fees and service charges


3,139



3,111



2,719Loan servicing fees


1,054



1,172



1,210Securities gains (losses), net


0



48



(21
)Gain on sales of loans


1,514



1,255



1,853Other


1,887



856



748Total non-interest income


7,594



6,442



6,509Non-interest expense:Compensation and benefits


12,491



11,869



11,140Occupancy


4,467



4,435



4,081Advertising


542



475



384Data processing


1,267



1,183



1,032Amortization of mortgage servicing rights


706



848



1,020Other


4,349



3,786



4,144Total noninterest expense


23,822



22,596



21,801Income before income tax expense


18,574



13,654



17,804Income tax expense


7,300



5,226



6,736Net income

$
11,274



8,428



11,068Basic earnings per share

$
3.02



2.20



2.89Diluted earnings per share

$
2.89



2.10



2.77   See accompanying notes to
    consolidated financial statements.
 25




---



##### 



CONSOLIDATED
    STATEMENTS OF STOCKHOLDERS EQUITY
    AND COMPREHENSIVE INCOME
   UnearnedAccumulated


Employee


UnearnedAdditional





Other


Stock


Compensation





TotalCommon


Paid-In


Retained


Comprehensive


Ownership


Restricted


Treasury


Stockholders(Dollars in thousands)

Stock


Capital


Earnings


Income (Loss)


Plan


Stock


Stock


EquityBalance, December 31, 2004

$
91



57,876



91,408



(605
)


(4,544
)


0



(60,455
)


83,771Net income










11,068



















11,068Other comprehensive loss, net of tax:Net unrealized losses on securities available for sale














(313
)














(313
)Total comprehensive income






























10,755Treasury stock purchases


























(972
)


(972
)Employee stock options exercised






(248
)


















285



37Tax benefits of exercised stock options






30























30Unearned compensation restricted stock awards






15















(326
)


311



0Restricted stock awards forfeited






(2
)














46



(44
)


0Amortization of restricted stock awards






















98







98Earned employee stock ownership plan shares






340











193











533Dividends paid










(3,524
)


















(3,524
)Balance, December 31, 2005

$
91



58,011



98,952



(918
)


(4,351
)


(182
)


(60,875
)


90,728Net income










8,428



















8,428Other comprehensive gain, 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

$
91



57,914



103,643



(284
)


(4,158
)


0



(64,064
)


93,142Net income










11,274



















11,274Other comprehensive gain, 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

$
91



58,049



110,943



1,167



(3,965
)


0



(68,157
)


98,128   See accompanying notes to
    consolidated financial statements.
 26




---



##### 



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

2007


2006


2005Cash flows from operating activities:Net income

$
11,274



8,428



11,068Adjustments to reconcile net income to cash provided by
    operating activities:Provision for loan losses


3,898



8,878



2,674Depreciation


1,903



1,919



1,751Accretion of discounts, net


(2,558
)


(1,658
)


(850
)Amortization of deferred loan fees


(1,182
)


(1,587
)


(1,071
)Amortization of core deposit intangible


106



114



114Amortization of mortgage servicing rights


706



848



1,020Capitalized mortgage servicing rights


(18
)


(152
)


(442
)Deferred income tax benefit


(2,622
)


(750
)


(1,259
)Securities (gains) losses, net


0



(48
)


21Loss (gain) on sales of real estate


(682
)


25



18Proceeds from sales of real estate


7,021



357



605Gain on sales of loans


(1,514
)


(1,255
)


(1,853
)Proceeds from sales of loans held for sale


70,407



71,982



97,015Disbursements on loans held for sale


(56,697
)


(66,819
)


(85,200
)Amortization of restricted stock awards


334



191



98Amortization of unearned ESOP shares


193



193



193Earned ESOP shares priced above original cost


339



380



340Stock option compensation expense


44



64



0Increase in accrued interest receivable


(1,832
)


(601
)


(766
)Increase (decrease) in accrued interest payable


8,339



(910
)


771Decrease (increase) in other assets


834



(979
)


776Increase (decrease) in other liabilities


2,034



948



(91
)Other, net


12



136



109Net cash provided by operating activities


40,339



19,704



25,041Cash flows from investing activities:Proceeds from sales of securities available for sale


0



2,988



0Principal collected on securities available for sale


2,437



752



2,139Proceeds collected on maturity of securities available for sale


165,000



150,500



21,000Purchases of securities available for sale


(223,146
)


(157,528
)


(39,464
)Purchase of Federal Home Loan Bank stock


(2,095
)


(902
)


(2,427
)Redemption of Federal Home Loan Bank stock


3,854



1,311



3,356Net (increase) decrease in loans receivable


(120,063
)


4,853



(14,532
)Purchases of premises and equipment


(2,552
)


(1,370
)


(1,209
)Net cash (used) provided by investing activities


(176,565
)


604



(31,137
)Cash flows from financing activities:Increase (decrease) in deposits


162,822



(6,008
)


33,219Purchase of treasury stock


(4,913
)


(3,960
)


(972
)Stock options exercised


139



166



38Excess tax benefit from options exercised


99



56



30Dividends paid to stockholders


(3,724
)


(3,737
)


(3,524
)Proceeds from borrowings


160,000



34,500



78,000Repayment of borrowings


(198,400
)


(44,500
)


(88,000
)Increase (decrease) in customer escrows


145



(318
)


276Net cash provided (used) by financing activities


116,168



(23,801
)


19,067Increase (decrease) in cash and cash equivalents


(20,058
)


(3,493
)


12,971Cash and cash equivalents, beginning of year


43,776



47,269



34,298Cash and cash equivalents, end of year

$
23,718



43,776



47,269Supplemental cash flow disclosures:Cash paid for interest

$
30,484



29,750



23,740Cash paid for income taxes


8,696



6,972



6,601Supplemental noncash flow disclosures:Loans transferred to loans held for sale


13,991



3,968



8,662Transfer of loans to real estate


6,499



1,325



15,995Transfer of real estate to loans


0



0



14,195   See accompanying notes to
    consolidated financial statements.
 27




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
   December 31,
    2007, 2006 and 2005
  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
  Year ended December 31,(Dollars in thousands)

2005Net income:As reported

$
11,068Deduct: total stock-based employee compensation expense
    determined under fair value based method for all awards, net of
    related tax effects


55Pro forma

$
11,013Earnings per common share:As reported:Basic

$
2.89Diluted


2.77Pro forma:Basic


2.88Diluted


2.77   Income Taxes
  Earnings per Share
  Comprehensive Income
  Segment Information
  New Accounting Pronouncements Accounting
    for Uncertainty in Income Taxes  an interpretation of
    FASB Statement No. 109
 Fair Value Measurements
 30




---



##### 



The
    Fair Value Option for Financial Assets and Financial
    Liabilities, Including an amendment of FASB Statement
    No. 115.
 Noncontrolling Interests in Consolidated Financial
    Statements-an amendment of ARB No. 51. ARB No. 51
 Business Combinations. Business Combinations
  Derivative Financial Instruments
  Reclassifications
  NOTE 2
    Other
    Comprehensive Income  For the years ended December 31,2007


2006


2005(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

$
2,443



992



1,451



1,098



433



665



(607
)


(279
)


(328
)Less reclassification of net gains (losses)
    included in net income


0



0



0



48



17



31



(21
)


(6
)


(15
)Net unrealized gains (losses) arising during the period


2,443



992



1,451



1,050



416



634



(586
)


(273
)


(313
)Other comprehensive income (loss)

$
2,443



992



1,451



1,050



416



634



(586
)


(273
)


(313
)  31




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
   NOTE 3 Securities
    Available for Sale
   Gross


GrossAmortized


unrealized


unrealized


Fair(Dollars in thousands)

cost


gains


losses


valueDecember 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 and agency preferred stock


700



0



0



700165,430



2,290



0



167,720$
184,216



2,517



(545
)


186,188December 31, 2006:Mortgage-backed securities:FHLMC

$
163



3



0



166GNMA


10



0



0



10Collateralized mortgage obligations:FHLMC


2,932



0



(263
)


2,669FNMA


3,566



1



(234
)


3,3336,671



4



(497
)


6,178Other marketable securities:U.S. Government agency obligations


119,240



119



(97
)


119,262Corporate and agency preferred stock


700



0



0



700119,940



119



(97
)


119,962$
126,611



123



(594
)


126,140     Amortized


Fair(Dollars in thousands)

cost


valueDue less than one year

$
103,141



103,508Due after one year through five years


73,508



75,376Due after five years through ten years


3,372



3,275Due after ten years


3,495



3,329No stated maturity


700



700Total

$
184,216



186,188   32




---



##### 



Less than twelve months


Twelve months or more


Total(Dollars in thousands)

# of


Fair


Unrealized


# of


Fair


Unrealized


Fair


UnrealizedDecember 31, 2007

Investments


Value


Losses


Investments


Value


Losses


Value


LossesMortgage 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
)   Less than twelve months


Twelve months or more


Total(Dollars in thousands)

# of


Fair


Unrealized


# of


Fair


Unrealized


Fair


UnrealizedDecember 31, 2006

Investments


Value


Losses


Investments


Value


Losses


Value


LossesMortgage backed securities:FHLMC


0


$
0



0



2


$
2,670



(263
)

$
2,670



(263
)FNMA


0



0



0



3



3,177



(234
)


3,177



(234
)Other marketable debt securities:FNMA


3



14,925



(3
)


0



0



0



14,925



(3
)FHLMC


2



9,792



(2
)


0



0



0



9,792



(2
)FFCB


1



4,878



(3
)


0



0



0



4,878



(3
)FHLB


4



19,878



(69
)


2



9,980



(20
)


29,858



(89
)Total temporarily impaired securities


10


$
49,473



(77
)


7


$
15,827



(517
)

$
65,300



(594
)   33




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  NOTE 4  Loans
    Receivable, Net
   (Dollars in thousands)

2007


2006Residential real estate loans:1-4 family conventional

$
152,672



133,9601-4 family conventional -construction


42,958



36,1131-4 family FHA


84



881-4 family VA


218



221195,932



170,382Multi family


29,073



29,863Multi family  construction


14,207



4,474239,212



204,719Commercial real estate:Lodging


49,590



46,953Retail/office


67,830



63,538Nursing home/health care


10,952



14,827Land developments


109,021



108,749Golf courses


18,869



19,109Restaurant/bar/café


4,972



3,310Ethanol plants


27,657



8,122Warehouse


9,512



7,843Manufacturing


5,761



15,581Churches/community service


4,757



3,976Other


26,770



22,073335,691



314,081Other loans:Autos


1,730



3,093Home equity line


51,317



54,247Home equity


20,254



21,263Consumer  secured


643



659Commercial business


222,959



176,770Land/lot loans


4,151



5,501Savings


358



814Mobile home


1,699



2,052Consumer  unsecured


4,757



2,219307,868



266,618Total loans


882,771



785,418Less:Unamortized (premiums) discounts


(11
)


40Net deferred loan fees


2,245



2,021Allowance for losses


12,438



9,873Loans in process


3,011



5,252Total loans receivable, net

$
865,088



768,232Commitments to originate or purchase loans

$
64,700



42,507Commitments to deliver loans to secondary market

$
5,599



2,285Weighted average contractual rate of loans in portfolio


7.57
%


7.69
%        34




---



##### 



2007


2006Percent





Percent(Dollars in thousands)

Amount


of Total


Amount


of TotalArizona

$
1,765



0.7
%

$
2,736



1.3
%California


4,498



1.9



0



0Florida


2,654



1.1



0



0Georgia


1,662



0.7



2,564



1.3Iowa


10,283



4.3



11,793



5.8Minnesota


211,825



88.6



178,121



87.0Wisconsin


3,947



1.6



4,317



2.1Other states


2,578



1.1



5,188



2.5Total

$
239,212



100.0
%

$
204,719



100.0
%  Amounts under one million dollars in both years are included
    in Other states.
     2007


2006Percent





Percent(Dollars in thousands)

Amount


of Total


Amount


of TotalArizona

$
3,640



1.1
%

$
2,885



0.9
%California


6,662



2.0



1,185



0.4Florida


2,135



0.6



0



0.0Idaho


7,861



2.3



5,389



1.7Iowa


19,402



5.8



13,399



4.3Kansas


2,686



0.8



3,520



1.1Minnesota


277,525



82.7



280,371



89.3Missouri


0



0.0



4,226



1.3Nebraska


5,811



1.7



948



0.3North Carolina


1,400



0.4



0



0.0Utah


1,976



0.6



2,030



0.6Wisconsin


5,444



1.6



128



0.1Other states


1,149



0.4



0



0.0Total

$
335,691



100.0
%

$
314,081



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, 2004

$
8,996Provision for losses


2,674Charge-offs


(3,077
)Recoveries


185Balance, 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

$
12,438   NOTE 6
    Accrued
    Interest Receivable   (Dollars in thousands)

2007


2006Securities available for sale

$
2,299



931Loans receivable


4,594



4,130$
6,893



5,061  NOTE 7
    Mortgage
    Servicing Rights, Net   (Dollars in thousands)

2007


2006Mortgage servicing rightsBalance, beginning of year

$
1,958



2,654Originations


18



152Amortization


(706
)


(848
)Balance, end of year


1,270



1,958Valuation reserve


0



0Mortgage servicing rights, net

$
1,270



1,958     WeightedWeighted


AverageLoan


Average


Remaining


NumberPrincipal


Interest


Term


of(Dollars in thousands)

Balance


Rate


(months)


LoansOriginal term 30 year fixed rate

$
215,707



5.88
%


293



1,996Original term 15 year fixed rate


119,819



5.18



115



1,841Adjustable rate


3,166



6.04



302



28  NOTE 8
    Real
    Estate   (Dollars in thousands)

2007


2006Real estate in judgment subject to redemption

$
1,952



943Real estate acquired through foreclosure


73



504Real estate acquired through deed in lieu of foreclosure


65



750Real estate acquired in satisfaction of debt


124



02,214



2,197Allowance for losses


0



(125
)$
2,214



2,072  35




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
   NOTE 9
    Intangible
    Assets   Gross





Unamortized(Dollars in thousands)

Carrying


Accumulated


IntangibleDecember 31, 2007

Amount


Amortization


AssetsAmortized intangible assets:Mortgage servicing rights

$
3,851



(2,581
)


1,270Core deposit intangible


1,567



(1,567
)


0Total

$
5,418



(4,148
)


1,270December 31, 2006Amortized intangible assets:Mortgage servicing rights

$
4,148



(2,190
)


1,958Core deposit intangible


1,567



(1,461
)


106Total

$
5,715



(3,651
)


2,064    Mortgage(Dollars in thousands)

ServicingYear ended December 31,

Rights2008

$
5232009


3852010


2112011


1022012


40    NOTE 10
    Premises
    and Equipment   (Dollars in thousands)

2007


2006Land

$
2,364



1,301Office buildings and improvements


10,207



9,795Furniture and equipment


10,813



11,95723,384



23,053Less accumulated depreciation


(11,360
)


(11,681
)$
12,024



11,372   NOTE 11
    Deposits   2007


2006Weighted





Percent of


Weighted





Percent of(Dollars in thousands)

average rate


Amount


total


average rate


Amount


totalNoninterest checking


0.00
%

$
54,998



6.2
%


0.00
%

$
68,991



9.5
%NOW accounts


1.88



118,652



13.4



2.54



87,074



12.0Savings accounts


1.40



39,671



4.5



1.37



40,445



5.6Money market accounts


3.34



182,413



20.5



3.31



178,694



24.6395,734



44.6







375,204



51.7Certificates:0-0.99%






555



0.1







532



0.11-1.99%






2



0.0







157



0.02-2.99%






6,168



0.7







25,700



3.53-3.99%






38,388



4.3







126,408



17.44-4.99%






203,720



22.9







119,376



16.55-5.99%






243,551



27.4







78,582



10.8Total certificates


4.94



492,384



55.4



4.23



350,755



48.3Total deposits


3.74


$
888,118



100.0
%


3.24


$
725,959



100.0
%  36




---



##### 



2007


2006Weighted





WeightedAmount


average


Amount


averageRemaining term to maturity

(in thousands)


rate


(in thousands)


rate1-6 months

$
286,259



5.10
%

$
132,231



3.92
%7-12 months


154,431



4.78



151,962



4.5613-36 months


46,839



4.44



57,106



4.08Over 36 months


4,855



4.00



9,456



4.08$
492,384



4.94


$
350,755



4.23     (Dollars in thousands)

2007


2006


2005NOW accounts

$
3,509



2,636



1,770Savings accounts


551



1,084



435Money market accounts


8,031



5,119



1,328Certificates


21,312



13,207



13,700$
33,403



22,046



17,233   NOTE 12
    Federal
    Home Loan Bank Advances   (Dollars in thousands)

2007


2006Year of Maturity

Amount


Rate


Amount


Rate2007









$
40,000



2.91
%2008

$
10,000



2.67
%


20,000



3.832010


10,000



6.48



10,000



6.482011


7,500



4.84



10,900



4.812013


70,000



4.77



70,000



4.7797,500



4.74



150,900



4.27Lines of Credit


15,000



4.04



0$
112,500



4.64


$
150,900



4.27     Callable QuarterlyYear of Maturity

in 20082010

$
10,0002011


7,5002013


70,000$
87,500     NOTE 13
    Other
    Borrowed Money  37




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
   NOTE 14
    Income
    Taxes   (Dollars in thousands)

2007


2006


2005Current:Federal

$
7,702



4,547



6,251State


2,220



1,429



1,744Total current


9,922



5,976



7,995Deferred:Federal


(2,044
)


(612
)


(843
)State


(578
)


(138
)


(416
)Total deferred


(2,622
)


(750
)


(1,259
)$
7,300



5,226



6,736     (Dollars in thousands)

2007


2006


2005Expected federal income tax expense

$
6,501



4,642



6,053Items affecting federal income tax:Dividend received deduction


0



(23
)


(26
)State income taxes, net of federal income tax benefit


1,094



881



975Low income housing credits


0



(10
)


(42
)Tax exempt interest


(276
)


(377
)


(378
)Other, net


(19
)


113



154$
7,300



5,226



6,736    (Dollars in thousands)

2007


2006Deferred tax assets:Allowances for loan and real estate losses

$
5,153



3,906Deferred compensation costs


235



172Net unrealized loss on market value adjustments to securities
    available for sale


0



187Deferred ESOP loan asset


597



545Restricted stock expense


132



77FIN 48 - cumulative effect adjustment


210



0Nonaccruing loan interest


847



0Other


83



64Total gross deferred tax assets


7,257



4,951Deferred tax liabilities:Net unrealized gain on securities available for sale


806



0Deferred loan fees and costs


541



494Premises and equipment basis difference


525



647Originated mortgage servicing rights


519



776Other


147



155Total gross deferred tax liabilities


2,538



2,072Net deferred tax assets

$
4,719



2,879  38




---



##### 



Accounting for Uncertainty in Income Taxes
    (FIN 48)
  NOTE 15
    Employee
    Benefits All eligible full-time employees
    of the Bank that were hired prior to 2002 were included in a
    noncontributory multiemployer retirement plan sponsored by the
    Financial Institutions Retirement Fund (FIRF). Effective
    September 1, 2002 the accrual of benefits for existing
    participants was frozen and no new enrollments were permitted
    into the plan. The actuarial present value of accumulated plan
    benefits and net assets available for benefits relating to the
    Banks employees was not available at December 31,
    2007 because such information is not accumulated for each
    participating institution. As of June 30, 2007, the FIRF
    valuation report reflected that the Bank was obligated to make a
    contribution totaling $159,000. The required contribution was
    $218,000 in 2006 and $235,000 in 2005.
   93-6, Employers Accounting for Employee Stock Ownership
    Plans
 39




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
    2007


2006


2005Shares allocated to participants beginning of the year


294,631



286,018



270,884Shares allocated to participants


24,317



24,317



24,317Shares purchased with dividends from allocated shares


8,843



9,223



8,311Shares distributed to participants


(31,705
)


(24,927
)


(17,494
)Shares allocated to participants end of year


296,086



294,631



286,018Unreleased shares beginning of the year


523,099



547,416



571,733Shares released during year


(24,317
)


(24,317
)


(24,317
)Unreleased shares end of year


498,782



523,099



547,416Total ESOP shares end of year


794,868



817,730



833,434Fair value of unreleased shares at December 31

$
12,245,098



18,052,146



16,148,772    40




---



##### 



Unvested optionsShares


Restricted





Award value/





Weighted averageavailable for


shares


Options


weighted average





grant date


Vesting1995 Stock Option and Incentive
    Plan

grant


outstanding


outstanding


exercise price


Number


fair value


periodDecember 31, 2004


9,397







134,941


$
11.97



15,000


$
2.15Options exercised










(10,941
)


9.56Expired


(9,397
)










N/AVested


















(9,000
)


2.34December 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



0.002001 Omnibus Stock PlanDecember 31, 2004


181,655







218,345


$
17.96



218,345


$
1.57Granted January 25, 2005


(10,047
)


10,047



0



N/A



N/A



N/A


3 yearsGranted May 24, 2005


(15,000
)






15,000



30.00



15,000



3.59


5 yearsForfeited


7,997



(1,418
)


(6,579
)


16.13



(6,579
)


1.43Vested


















(15,895
)


1.93December 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






(2,900
)










(12,429
)


2.59December 31, 2006


154,127



16,207



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



22,772



189,895



19.33



155,605



1.61Total both plans


171,619



22,772



295,395



16.75



155,605



1.61    Weighted AverageYears OverWeighted Average








Unrecognized


Which UnrecognizedExercise


Number


Remaining Contractual


Number


Number


Compensation


Compensation willPrice


Outstanding


Life in Years


Exercisable


Unexercisable


Expense


be Recognized11.50



65,000



1.3



65,000



0



0



N/A11.25



25,500



2.4



25,500



0



0



N/A16.13



139,355



4.4



0



139,355



82,377



4.016.25



15,000



4.4



15,000



0



0



N/A27.64



5,000



6.2



3,750



1,250



87



0.227.66



15,540



6.2



15,540



0



0



N/A26.98



15,000



6.6



9,000



6,000



5,282



1.630.00



15,000



7.4



6,000



9,000



10,327



2.4295,395







139,790



155,605


$
98,073     41




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
     2005Risk-free interest rate

4.03%Expected life

9 yearsExpected volatility

8.75%Expected dividends

2.9%   NOTE 16
    Earnings
    per Share   Year ended December 31,(Dollars in thousands, except per share data)

2007


2006


2005Weighted average number of common shares outstanding used in
    basic earnings per common share calculation


3,738,457



3,822,189



3,824,555Net dilutive effect of:Options


145,503



174,883



166,207Restricted stock awards


17,828



12,770



7,683Weighted average number of shares outstanding adjusted for
    effect of dilutive securities


3,901,788



4,009,842



3,998,445Net income available to common shareholders

$
11,274



8,428



11,068Basic earnings per common share

$
3.02



2.20



2.89Diluted earnings per common share

$
2.89



2.10



2.77   NOTE 17
    Stockholders
    Equity    QuarterlyDividend


DividendRecord date

Payable date

per share


Payout RatioFebruary 18, 2005

March 7, 2005

$
0.22



41.51
%May 20, 2005

June 8, 2005

$
0.22



31.43
%August 26, 2005

September 9, 2005

$
0.24



38.71
%November 25, 2005

December 14, 2005

$
0.24



42.11
%February 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



1,250.00
%February 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
%       NOTE 18 Federal
    Home Loan Bank Investment and Regulatory Capital
    Requirements
  42




---



##### 



Required to be





To be Well CapitalizedAdequately





Under PromptActual


Capitalized


Excess Capital


Corrective Action 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, 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



10.00December 31, 2006Tier I or core capital

$
80,586



8.34
%

$
38,650



4.00
%

$
41,936



4.34
%

$
48,312



5.00
%Tier I risk-based capital


80,586



10.19



31,630



4.00



48,956



6.19



47,445



6.00Risk-based capital to risk-weighted assets


89,611



11.33



63,261



8.00



26,350



3.33



79,076



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 19 Financial
    Instruments with Off-Balance Sheet Risk
    December 31,Contract amount(Dollars in thousands)

2007


2006Financial instruments whose contract amount represents credit
    risk:Commitments to originate, fund or purchase loans:1-4 family mortgages

$
4,034



786Multi- family mortgages


10,116



0Commercial real estate mortgages


29,370



38,996Non-mortgage loans


21,180



2,725Undisbursed balance of loans closed


84,512



96,843Unused lines of credit


131,276



129,728Letters of credit


8,016



13,263Total commitments to extend credit

$
288,504



282,341Forward commitments

$
5,599



2,285  43




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  case-by-case
    NOTE 20 Derivative
    Instruments and Hedging Activities
 Accounting for
    Derivative Instruments and Hedging Activities
    NOTE 21
    Fair
    Value of Financial Instruments Disclosures about Fair Values of
    Financial Instruments
  44




---



##### 



December 31,2007


2006Carrying


Estimated


Contract


Carrying


Estimated


Contract(Dollars in thousands)

amount


fair value


amount


amount


fair value


amountFinancial assets:Cash and cash equivalents

$
23,718



23,718







43,776



43,776Securities available for sale


186,188



186,188







126,140



126,140Loans held for sale


3,261



3,261







1,493



1,493Loans receivable, net


865,088



874,062







768,232



776,895Federal Home Loan Bank stock


6,198



6,198







7,956



7,956Accrued interest receivable


6,893



6,893







5,061



5,061Financial liabilities:Deposits


888,118



888,118







725,959



725,959Federal Home Loan Bank advances


112,500



116,574







150,900



151,200Accrued interest payable


9,515



9,515







1,176



1,176Off-balance sheet financial instruments:Commitments to extend credit


32



32



288,504



2



2



282,341Commitments to sell loans


(17
)


(17
)


5,599



(14
)


(14
)


2,285  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
  45




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
   NOTE 22
    HMN
    Financial, Inc. Financial Information (Parent Company
    Only)   (Dollars in thousands)

2007


2006


2005Condensed Balance SheetsAssets:Cash and cash equivalents

$
1,022



5,742Investment in subsidiaries


93,372



86,770Loans receivable, net


4,000



0Accrued interest receivable


20



0Real estate, net


0



650Prepaid expenses and other assets


3



451Deferred tax asset


408



173Total assets

$
98,825



93,786Liabilities and Stockholders Equity:Accrued expenses and other liabilities

$
697



644Total liabilities


697



644Common stock


91



91Additional paid-in capital


58,049



57,914Retained earnings


110,943



103,643Net unrealized gain (loss) on securities available for sale


1,167



(284
)Unearned employee stock ownership plan shares


(3,965
)


(4,158
)Treasury stock, at cost, 4,953,045 and 4,813,232 shares


(68,157
)


(64,064
)Total stockholders equity


98,128



93,142Total liabilities and stockholders equity

$
98,825



93,786Condensed Statements of IncomeInterest income

$
171



121



108Interest expense


0



(3
)


0Equity earnings of subsidiaries


11,151



8,838



11,375Other income


739



1



0Compensation and benefits


(233
)


(236
)


(247
)Occupancy


(24
)


(21
)


(20
)Data processing


(6
)


(4
)


(4
)Other


(459
)


(503
)


(376
)Income before income tax benefit


11,339



8,193



10,836Income tax expense (benefit)


65



(235
)


(232
)Net income

$
11,274



8,428



11,068  46




---



##### 



(Dollars in thousands)

2007


2006


2005Condensed Statements of Cash FlowsCash flows from operating activities:Net income

$
11,274



8,428



11,068Adjustments to reconcile net income to cash provided by
    operating activities:Equity earnings of subsidiaries


(11,151
)


(8,838
)


(11,375
)Provision for loan losses


0



100



0Deferred income taxes


(25
)


22



(33
)Gain on sales of real estate


(639
)


0



0Proceeds from sales of real estate


1,389



0



0Earned employee stock ownership shares priced above original cost


339



380



340Stock option compensation


44



64



0Amortization of restricted stock awards


334



191



98Decrease in unearned ESOP shares


193



193



193Decrease (increase) in accrued interest receivable


(20
)


0



8Increase in accrued expenses and other liabilities


53



11



67Decrease (increase) in other assets


(13
)


(220
)


89Other, net


(99
)


0



0Net cash provided by operating activities


1,679



331



455Cash flows from investing activities:Purchase of real estate owned from subsidiary


0



0



(750
)Increase in loans receivable, net


(4,000
)


0



0Net cash used by investing activities


(4,000
)


0



(750
)Cash flows from financing activities:Purchase of treasury stock


(4,913
)


(3,960
)


(972
)Stock options exercised


139



166



38Excess tax benefit from options exercised


99



56



30Dividends paid to stockholders


(3,724
)


(3,737
)


(3,524
)Proceeds from dividends on Bank stock


6,000



8,000



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


(2,399
)


525



(428
)Increase (decrease) in cash and cash equivalents


(4,720
)


856



(723
)Cash and cash equivalents, beginning of year


5,742



4,886



5,609Cash and cash equivalents, end of year

$
1,022



5,742



4,886  47




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
   NOTE 23
    Business
    Segments    Home Federal








Consolidated(Dollars in thousands)

Savings Bank


Other


Eliminations


TotalAt 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
)


977,789At or for the year ended December 31, 2005:Interest income - external customers

$
60,201



80



0



60,281Non-interest income - external customers


6,509



0



0



6,509Intersegment interest income


0



28



(28
)


0Intersegment non-interest income


134



11,375



(11,509
)


0Interest expense


24,539



0



(28
)


24,511Amortization of mortgage servicing rights, net


1,020



0



0



1,020Other non-interest expense


20,260



655



(134
)


20,781Income tax expense (benefit)


6,971



(235
)


0



6,736Net income


11,380



11,063



(11,375
)


11,068Goodwill


3,801



0



0



3,801Total assets


985,456



91,410



(85,629
)


991,237  48




---



##### 



Report
    of Independent Registered Public Accounting Firm
  
  The Board of Directors and
    Stockholders
 HMN Financial, Inc.:
        Internal Control  Integrated Framework
    
   
 49




---



##### 



SELECTED
    QUARTERLY FINANCIAL DATA
   December 31,


September 30,


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

2007


2007


2007Selected Operations Data (3 months ended):Interest income

$
19,338



20,278



19,628Interest expense


10,090



10,465



9,773Net interest income


9,248



9,813



9,855Provision for loan losses


1,494



921



1,028Net interest income after provision for loan losses


7,754



8,892



8,827Noninterest income:Fees and service charges


833



829



781Loan servicing fees


265



253



265Securities gains, net


0



0



0Gain on sales of loans


325



204



189Other noninterest income


1,163



362



57Total noninterest income


2,586



1,648



1,292Noninterest expense:Compensation and benefits


2,721



3,147



3,262Occupancy


1,144



1,127



1,112Advertising


118



123



195Data processing


326



325



321Amortization of mortgage servicing rights, net


166



169



189Other noninterest expense


1,295



1,062



1,070Total noninterest expense


5,770



5,953



6,149Income (loss) before income tax expense


4,570



4,587



3,970Income tax expense (benefit)


1,795



1,806



1,520Net income

$
2,775



2,781



2,450Basic earnings per share

$
0.75



0.74



0.65Diluted earnings per share

$
0.73



0.71



0.62Financial Ratios:Return on average assets(1)


0.98
%


0.97



0.89Return on average equity(1)


11.11



11.19



10.09Average equity to average assets


8.89



8.92



9.05Dividend payout ratio


35.21



36.76



30.49Net interest margin(1)(2)


3.39



3.58



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

$
1,117,054



1,147,413



1,127,426Securities available for sale:Mortgage-backed and related securities


18,468



18,927



14,417Other marketable securities


167,720



191,251



189,511Loans held for sale


3,261



2,153



4,454Loans receivable, net


865,088



846,201



843,221Deposits


888,118



936,419



925,511Federal Home Loan Bank advances


112,500



97,500



97,500Stockholders equity


98,128



97,300



94,716   (1)
    
    Annualized(2)
    
    Net interest income divided by
    average interest-earning assets. 50




---



##### 



March 31,


December 31,


September 30,


June 30,


March 31,2007


2006


2006


2006


200618,279



17,358



17,175



17,011



15,9838,495



7,513



7,473



7,261



6,5949,784



9,845



9,702



9,750



9,389455



1,357



6,026



980



5159,329



8,488



3,676



8,770



8,874696



780



820



796



715271



276



291



301



3040



0



0



48



0796



225



481



303



246305



173



143



318



2212,068



1,454



1,735



1,766



1,4863,361



2,786



2,706



3,118



3,2591,084



1,101



1,131



1,103



1,100106



129



108



107



131295



300



307



287



289182



187



208



237



216922



951



980



911



9445,950



5,454



5,440



5,763



5,9395,447



4,488



(29
)


4,773



4,4212,179



1,818



(102
)


1,829



1,6803,268



2,670



73



2,944



2,7410.87



0.71



0.02



0.77



0.710.82



0.67



0.02



0.73



0.681.28



1.11



0.03



1.18



1.1413.79



11.18



0.30



12.34



11.829.26



9.70



9.64



9.60



9.6737.31



1,250.00



34.25



35.29



27.594.01



4.28



4.06



4.08



4.101,117,043



977,789



991,258



1,009,935



989,98411,110



6,178



6,221



6,267



6,698179,931



119,962



139,787



138,953



117,3841,412



1,493



4,217



7,129



5,011798,502



768,232



729,381



757,621



767,881871,929



725,959



741,618



748,355



727,466140,900



150,900



150,900



160,900



160,90094,813



93,142



92,064



93,624



92,646  51




---



##### 



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

2007


2006


2005Maximum Balance:Federal Home Loan Bank advances

$
168,200



162,900



193,900Federal Home Loan Bank short-term borrowings


57,300



52,000



33,000Average Balance:Federal Home Loan Bank advances


116,406



155,972



170,919Federal Home Loan Bank short-term borrowings


18,993



28,513



10,047     December 31,20052007


2006Weighted





Weighted





WeightedAverage





Average





Average(Dollars in thousands)

Amount


Rate


Amount


Rate


Amount


RateFHLB short-term borrowings

$
25,000



3.49
%

$
40,000



2.91
%

$
0



0.00
%FHLB long-term advances


87,500



4.97



110,900



4.76



160,900



4.29Total

$
112,500



4.64


$
150,900



4.27


$
160,900



4.29   COMMON
    STOCK INFORMATION
    December 31,


September 28,


June 29,


March 30,


December 29,


September 29,


June 30,


March 31,2007


2007


2007


2007


2006


2006


2006


2006HIGH

$
29.89



35.25



35.55



34.95



35.10



36.10



35.02



34.79LOW


22.55



28.54



32.25



32.77



32.75



33.75



33.14



28.84CLOSE


24.55



29.63



35.15



33.84



34.51



34.76



34.80



34.79  52