**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

 

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**FORM 10-Q**

 

**ý****       ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15 (d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**Forthe Quarterly Period ended March 31, 2004**

 

**CommissionFile Number: 0-19972**

 

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**HF FINANCIAL CORP.**

(Exact name ofregistrant as specified in its charter.)

 

| **Delaware**                                                     |   | **46-0418532**                           |
|------------------------------------------------------------------|--------|------------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification Number) |
|                                                             |   |                                     |
| **225  South Main Avenue,  Sioux Falls, SD**                     |   | **57104**                                |
| (Address of  principal executive office)                         |   | (ZIP Code)                               |
|                                                             |   |                                     |
| **(605)  333-7556**                                              |
| (Registrant’s  telephone number, including area code)       |

 

Indicate by check mark whether the registrant  (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes  ý  No  o

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No  ý

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.

 

Asof May 12, 2004 there were 3,531,904 issued and outstanding shares of theRegistrant’s Common Stock, with $.01 par value.

 

 

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**Table of Contents**

 
| **PART I**  |                                                                                            |
|-------------|-------------------------------------------------------------------------------------------------|
|        |                                                                                            |   |
| Item 1.     | Financial Statements  (Unaudited):                                                              |   |
|        |                                                                                            |   |
|        | Consolidated  Statements of Financial Condition  As of March 31, 2004 and June 30, 2003         |   |
|        |                                                                                            |   |
|        | Consolidated  Statements of Income for the  Three and Nine Months Ended March 31, 2004 and 2003 |   |
|        |                                                                                            |   |
|        | Consolidated Statements  of Cash Flows for the  Nine Months Ended March 31, 2004 and 2003       |   |
|        |                                                                                            |   |
|        | Notes to  Consolidated Financial Statements                                                     |   |
|        |                                                                                            |   |
| Item  2.    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations     |   |
|        |                                                                                            |   |
| Item 3.     | Quantitative and Qualitative Disclosures about  Market Risk                                     |   |
|        |                                                                                            |   |
| Item  4.    | Controls  and Procedures                                                                        |   |
|        |                                                                                            |   |
| **PART II** |                                                                                            |
|        |                                                                                            |   |
| Item 1.     | Legal  Proceedings                                                                              |   |
|        |                                                                                            |   |
| Item 2.     | Changes in Securities, Use of Proceeds and  Issuer Purchases of Equity Securities               |   |
|        |                                                                                            |   |
| Item  3.    | Defaults  upon Senior Securities                                                                |   |
|        |                                                                                            |   |
| Item 4.     | Submission of  Matters to a Vote of Security Holders                                            |   |
|        |                                                                                            |   |
| Item 5.     | Other  Information                                                                              |   |
|        |                                                                                            |   |
| Item  6.    | Exhibits  and Reports on Form 8-K                                                               |   |
|        |                                                                                            |   |
| Form 10-Q   | Signature Page                                                                                  |   |

 

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**HF FINANCIAL CORP. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFFINANCIAL CON****DITION**

**(Dollars in Thousands)**

 
|                                                                                                                                                  |   | **March 31,  2004** |    | **June 30,  2003** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|--------------------|--------|
|                                                                                                                                                  |   | **(Unaudited)**     |    | **(Audited)**      |   |
| **ASSETS**                                                                                                                                            |   |                |    |               |   |
| Cash and cash  equivalents                                                                                                                            |   | $                   | 16,750  |               | $      | 44,214 |   |
| Securities  available for sale                                                                                                                        |   | 133,690             |    | 88,527             |   |
| Federal Home  Loan Bank stock                                                                                                                         |   | 4,737               |    | 7,025              |   |
| Loans held for  sale                                                                                                                                  |   | 8,110               |    | 15,984             |   |
|                                                                                                                                                  |   |                |    |               |   |
| Loans and leases  receivable                                                                                                                          |   | 614,966             |    | 599,259            |   |
| Allowance for  loan and lease losses                                                                                                                  |   | (3,608              | )       | (3,842             | )      |
| Net loans and  leases receivable                                                                                                                      |   | 611,358             |    | 595,417            |   |
|                                                                                                                                                  |   |                |    |               |   |
| Accrued interest  receivable                                                                                                                          |   | 4,177               |    | 4,298              |   |
| Office  properties and equipment, net of accumulated depreciation                                                                                     |   | 12,719              |    | 13,138             |   |
| Foreclosed real  estate and other properties                                                                                                          |   | 1,649               |    | 1,812              |   |
| Cash value of  life insurance                                                                                                                         |   | 11,928              |    | 11,432             |   |
| Servicing rights                                                                                                                                      |   | 4,541               |    | 4,003              |   |
| Goodwill, net                                                                                                                                         |   | 4,951               |    | 5,020              |   |
| Intangible asset                                                                                                                                      |   | —              |    | 175                |   |
| Other assets                                                                                                                                          |   | 8,598               |    | 10,058             |   |
| Total assets                                                                                                                                          |   | $                   | 823,208 |               | $      | 801,103 |   |
|                                                                                                                                                  |   |                |    |               |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                        |   |                |    |               |   |
| **LIABILITIES**                                                                                                                                       |   |                |    |               |   |
| Deposits                                                                                                                                              |   | $                   | 643,168 |               | $      | 621,381 |   |
| Advances from  Federal Home Loan Bank and other borrowings                                                                                            |   | 84,538              |    | 89,819             |   |
| Subordinated  debentures payable to trusts                                                                                                            |   | 27,837              |    | 20,620             |   |
| Advances by  borrowers for taxes and insurance                                                                                                        |   | 7,903               |    | 7,901              |   |
| Accrued expenses  and other liabilities                                                                                                               |   | 9,003               |    | 12,024             |   |
| Total  liabilities                                                                                                                                    |   | 772,449             |    | 751,745            |   |
|                                                                                                                                                  |   |                |    |               |   |
| **STOCKHOLDERS’  EQUITY**                                                                                                                        |   |                |    |               |   |
| Preferred stock,  $.01 par value, 500,000 shares authorized, none outstanding                                                                         |   | —              |    | —             |   |
| Series A Junior  Participating Preferred Stock, $1.00 stated value, 50,000 shares authorized,  none outstanding                                       |   | —              |    | —             |   |
| Common stock,  $.01 par value, 10,000,000 shares authorized, 5,332,709 and 5,252,535 shares  issued at March 31, 2004 and June 30, 2003, respectively |   | 53                  |    | 49                 |   |
| Common stock  subscribed for but not issued, 23,534 shares at June 30, 2003                                                                           |   | —              |    | 382                |   |
| Additional paid-in  capital                                                                                                                           |   | 17,560              |    | 16,527             |   |
| Retained  earnings, substantially restricted                                                                                                          |   | 60,381              |    | 57,967             |   |
| Deferred  compensation                                                                                                                                |   | (546                | )       | (733               | )      |
| Accumulated  other comprehensive (loss), net of related deferred tax effect                                                                           |   | (728                | )       | (735               | )      |
| Less cost of  treasury stock, 1,814,646 and 1,708,946 shares at March 31, 2004 and June 30,  2003, respectively                                       |   | (25,961             | )       | (24,099            | )      |
| Total  stockholders’ equity                                                                                                                      |   | 50,759              |    | 49,358             |   |
| Total  liabilities and stockholders’ equity                                                                                                      |   | $                   | 823,208 |               | $      | 801,103 |   |

 

*Seeaccompanying notes to unaudited consolidated financial statements.*

 

1

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**HF FINANCIAL CORP. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF INCOME**

**(Dollars in Thousands, Except PerShare Data)**

**(Unaudited)**

 
|                                                                                 |   | **Three  Months Ended  March 31,** |   | **Nine Months  Ended  March 31,** |   |
|--------------------------------------------------------------------------------------|--------|------------------------------------|--------|-----------------------------------|--------|
|                                                                                 |   | **2004**                           |   | **2003**                          |   | **2004** |   | **2003** |   |
| **Continuing  operations:**                                                          |   |                               |   |                              |   |   |   |   |   |
| Interest,  dividend and loan fee income:                                             |   |                               |   |                              |   |   |   |   |   |
| Loans and leases  receivable                                                         |   | $                                  | 8,927  |                              | $      | 9,492 |   | $ | 27,645 |   | $ | 30,665 |   |
| Investment  securities and interest-earning deposits                                 |   | 910                                |   | 1,157                             |   | 2,320 |   | 3,189 |   |
|                                                                                 |   | 9,837                              |   | 10,649                            |   | 29,965 |   | 33,854 |   |
| Interest  expense:                                                                   |   |                               |   |                              |   |   |   |   |   |
| Deposits                                                                             |   | 2,503                              |   | 3,046                             |   | 7,576 |   | 9,766 |   |
| Advances from  Federal Home Loan Bank and other borrowings                           |   | 1,163                              |   | 1,334                             |   | 3,729 |   | 4,122 |   |
|                                                                                 |   | 3,666                              |   | 4,380                             |   | 11,305 |   | 13,888 |   |
| **Net  interest income**                                                             |   | 6,171                              |   | 6,269                             |   | 18,660 |   | 19,966 |   |
| Provision for  losses on loans and leases                                            |   | 607                                |   | 391                               |   | 1,678 |   | 1,874 |   |
| **Net  interest income after provision for losses on loans and leases**              |   | 5,564                              |   | 5,878                             |   | 16,982 |   | 18,092 |   |
| Noninterest  income:                                                                 |   |                               |   |                              |   |   |   |   |   |
| Fees on deposits                                                                     |   | 981                                |   | 979                               |   | 3,110 |   | 3,185 |   |
| Loan servicing  income                                                               |   | 383                                |   | 442                               |   | 1,221 |   | 1,210 |   |
| Gain on sale of  loans, net                                                          |   | 245                                |   | 611                               |   | 1,079 |   | 1,277 |   |
| Gain on sale of  securities, net                                                     |   | —                             |   | 1                                 |   | 42 |   | 351 |   |
| Other                                                                                |   | 624                                |   | 708                               |   | 2,063 |   | 1,851 |   |
|                                                                                 |   | 2,233                              |   | 2,741                             |   | 7,515 |   | 7,874 |   |
| Noninterest  expense:                                                                |   |                               |   |                              |   |   |   |   |   |
| Compensation and  employee benefits                                                  |   | 4,029                              |   | 3,775                             |   | 11,880 |   | 11,495 |   |
| Occupancy and  equipment                                                             |   | 795                                |   | 1,021                             |   | 2,431 |   | 2,695 |   |
| Other                                                                                |   | 1,476                              |   | 1,616                             |   | 4,639 |   | 4,904 |   |
|                                                                                 |   | 6,300                              |   | 6,412                             |   | 18,950 |   | 19,094 |   |
| **Income  from continuing operations before income taxes**                           |   | 1,497                              |   | 2,207                             |   | 5,547 |   | 6,872 |   |
| Income tax  expense                                                                  |   | 524                                |   | 691                               |   | 1,983 |   | 2,361 |   |
| **Income  from continuing operations**                                               |   | 973                                |   | 1,516                             |   | 3,564 |   | 4,511 |   |
|                                                                                 |   |                               |   |                              |   |   |   |   |   |
| **Discontinued  operations:**                                                        |   |                               |   |                              |   |   |   |   |   |
| Income from  operations of discontinued segment, net of income taxes of $34 and $133 |   | —                             |   | 65                                |   | — |   | 258 |   |
| Income (loss) on  discontinued segment, net of income taxes of $10 and $(116)        |   | —                             |   | 20                                |   | — |   | (224 | ) |
| **Income  from discontinued operations**                                             |   | —                             |   | 85                                |   | — |   | 34 |   |
| **Net  Income**                                                                      |   | $                                  | 973    |                              | $      | 1,601 |   | $ | 3,564 |   | $ | 4,545 |   |
| **Comprehensive  income**                                                            |   | $                                  | 1,193  |                              | $      | 1,549 |   | $ | 3,571 |   | $ | 4,074 |   |
| **Cash  dividends paid per share (1)**                                               |   | $                                  | 0.1075 |                              | $      | 0.1045 |   | $ | 0.3211 |   | $ | 0.3136 |   |

 

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(1) Retroactively adjusted for the 10% stockdividend paid on December 31, 2003 to shareholders of record as of December 3,2003.

 

*See accompanying notes tounaudited consolidated financial statements.*

 

2

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|                                 |   | **Three  Months Ended  March 31,** |   | **Nine  Months Ended  March 31,** |   |
|--------------------------------------|--------|------------------------------------|--------|-----------------------------------|--------|
|                                 |   | **2004**                           |   | **2003**                          |   | **2004** |   | **2003** |   |
|                                 |   |                               |   |                              |   |   |   |   |   |
| **Basic  earnings per share: (1)**   |   |                               |   |                              |   |   |   |   |   |
| Income from  continuing operations   |   | $                                  | 0.27   |                              | $      | 0.42 |   | $ | 1.00 |   | $ | 1.24 |   |
| Income from  discontinued operations |   | —                             |   | 0.02                              |   | — |   | 0.01 |   |
| Net income                           |   | $                                  | 0.27   |                              | $      | 0.44 |   | $ | 1.00 |   | $ | 1.25 |   |
| **Diluted  earnings per share: (1)** |   |                               |   |                              |   |   |   |   |   |
| Income from  continuing operations   |   | $                                  | 0.26   |                              | $      | 0.41 |   | $ | 0.97 |   | $ | 1.21 |   |
| Income from  discontinued operations |   | —                             |   | 0.02                              |   | — |   | 0.01 |   |
| Net income                           |   | $                                  | 0.26   |                              | $      | 0.43 |   | $ | 0.97 |   | $ | 1.22 |   |

 

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(1)   Retroactivelyadjusted for the 10% stock dividend paid on December 31, 2003 to shareholdersof record as of December 3, 2003.

 

*See accompanying notes to unaudited consolidated financialstatements.*

 

3

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**HF FINANCIAL CORP. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH****FLOWS**

**(Dollars in Thousands)**

**(Unaudited)**

 
|                                                                                           |   | **Nine  Months Ended March 31,** |   |
|------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                                           |   | **2004**                         |   | **2003** |   |
| **Cash  flows from operating activities**                                                      |   |                             |   |   |   |
| Net income                                                                                     |   | $                                | 3,564  |   | $ | 4,545 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:             |   |                             |   |   |   |
| Provision for  losses on loans and leases                                                      |   | 1,678                            |   | 1,874 |   |
| Depreciation                                                                                   |   | 1,166                            |   | 1,238 |   |
| Amortization of  discounts and premiums on securities and other                                |   | 1,173                            |   | 1,044 |   |
| Stock based  compensation                                                                      |   | 208                              |   | 205 |   |
| Loans originated  for resale                                                                   |   | (101,377                         | )      | (169,140 | ) |
| Proceeds from  the sale of loans                                                               |   | 110,330                          |   | 170,417 |   |
| (Gain) on sale  of loans, net                                                                  |   | (1,079                           | )      | (1,277 | ) |
| Realized (gain)  on sale of securities, net                                                    |   | (42                              | )      | (351 | ) |
| Losses and  provision for losses on sales of foreclosed real estate and other properties,  net |   | 106                              |   | 89 |   |
| Loss on disposal  of office properties and equipment, net                                      |   | 1                                |   | 22 |   |
| Change in other  assets and liabilities                                                        |   | (1,908                           | )      | (8,451 | ) |
| Net cash  provided by operating activities                                                     |   | 13,820                           |   | 215 |   |
| **Cash  flows from investing activities**                                                      |   |                             |   |   |   |
| Loans and leases  purchased                                                                    |   | (2,186                           | )      | (635 | ) |
| Loans and leases  originated and held                                                          |   | (169,592                         | )      | (126,421 | ) |
| Principal  collected on loans and leases                                                       |   | 154,162                          |   | 113,048 |   |
| Securities  available for sale:                                                                |   |                             |   |   |   |
| Sales and  maturities and repayments                                                           |   | 29,517                           |   | 40,002 |   |
| Purchases                                                                                      |   | (75,624                          | )      | (61,017 | ) |
| Purchase of  Federal Home Loan Bank stock                                                      |   | (2,158                           | )      | (694 | ) |
| Redemption of  Federal Home Loan Bank stock                                                    |   | 4,446                            |   | — |   |
| Proceeds from sale  of office properties and equipment                                         |   | —                           |   | 10 |   |
| Purchase of  office properties and equipment                                                   |   | (748                             | )      | (1,116 | ) |
| Purchase of  servicing rights                                                                  |   | (716                             | )      | (390 | ) |
| Proceeds from  sale of foreclosed real estate and other properties, net                        |   | 426                              |   | 667 |   |
| Net cash (used  in) investing activities                                                       |   | (62,473                          | )      | (36,546 | ) |
|                                                                                                |        |                                  |        |  |  |  |  |

 

*See accompanying notes tounaudited consolidated financial statements.*

 

4

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|                                                                   |   | **Nine  Months Ended March 31,** |   |
|------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                   |   | **2004**                         |   | **2003** |   |
|                                                                   |   |                             |   |   |   |
| **Cash  flows from financing activities**                              |   |                             |   |   |   |
| Net increase in  deposit accounts                                      |   | $                                | 21,787 |   | $ | 31,701 |   |
| Proceeds of  advances from Federal Home Loan Bank and other borrowings |   | 125,650                          |   | 473,250 |   |
| Payments on  advances from Federal Home Loan Bank and other borrowings |   | (130,931                         | )      | (471,899 | ) |
| Payment of debt  issue costs                                           |   | (158                             | )      | (300 | ) |
| Proceeds from  issuance of preferred securities                        |   | 7,217                            |   | 10,000 |   |
| Increase in  advances by borrowers                                     |   | 2                                |   | 4,507 |   |
| Purchase of  treasury stock                                            |   | (1,862                           | )      | (1,478 | ) |
| Proceeds from  issuance of common stock                                |   | 634                              |   | — |   |
| Cash dividends  paid                                                   |   | (1,150                           | )      | (1,149 | ) |
| Net cash  provided by financing activities                             |   | 21,189                           |   | 44,632 |   |
|                                                                   |   |                             |   |   |   |
| Increase  (decrease) in cash and cash equivalents                      |   | (27,464                          | )      | 8,301 |   |
|                                                                   |   |                             |   |   |   |
| Cash and cash  equivalents                                             |   |                             |   |   |   |
| Beginning                                                              |   | 44,214                           |   | 27,546 |   |
| Ending                                                                 |   | $                                | 16,750 |   | $ | 35,847 |   |
|                                                                   |   |                             |   |   |   |
| Supplemental  Disclosures of Cash Flows Information                    |   |                             |   |   |   |
| Cash payments  for interest                                            |   | $                                | 11,380 |   | $ | 13,793 |   |
| Cash payments  for income and franchise taxes, net                     |   | 401                              |   | 2,378 |   |
|                                                                   |   |                             |   |   |   |
| Supplemental  Schedule of Noncash Investing and Financing Activities   |   |                             |   |   |   |
| Loans receivable  reclassified as loans held for sale                  |   | $                                | 1,917  |   | $ | 51,085 |   |
| Other  investments reclassified as cash and cash equivalents           |   | 98                               |   | — |   |
| Other  investments reclassified as other assets                        |   | 95                               |   | — |   |
| Core deposit  intangibles reclassified as goodwill                     |   | —                           |   | 416 |   |

 

*See accompanying notes tounaudited consolidated financial statements.*

 

5

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**HFFINANCIAL CORP. AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMEN****TS**

For The Three and NineMonths Ended March 31, 2004 and 2003

(Unaudited)

 

**NOTE 1.****          SELECTED ACCOUNTINGPOLICIES**

 

*Basis of presentation:*

 

The consolidated financial information of HF FinancialCorp. (the “Company”) and its wholly-owned subsidiaries included in this Form10-Q is unaudited.  However, in theopinion of management, adjustments (consisting of normal recurring adjustments)necessary for a fair presentation for the interim periods have been included.  Results for any interim period are not necessarilyindicative of results to be expected for the year.  The accounting and reporting policies of the Company and itssubsidiaries conform to accounting principles generally accepted in the UnitedStates of America (“GAAP”) and to general practice within the industry.

 

During the second quarter of fiscal 2004, the Companycompleted a reclassification of its deferred loan origination fees and otherloan fees and costs.  This process wasdone upon a fuller interpretation of Statement No. 91 as issued by theFinancial Accounting Standards Board (“FASB”) and Regulation S-X (“Reg S-X”) asissued by the Securities and Exchange Commission.   All periods presented have been revised in presentation toreflect this reclassification and there was no change to net income or earningsper share as a result of this reclassification.

 

The interim consolidated financial statements includethe accounts of the Company, its wholly-owned subsidiaries, Home Federal Bank(the “Bank”), HF Financial Group, Inc. (“HF Group”), HF Card Services, LLC (“HFCard”), HomeFirst Mortgage Corp. (the “Mortgage Corp.”), and the Bank’swholly-owned subsidiaries, Mid America Capital Services, Inc. (“Mid AmericaLeasing”), Hometown Insurors, Inc. (“Hometown”), Home Federal SecuritizationCorp. (“HFSC”), Mid-America Service Corporation and PMD, Inc.  The interim consolidated financialstatements reflect the deconsolidation of the subsidiary trusts of the Company,HF Financial Capital Trust I (“Trust I”), HF Financial Capital Trust II (“TrustII”), HF Financial Capital Trust III (“Trust III”) and HF Financial CapitalTrust IV (“Trust IV”).  See Note 5 ofthe “Notes to Consolidated Financial Statements.”  During the third quarter of fiscal year 2003, the Companydissolved HF Card.  All intercompany balancesand transactions have been eliminated in consolidation.

 

Health claims accrual:  The Company has a self-insured health planfor its employees.  The accrual estimatefor pending and incurred but not reported health claims is based upon a pendingclaims lag report provided by a third party provider.  Although management believes that it uses the best informationavailable to determine the accrual, unforeseen health claims could result inadjustments and net earnings being significantly affected if circumstancesdiffer substantially from the assumptions used in estimating the accrual.

 

Stock-basedcompensation:  The Company accounts for stock-basedcompensation in accordance with Accounting Principles Board (“APB”) Opinion No.25, “*Accounting for Stock Issued toEmployees”,*and related interpretations.  Accordingly, no stock-based employee compensation cost has beenrecognized for grants under the fixed stock option plans, as all optionsgranted under those plans had an exercise price equal to the market value ofthe underlying common stock on the date of grant.  These stock-based compensation plans are described more fully inthe Company’s Annual Report on Form 10-K for the fiscal year ended June 30,2003, under Note 18 of “Notes to Consolidated Financial Statements.”

 

6

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The following table illustrates the effect on net incomeand earnings per share if the Company had applied the fair value recognitionprovisions of FASB Statement No. 123, “*Accountingfor Stock-Based Compensation”,*to stock-based employee compensation.

 
|                                                                                                                                         |   | **Three  Months Ended March 31,**                      |   | **Nine  Months Ended March 31,** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------|--------|----------------------------------|--------|
|                                                                                                                                         |   | **2004**                                               |   | **2003**                         |   | **2004** |   | **2003** |   |
|                                                                                                                                         |   | **(Dollars  in Thousands, Except for Per Share Data)** |   |
|                                                                                                                                         |   |                                                   |   |                             |   |   |   |   |   |
| Net income, as  reported                                                                                                                     |   | $                                                      | 973    |                             | $      | 1,601 |   | $ | 3,564 |   | $ | 4,545 |   |
| Deduct total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |   | (33                                                    | )      | (34                              | )      | (103 | ) | (102 | ) |
| Pro forma net  income                                                                                                                        |   | $                                                      | 940    |                             | $      | 1,567 |   | $ | 3,461 |   | $ | 4,443 |   |
| Basic earnings  per share: (1)                                                                                                               |   |                                                   |   |                             |   |   |   |   |   |
| As reported                                                                                                                                  |   | $                                                      | 0.27   |                             | $      | 0.44 |   | $ | 1.00 |   | $ | 1.25 |   |
| Pro forma                                                                                                                                    |   | 0.26                                                   |   | 0.43                             |   | 0.97 |   | 1.22 |   |
|                                                                                                                                         |   |                                                   |   |                             |   |   |   |   |   |
| Diluted earnings  per share: (1)                                                                                                             |   |                                                   |   |                             |   |   |   |   |   |
| As reported                                                                                                                                  |   | 0.26                                                   |   | 0.43                             |   | 0.97 |   | 1.22 |   |
| Pro forma                                                                                                                                    |   | 0.26                                                   |   | 0.42                             |   | 0.94 |   | 1.20 |   |

 

----

(1)Retroactively adjusted for the 10% stock dividend paid on December 31, 2003 toshareholders of record as of December 3, 2003.

 

**NOTE 2.****          REGULATORY CAPITAL**

 

Thefollowing table sets forth the Bank’s compliance with its minimum capitalrequirements for a well capitalized institution at March 31, 2004:

 
|                                               |   | **Amount**                  |   | **Percent** |   |
|----------------------------------------------------|--------|-----------------------------|--------|-------------|--------|
|                                               |   | **(Dollars  in Thousands)** |   |
| Tier I (core)  capital (to adjusted total assets): |   |                        |   |        |   |
| Required                                           |   | $                           | 40,782 |        | 5.00   | % |
| Actual                                             |   | 68,456                      |   | 8.39        |   |
| Excess                                             |   | 27,674                      |   | 3.39        |   |
|                                               |   |                        |   |        |   |
| Risk-based  capital (to risk-weighted assets):     |   |                        |   |        |   |
| Required                                           |   | $                           | 65,636 |        | 10.00  | % |
| Actual                                             |   | 69,952                      |   | 10.66       |   |
| Excess                                             |   | 4,316                       |   | 0.66        |   |

 

**NOTE 3.****          EARNINGS PER SHARE**

 

Basicearnings per share is computed by dividing income available to common stockholders(the numerator) by the weighted-average number of common sharesoutstanding  (the denominator) duringthe period.  Shares issued during theperiod and shares reacquired during the period are weighted for the portion ofthe period that they were outstanding. The weighted average number of basiccommon shares outstanding for the three month periods ended March 31, 2004 and2003 was 3,565,211 and 3,619,697, respectively.  The weighted average number of basic common shares outstandingfor the nine month period ended March 31, 2004 and 2003 was 3,568,128 and3,651,221, respectively.

 

7

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Dilutive earnings per share is similar to thecomputation of basic earnings per share except that the denominator is increasedto include the number of additional common shares that would have beenoutstanding if the dilutive options outstanding had been exercised. Theweighted average number of common and dilutive potential common sharesoutstanding for the three month periods ended March 31, 2004 and 2003 was3,676,998 and 3,702,848, respectively. The weighted average number of common and dilutive potential commonshares outstanding for the nine month periods ended March 31, 2004 and 2003 was3,676,248 and 3,704,445, respectively.

 

All earnings per share data and number of commonshares outstanding have been retroactively adjusted for the 10% stock dividendpaid on December 31, 2003 to shareholders of record as of December 3, 2003.

 

**NOTE 4.****          HF SECURITIZATION CORP.AND CONSUMER LOAN SECURITIZATION**

 

On January 31, 2003, theBank securitized and sold motor vehicle installment loans with principalbalances totaling $50.0 million through HFSC and Home Federal AutomobileSecuritization Trust 2003-A (“Automobile Securitization Trust”).  As part of the sales transaction, the Bankretains servicing responsibilities.  Inaddition, the Bank retains the rights to cash flows remaining after investorsin the Automobile Securitization Trust have received their contractual paymentsand has pledged a $2.4 million reserve fund to the Automobile SecuritizationTrust.  These retained interests aresubordinated to investors’ interests. The investors and Automobile Securitization Trust have no recourse tothe Bank’s other assets for failure of debtors to pay when due.  The pass through rate to investors is 2.65%.

 

Thegain recognized on the sale of these loans was determined by allocating thecarrying amount of the loans between the loans sold and the interestsretained.  The Bank determined that 50basis points of the 100 basis points servicing contract represented was excessservicing and was capitalized as part of the transaction utilizing a marketdiscount rate of 10.0%.  This asset isamortized in proportion to, and over the period of, estimated net servicingincome.

 

Key economic assumptionsused and the sensitivity of fair value of the retained interest as of March 31,2004 are as follows:

 
|                                        |   | **Retained  Interest**      |   | **Servicing  Rights** |   |
|---------------------------------------------|--------|-----------------------------|--------|-----------------------|--------|
|                                        |   | **(Dollars  in Thousands)** |   |
| Fair Value                                  |   | $                           | 2,045  |                  | $      | 93 |   |
| Weighted average  life (in years)           |   | 2.79                        |   | 2.79                  |   |
| Prepayment speed  (ABS annual rate):        |   | 21.60                       | %      | 21.60                 | %      |
| Impact on fair  value of 10% adverse change |   | $                           | (50    | )                     | $      | (6 | ) |
| Impact on fair  value of 20% adverse change |   | (94                         | )      | (15                   | )      |
| Credit losses  (annual rate):               |   | 0.63                        | %      | 0.63                  | %      |
| Impact on fair  value of 10% adverse change |   | $                           | (13    | )                     | $      | — |   |
| Impact on fair  value of 20% adverse change |   | (26                         | )      | —                |   |
| Discount rate:                              |   | 10.38                       | %      | 10.00                 | %      |
| Impact on fair  value of 10% adverse change |   | $                           | (25    | )                     | $      | (1 | ) |
| Impact on fair  value of 20% adverse change |   | (49                         | )      | (1                    | )      |

 

8

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These sensitivities arehypothetical and should be used with caution. Changes in fair value based on a 10.0% variation in assumptionsgenerally cannot be extrapolated because the relationship of the change inassumption to the change in fair value may not be linear.  Also, in this table, the effect of avariation in a particular assumption on the fair value of the retained interestis calculated without changing any other assumption.  In reality, changes in one factor may result in changes inanother (i.e., increases in market interest rates may result in lowerprepayments and increased credit losses), which might magnify or counteract thesensitivities.

 

**NOTE 5.****          SUBORDINATEDDEBENTURES PAYABLE TO TRUSTS**

 

The Company previouslyissued $27.0 million of trust preferred securities.  Pursuant to FASB Interpretation No. 46R (“FIN 46R”),“Consolidation of Variable Interest Entities,” issued in December 2003, thesubordinated trust entities of the Company were deconsolidated at March 31,2004 and the June 30, 2003 balance sheet was restated.  As a result, the 2003 balance sheet includes$20.6 million of subordinated debt, which was previously included on thebalance sheet as $20.0 million in trust preferred securities after aconsolidation elimination of $600,000. The overall effect on the Company’sfinancial position and operating results of the deconsolidation was notmaterial, and did not affect reported equity or net income.

 

**NOTE 6.****         ****SEGMENT REPORTING**

 

Operating segments aredefined as components of an enterprise for which separate financial informationis available that is evaluated regularly by the chief operating decision makersin deciding how to allocate resources and in assessing performance.  The Company’s reportable segments are“banking” (including leasing activities) and “other”.  The “banking” segment is conducted through the Bank and MidAmerica Leasing and the “other” segment is composed of smaller nonreportablesegments, the Company and inter-segment eliminations.

 

The management approach isused as the conceptual basis for identifying reportable segments and is basedon the way that management organizes the segments within the enterprise formaking operating decisions, allocating resources and monitoring performance,which is primarily based on products.

 
| **Three Months Ended March 31, 2004**                         |   | **Banking**                 |       | **Other** |   | **Total** |   |
|---------------------------------------------------------------|--------|-----------------------------|------------|-----------|--------|-----------|--------|
|                                                          |   | **(Dollars  in Thousands)** | ** ** |
|                                                          |   |                        |       |      |   |      |   |
| Net interest  income                                          |   | $                           | 6,720      |      | $      | (549      | )      | $ | 6,171 |   |
| Intersegment  interest income                                 |   | (217                        | )          | 217       |   | —    |   |
| Provision for  losses on loans and leases                     |   | (607                        | )          | —    |   | (607      | )      |
| Noninterest  income                                           |   | 2,264                       |       | (31       | )      | 2,233     |   |
| Intersegment  noninterest income                              |   | (87                         | )          | 87        |   | —    |   |
| Noninterest  expense                                          |   | (6,075                      | )          | (225      | )      | (6,300    | )      |
| Intersegment  noninterest expense                             |   | 2                           |       | (2        | )      | —    |   |
| Income (loss)  from continuing operations before income taxes |   | $                           | 2,000      |      | $      | (503      | )      | $ | 1,497 |   |
|                                                          |   |                        |       |      |   |      |   |
| Total assets at  March 31, 2004                               |   | $                           | 820,342    |      | $      | 2,866     |   | $ | 823,208 |   |

 

9

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| **Three Months Ended March 31, 2003**                         |   | **Banking**                 |       | **Other** |   | **Total** |   |
|---------------------------------------------------------------|--------|-----------------------------|------------|-----------|--------|-----------|--------|
|                                                          |   | **(Dollars  in Thousands)** | ** ** |
|                                                          |   |                        |       |      |   |      |   |
| Net interest  income                                          |   | $                           | 6,758      |      | $      | (489      | )      | $ | 6,269 |   |
| Intersegment  interest income                                 |   | (210                        | )          | 210       |   | —    |   |
| Provision for  losses on loans and leases                     |   | (391                        | )          | —    |   | (391      | )      |
| Noninterest  income                                           |   | 2,707                       |       | 34        |   | 2,741     |   |
| Intersegment  noninterest income                              |   | (202                        | )          | 202       |   | —    |   |
| Noninterest  expense                                          |   | (6,055                      | )          | (357      | )      | (6,412    | )      |
| Intersegment  noninterest expense                             |   | 1                           |       | (1        | )      | —    |   |
| Income (loss)  from continuing operations before income taxes |   | $                           | 2,608      |      | $      | (401      | )      | $ | 2,207 |   |
|                                                          |   |                        |       |      |   |      |   |
| Total assets at  March 31, 2003                               |   | $                           | 768,230    |      | $      | 4,238     |   | $ | 772,468 |   |

 
| **Nine Months Ended March 31, 2004**                          |   | **Banking**                 | ** ** | **Other** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------|--------|-----------------------------|------------|-----------|------------|-----------|------------|
|                                                          |   | **(Dollars  in Thousands)** | ** ** |
|                                                          |   |                        |       |      |       |      |       |
| Net interest  income                                          |   | $                           | 20,258     |      | $          | (1,598    | )          | $ | 18,660 |   |
| Intersegment  interest income                                 |   | (621                        | )          | 621       |       | —    |       |
| Provision for  losses on loans and leases                     |   | (1,678                      | )          | —    |       | (1,678    | )          |
| Noninterest  income                                           |   | 7,662                       |       | (37       | )          | 7,515     |       |
| Intersegment  noninterest income                              |   | (275                        | )          | 275       |       | —    |       |
| Noninterest  expense                                          |   | (18,221                     | )          | (729      | )          | (18,950   | )          |
| Intersegment  noninterest expense                             |   | 3                           |       | (3        | )          | —    |       |
| Income (loss)  from continuing operations before income taxes |   | $                           | 7,018      |      | $          | (1,471    | )          | $ | 6,647 |   |
|                                                          |   |                        |       |      |       |      |       |
| Total assets at  March 31, 2004                               |   | $                           | 820,342    |      | $          | 2,866     |       | $ | 823,208 |   |

 
| **Nine Months Ended March 31, 2003**                          |   | **Banking**                 | ** ** | **Other** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------|--------|-----------------------------|------------|-----------|------------|-----------|------------|
|                                                          |   | **(Dollars  in Thousands)** | ** ** |
|                                                          |   |                        |       |      |       |      |       |
| Net interest  income                                          |   | $                           | 21,380     |      | $          | (1,414    | )          | $ | 19,966 |   |
| Intersegment  interest income                                 |   | (675                        | )          | 675       |       | —    |       |
| Provision for  losses on loans and leases                     |   | (1,874                      | )          | —    |       | (1,874    | )          |
| Noninterest  income                                           |   | 7,549                       |       | 325       |       | 7,874     |       |
| Intersegment  noninterest income                              |   | (414                        | )          | 414       |       | —    |       |
| Noninterest  expense                                          |   | (17,930                     | )          | (1,164    | )          | (19,094   | )          |
| Intersegment  noninterest expense                             |   | 2                           |       | (2        | )          | —    |       |
| Income (loss)  from continuing operations before income taxes |   | $                           | 8,038      |      | $          | (1,166    | )          | $ | 6,872 |   |
|                                                          |   |                        |       |      |       |      |       |
| Total assets at  March 31, 2003                               |   | $                           | 768,230    |      | $          | 4,238     |       | $ | 772,468 |   |

 

10

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**NOTE 7.****         ****DEFINED BENEFIT PLAN**

 

The Company has anoncontributory (cash balance) defined benefit pension plan covering allemployees of the Company and its wholly-owned subsidiaries who have attainedthe age of 21 and have completed 1,000 hours in a plan year.  The benefits are based on 6% of eacheligible participant’s annual compensation, plus income earned in the accountsat a rate determined annually based on 30-year treasury note rates.  The Company’s funding policy is to make theminimum annual required contribution plus such amounts as the Company maydetermine to be appropriate from time to time. One hundred percent vesting occurs after five years with a retirementage of 65.  Information relative to thecomponents of net periodic benefit cost for the Company’s defined benefit planis presented below:

 
|                               |   | **Three  Months Ended  March 31,** |    | **Nine  Months Ended  March 31,** |   |
|------------------------------------|--------|------------------------------------|---------|-----------------------------------|--------|
|                               |   | **2004**                           |    | **2003**                          |   | **2004** |   | **2003** |   |
| Service cost                       |   | $                                  | 107,695 |                              | $      | 155,380 |   | $ | 323,087 |   | $ | 478,394 |   |
| Interest cost                      |   | 81,077                             |    | 70,398                            |   | 243,231 |   | 211,195 |   |
| Expected return  on plan assets    |   | (60,988                            | )       | (50,911                           | )      | (182,964 | ) | (152,732 | ) |
| Amortization of  prior losses      |   | 13,681                             |    | 28,205                            |   | 41,043 |   | 84,614 |   |
| Accretion of  prior service cost   |   | (10,882                            | )       | (11,583                           | )      | (32,647 | ) | (34,750 | ) |
| Amortization of  transition asset  |   | 2,908                              |    | 2,908                             |   | 8,723 |   | 8,723 |   |
| Total costs  recognized in expense |   | $                                  | 133,491 |                              | $      | 194,397 |   | $ | 400,473 |   | $ | 595,444 |   |

 

TheCompany previously disclosed in its financial statements for the fiscal yearended June 30, 2003, that it contributed $498,000 to fund its qualified pensionplan.  For the nine months ended March31, 2004, the Company made contributions of $670,000 to fund its qualifiedpension plan.  The Company anticipatesno additional contributions for this fiscal year ending June 30 , 2004.

 

11

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**ITEM 2.  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL**

**CONDITION AND RESULTS OF OPERATIONS**

 

**General**

 

The Company is a financial services provider and, assuch, has inherent risks that must be managed in order to achieve netincome.  Primary risks that affect netincome include credit risk, liquidity risk, operational risk, regulatorycompliance risk and reputation risk. The Company’s net income is derived by managing net interest margin, theability to collect fees from services provided, by controlling the costs ofdelivering services and the management of loan and lease losses.  The primary source of revenues comes fromthe net interest margin, which represents the difference between income oninterest-earning assets (i.e. loans and investment securities) and expense oninterest-bearing liabilities (i.e. deposits and borrowed funding).  The net interest margin is affected byregulatory, economic and competitive factors that influence interest rates,loan demand and deposit flows.  Feesearned include charges for deposit services, trust services and loan services.  Personnel costs are the primary expensesrequired to deliver the services to customers. Other costs include occupancy and equipment and general andadministrative expenses.

 

**Forward-Looking Statements**

 

ThisForm 10-Q and other reports issued by the Company, including reports filed withthe Securities and Exchange Commission, contain “forward-looking statements”that may deal with future results, expectations, plans and performance.  In addition, the Company’s management maymake forward-looking statements orally to the media, securities analysts,investors or others.  Theseforward-looking statements might include one or more of the following:

 

*      Projectionsof income, loss, revenues, earnings or losses per share, dividends, capitalexpenditures, capital structure, tax benefit or other financial items.

*      Descriptionsof plans or objectives of management for future operations, products orservices and transactions.

*      Forecastsof future economic performance.

*      Descriptionsof assumptions underlying or relating to such matters.

 

Forward-lookingstatements can be identified by the fact that they do not relate strictly tohistorical or current facts.  They ofteninclude words such as “optimism”, “look-forward”, “bright”, “believe”,“expect”, “anticipate”, “intend”, “plan”, “estimate” or words of similarmeaning, or future or conditional verbs such as “will”, “would”, “should”,“could” or “may.”

 

Forward-lookingstatements about the Company’s expected financial results and other plans aresubject to certain risks, uncertainties and assumptions.  These include, but are not limited to,possible legislative changes and adverse economic, business and competitivedevelopments, such as shrinking interest margins; deposit outflows; reduceddemand for financial services and loan products; changes in accounting policiesor guidelines, or in monetary and fiscal policies of the federal government;changes in credit and other risks posed by the Company’s loan portfolios; theability or inability to successfully enter into a definitive agreement for andclose anticipated transactions; technological, computer-related or operationaldifficulties; adverse changes in securities markets; results of litigation; orother significant uncertainties.

 

Forward-lookingstatements speak only as of the date they are made.  The Company does not undertake to update forward-lookingstatements to reflect circumstances or events that occur after the date theforward-looking statements are made.

 

12

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**Financial Condition Data**

 

At March 31, 2004, the Company had total assets of$823.2 million, an increase of $22.1 million from the level at June 30,2003.  The increase in assets was dueprimarily to increases in securities available for sale of $45.2 million andnet loans and leases receivable of $15.9 million offset by decreases in cashand cash equivalents of $27.5 million, loans held for sale of $7.9 million andFederal Home Loan Bank (“FHLB”) stock of $2.3 million.  The increase in liabilities of $20.7 millionfrom June 30, 2003 to March 31, 2004 was due to increases in deposits of $21.8million and subordinated debentures payable to trusts of $7.2 million offset bydecreases in advances from the FHLB and other borrowings of $5.3 million andaccrued expenses and other liabilities of $3.0 million.  In addition, stockholders’ equity increased$1.4 million to $50.8 million at March 31, 2004 from $49.4 million at June 30,2003 primarily due to net income of $3.6 million offset by payment of cashdividends of $1.2 million and Company stock repurchases of $1.9 million.

 

The increase insecurities available for sale of $45.2 million was primarily the result ofpurchases of $75.6 million exceeding sales, maturities and repayments of $29.5million.  The purchases of $75.6 millionincluded variable-rate, mortgage-backed securities of $70.8 million.  Included in the $29.5 million of sales,maturities and repayments was approximately $20.5 million of mortgage-backedsecurities principal repayments. Variable-rate mortgage-backed securities comprise 78.4% of the Company’ssecurities available for sale portfolio.

 

The increase in net loansand leases receivable of $15.9 million was due primarily to an increase inpurchases and originations over sales, amortization and repayments ofprincipal.  Consumer indirect automobileloans increased $16.6 million over the levels at June 30, 2003.  In the second quarter of fiscal 2004, theCompany sold approximately $5.0 million of student loans to the Student LoanFinance Corporation.

 

The decrease in cash andcash equivalents of $27.5 million was due primarily to a decrease in Federalfunds sold of $24.0 million in part due to not renewing maturing advances withthe FHLB and the use of funds to invest in other interest-earning assets.  Purchases of securities available for salein the nine months ended March 31, 2004 were $75.6 million.  See “Liquidity and Capital Resources.”

 

The decrease in loansheld for sale of $7.9 million was primarily related to a $10.3 million decreasein mortgage loan closings during March 2004 as compared to June 2003.  Mortgage loans held for sale decreased $9.8million from $16.0 million at June 30, 2003 to $6.2 million at March 31,2004.  Offsetting the decrease inmortgage loans held for sale was an increase in student loans held for sale inthe amount of $1.9 million at March 31, 2004. During the second quarter of fiscal 2004, the Company began classifyingits student loan portfolio as held for sale.

 

The net decrease in FHLBstock of $2.3 million was primarily the result of the Company’s redemption of$3.2 million of stock, through the Bank, due to a FHLB capital structure changeeffective July 1, 2003.

 

The $21.8 millionincrease in deposits was primarily due to increases in money market accounts of$32.5 million and out-of-market certificates of deposit of $12.4 million offsetby decreases in savings accounts of $6.5 million and in-market certificates ofdeposits of $6.4 million.  Public funddeposits increased $9.3 million at March 31, 2004 from the levels at June 30,2004 primarily due to increases in in-market certificates of deposit of $9.5million, in-market demand accounts of $8.8 million and out-of-market demandaccounts of $2.3 million offset by decreases in in-market savings accounts of$9.0 million and out-of-market certificates of deposit of $2.3 million.

 

The liability forsubordinated debentures payable to trusts increased $7.2 million due to theCompany issuing additional trust preferred securities through Trust IV duringthe first quarter of fiscal 2004.

 

13

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Advances from the FHLBand other borrowings decreased $5.3 million primarily due to the Company’srepayment on two short-term notes with First Tennessee Bank, NA totaling $4.0million and maturing advances with the FHLB in the amount of $5.4 million.  In addition, the Company made a repayment of$11.3 million on one long-term note with the FHLB during the second quarter offiscal 2004.

 

Accrued expenses andother liabilities decreased $3.0 million primarily due to the decrease inbalances of accrued compensation expenses of $904,000, collections due on loanssold to third parties of $1.4 million and treasury, tax and loan liability of$1.3 million.

 

The following tablesshow the composition of the Company’s loan and lease portfolio and depositaccounts at the dates indicated.

 
|                               |   | **At March  31, 2004**      |    | **At June  30, 2003**                   |   |
|------------------------------------|--------|-----------------------------|---------|-----------------------------------------|--------|
|                               |   | **Amount**                  |    | **Percent of  Loans in  Each Category** |   | **Amount** |   | **Percent of  Loans in  Each Category** |   |
|                               |   | **(Dollars  in Thousands)** |    |
|                               |   |                        |    |                                    |   |   |   |   |   |
| One-to  four-family (1)            |   | $                           | 90,339  |                                    | 14.69  | % | $ | 83,722 |   | 13.97 | % |
| Commercial real  estate            |   | 89,004                      |    | 14.47                                   | %      | 93,192 |   | 15.55 | % |
| Multi-family  real estate          |   | 44,104                      |    | 7.17                                    | %      | 49,171 |   | 8.21 | % |
| Commercial  business               |   | 118,193                     |    | 19.22                                   | %      | 113,406 |   | 18.93 | % |
| Equipment  finance leases          |   | 25,202                      |    | 4.10                                    | %      | 23,070 |   | 3.85 | % |
| Consumer (2) (3)                   |   | 184,048                     |    | 29.93                                   | %      | 173,246 |   | 28.91 | % |
| Agricultural                       |   | 58,912                      |    | 9.58                                    | %      | 58,095 |   | 9.69 | % |
| Construction and  development      |   | 5,164                       |    | 0.84                                    | %      | 5,357 |   | 0.89 | % |
| Total Loans and  Leases Receivable |   | $                           | 614,966 |                                    | 100.00 | % | $ | 599,259 |   | 100.00 | % |

 

----

(1)   Excludes $6,192 and $15,984 loans held forsale at March 31, 2004 and June 30, 2003, respectively.

(2)   Includes mobile home loans.

(3)   Excludes $1,918 and $0 student loans held forsale at March 31, 2004 and June 30, 2003, respectively.During the second quarter of fiscal 2004, the Company began classifying itsstudent loan portfolio as held for sale.

 

14

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|                                   |   | **At March  31, 2004**     |    | **At June  30, 2003**                      |   |
|----------------------------------------|--------|----------------------------|---------|--------------------------------------------|--------|
|                                   |   | **Amount**                 |    | **Percent of  Deposits in  Each Category** |   | **Amount** |   | **Percent of  Deposits in  Each Category** |   |
|                                   |   | **(Dollars in Thousands)** |    |
|                                   |   |                       |    |                                       |   |   |   |   |   |
| Noninterest  bearing checking accounts |   | $                          | 71,543  |                                       | 11.12  | % | $ | 77,004 |   | 12.39 | % |
| Interest bearing  accounts             |   | 49,584                     |    | 7.71                                       | %      | 43,699 |   | 7.03 | % |
| Money market  accounts                 |   | 212,014                    |    | 32.96                                      | %      | 178,113 |   | 28.66 | % |
| Savings accounts                       |   | 47,963                     |    | 7.46                                       | %      | 54,462 |   | 8.77 | % |
| Certificates of  deposit               |   | 262,064                    |    | 40.75                                      | %      | 268,103 |   | 43.15 | % |
| Total Deposits                         |   | $                          | 643,168 |                                       | 100.00 | % | $ | 621,381 |   | 100.00 | % |

 

**Analysis of Net Interest Income**

 

Net interest income represents the difference betweenincome on interest-earning assets and expense on interest-bearingliabilities.  Net interest incomedepends upon the volume of interest-earning assets and interest-bearingliabilities and the interest rates earned or paid on them.

 

*AverageBalances, Interest Rates and Yields.*  The following table presents for the periodsindicated, the total dollar amount of interest income from averageinterest-earning assets and the resulting yields, as well as the interestexpense on average interest-bearing liabilities, expressed both in dollars andrates, and the net interest margin.  Thetable does not reflect any effect of income taxes.  All average balances are monthly average balances and include thebalances of nonaccruing loans.  Theyields and costs for the three months and nine months ended March 31, 2004 and2003 include fees which are considered adjustments to yield.  Balances related to discontinued credit cardloan operations have been reclassified to non-interest earning assets for allperiods presented.

 

15

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|                                           |   | **THREE  MONTHS ENDED MARCH 31,** |    |
|------------------------------------------------|--------|-----------------------------------|---------|
|                                           |   | **2004**                          |    | **2003** |   |
|                                           |   | **Average  Outstanding  Balance** |    | **Interest  Earned/  Paid** |   | **Yield/  Rate** |   | **Average  Outstanding  Balance** |   | **Interest  Earned/  Paid** |   | **Yield/  Rate** |   |
|                                           |   | **(Dollars  in Thousands)**       |    |
| Interest-earning  assets:                      |   |                              |    |   |   |   |   |   |   |   |   |   |   |
| Loans and leases  receivable (1)               |   | $                                 | 614,358 |   | $ | 8,927 |   | 5.83 | % | $ | 584,888 |   | $ | 9,492 |   | 6.58 | % |
| Investment  securities (2) (3)                 |   | 110,411                           |    | 892 |   | 3.24 | % | 128,330 |   | 1,088 |   | 3.44 | % |
| FHLB stock                                     |   | 4,367                             |    | 18 |   | 1.65 | % | 7,025 |   | 69 |   | 3.98 | % |
|                                           |   |                              |    |   |   |   |   |   |   |   |   |   |   |
| Total  interest-earning assets                 |   | 729,136                           |    | $ | 9,837 |   | 5.41 | % | 720,243 |   | $ | 10,649 |   | 6.00 | % |
| Noninterest-earning  assets                    |   | 60,875                            |    |   |   |   |   | 57,553 |   |   |   |   |   |
| Total assets                                   |   | $                                 | 790,011 |   |   |   |   |   | $ | 777,796 |   |   |   |   |   |
|                                           |   |                              |    |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                 |   |                              |    |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                      |   |                              |    |   |   |   |   |   |   |   |   |   |   |
| Checking and  money market                     |   | $                                 | 241,156 |   | $ | 673 |   | 1.12 | % | $ | 199,230 |   | $ | 633 |   | 1.29 | % |
| Savings                                        |   | 56,718                            |    | 86 |   | 0.61 | % | 45,618 |   | 79 |   | 0.70 | % |
| Certificates of  deposit                       |   | 258,307                           |    | 1,744 |   | 2.71 | % | 293,115 |   | 2,334 |   | 3.23 | % |
| Total  interest-bearing deposits               |   | 556,181                           |    | 2,503 |   | 1.81 | % | 537,963 |   | 3,046 |   | 2.30 | % |
| FHLB advances  and other borrowings            |   | 70,372                            |    | 839 |   | 4.78 | % | 87,702 |   | 1,068 |   | 4.94 | % |
| Subordinated  debentures payable to trusts     |   | 27,837                            |    | 324 |   | 4.67 | % | 20,000 |   | 266 |   | 5.39 | % |
|                                           |   |                              |    |   |   |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities            |   | 654,390                           |    | 3,666 |   | 2.25 | % | 645,665 |   | 4,380 |   | 2.76 | % |
| Noninterest-bearing  deposits                  |   | 65,316                            |    |   |   |   |   | 61,944 |   |   |   |   |   |
| Other  liabilities                             |   | 19,054                            |    |   |   |   |   | 20,189 |   |   |   |   |   |
| Total  liabilities                             |   | 738,760                           |    |   |   |   |   | 727,798 |   |   |   |   |   |
| Equity                                         |   | 51,251                            |    |   |   |   |   | 49,998 |   |   |   |   |   |
| Total  liabilities and equity                  |   | $                                 | 790,011 |   |   |   |   |   | $ | 777,796 |   |   |   |   |   |
|                                           |   |                              |    |   |   |   |   |   |   |   |   |   |   |
| Net interest  income; interest rate spread (4) |   |                              |    | $ | 6,171 |   | 3.16 | % |   |   | $ | 6,269 |   | 3.24 | % |
|                                           |   |                              |    |   |   |   |   |   |   |   |   |   |   |
| Net interest  margin (4) (5)                   |   |                              |    |   |   | 3.39 | % |   |   |   |   | 3.53 | % |

 

----

(1)   Includes loan fees and interest on accruing loans and leases past due 90days or more.

(2)   Includes federal funds sold.

(3)   Yields do not reflect the tax exempt nature of municipal securities.

(4)   Percentages for the three months ended March 31, 2004 and March 31, 2003have been annualized.

(5)   Net interest margin is net interest income divided by averageinterest-earning assets.

 

16

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|                                           |   | **NINE  MONTHS ENDED MARCH 31,**  |    |
|------------------------------------------------|--------|-----------------------------------|---------|
|                                           |   | **2004**                          |    | **2003** |   |
|                                           |   | **Average  Outstanding  Balance** |    | **Interest  Earned/  Paid** |   | **Yield/  Rate** |   | **Average  Outstanding  Balance** |   | **Interest  Earned/  Paid** |   | **Yield/  Rate** |   |
|                                           |   | **(Dollars  in Thousands)**       |    |
| Interest-earning  assets:                      |   |                              |    |   |   |   |   |   |   |   |   |   |   |
| Loans and leases  receivable (1)               |   | $                                 | 616,528 |   | $ | 27,645 |   | 5.95 | % | $ | 592,443 |   | $ | 30,665 |   | 6.90 | % |
| Investment  securities (2) (3)                 |   | 100,406                           |    | 2,237 |   | 2.96 | % | 105,100 |   | 3,021 |   | 3.83 | % |
| FHLB stock                                     |   | 4,529                             |    | 83 |   | 2.43 | % | 6,797 |   | 168 |   | 3.29 | % |
|                                           |   |                              |    |   |   |   |   |   |   |   |   |   |   |
| Total  interest-earning assets                 |   | 721,463                           |    | $ | 29,965 |   | 5.51 | % | 704,340 |   | $ | 33,854 |   | 6.40 | % |
| Noninterest-earning  assets                    |   | 61,337                            |    |   |   |   |   | 53,619 |   |   |   |   |   |
| Total assets                                   |   | $                                 | 782,800 |   |   |   |   |   | $ | 757,959 |   |   |   |   |   |
|                                           |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                 |   |                              |    |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                      |   |                              |    |   |   |   |   |   |   |   |   |   |   |
| Checking and  money market                     |   | $                                 | 232,182 |   | $ | 1,935 |   | 1.11 | % | $ | 193,484 |   | $ | 2,045 |   | 1.41 | % |
| Savings                                        |   | 50,333                            |    | 223 |   | 0.59 | % | 40,141 |   | 241 |   | 0.80 | % |
| Certificates of  deposit                       |   | 260,018                           |    | 5,418 |   | 2.77 | % | 280,873 |   | 7,480 |   | 3.55 | % |
| Total  interest-bearing deposits               |   | 542,533                           |    | 7,576 |   | 1.85 | % | 514,498 |   | 9,766 |   | 2.53 | % |
| FHLB advances  and other borrowings            |   | 77,956                            |    | 2,828 |   | 4.81 | % | 99,294 |   | 3,406 |   | 4.57 | % |
| Subordinated  debentures payable to trusts     |   | 25,672                            |    | 901 |   | 4.66 | % | 17,222 |   | 716 |   | 5.54 | % |
| Total  interest-bearing liabilities            |   | 646,161                           |    | 11,305 |   | 2.32 | % | 631,014 |   | 13,888 |   | 2.93 | % |
| Noninterest-bearing  deposits                  |   | 66,192                            |    |   |   |   |   | 57,804 |   |   |   |   |   |
| Other  liabilities                             |   | 19,886                            |    |   |   |   |   | 19,538 |   |   |   |   |   |
| Total  liabilities                             |   | 732,239                           |    |   |   |   |   | 708,356 |   |   |   |   |   |
| Equity                                         |   | 50,561                            |    |   |   |   |   | 49,603 |   |   |   |   |   |
| Total  liabilities and equity                  |   | $                                 | 782,800 |   |   |   |   |   | $ | 757,959 |   |   |   |   |   |
| Net interest  income; interest rate spread (4) |   |                              |    | $ | 18,660 |   | 3.19 | % |   |   | $ | 19,966 |   | 3.47 | % |
|                                           |   |                              |    |   |   |   |   |   |   |   |   |   |   |
| Net interest  margin (4) (5)                   |   |                              |    |   |   | 3.43 | % |   |   |   |   | 3.78 | % |

 

----

(1)   Includes loan feesand interest on accruing loans and leases past due 90 days or more.

(2)   Includes federal funds sold.

(3)   Yields do notreflect the tax exempt nature of municipal securities.

(4)   Percentages for thenine months ended March 31, 2004 and March 31, 2003 have been annualized.

(5)   Net interest marginis net interest income divided by average interest-earning assets.

 

17

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**Rate/Volume Analysis of Net Interest Income**

 

Thefollowing schedule presents the dollar amount of changes in interest income andinterest expense for major components of interest-earning assets andinterest-bearing liabilities.  Itdistinguishes between the increases and decreases due to fluctuatingoutstanding balances that are due to the levels and volatility of interestrates.  For each category ofinterest-earning assets and interest-bearing liabilities, information isprovided on changes attributable to (i) changes in volume (i.e., changes involume multiplied by old rate) and (ii) changes in rate (i.e., changes in ratemultiplied by old volume).  For purposesof this table, changes attributable to both rate and volume, which cannot besegregated, have been allocated proportionately to the change due to volume andthe change due to rate.

 
|                                       |   | **Three  Months Ended March 31,  2004 vs 2003** |   | **Nine  Months Ended March 31,  2004 vs 2003** |   |
|--------------------------------------------|--------|-------------------------------------------------|--------|------------------------------------------------|--------|
|                                       |   | **Increase  (Decrease)  Due to  Volume**        |   | **(Decrease)  Due to  Rate**                   |   | **Total  Increase  (Decrease)** |   | **Increase  (Decrease)  Due to  Volume** |   | **Increase  (Decrease)  Due to  Rate** |   | **Total  Increase  (Decrease)** |   |
|                                       |   |                                            |   |                                           |   |   |   | **(Dollars  in Thousands)** |   |
| Interest-earning  assets:                  |   |                                            |   |                                           |   |   |   |   |   |   |   |   |   |
| Loans and leases  receivable (1)           |   | $                                               | 537    |                                           | $      | (1,102 | ) | $ | (565 | ) | $ | 1,307 |   | $ | (4,327 | ) | $ | (3,020 | ) |
| Investment securities  (2)                 |   | (148                                            | )      | (48                                            | )      | (196 | ) | (130 | ) | (654 | ) | (784 | ) |
| FHLB stock                                 |   | (18                                             | )      | (33                                            | )      | (51 | ) | (56 | ) | (29 | ) | (85 | ) |
|                                       |   |                                            |   |                                           |   |   |   |   |   |   |   |   |   |
| Total  interest-earning assets             |   | $                                               | 371    |                                           | $      | (1,183 | ) | $ | (812 | ) | $ | 1,121 |   | $ | (5,010 | ) | $ | (3,889 | ) |
|                                       |   |                                            |   |                                           |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:             |   |                                            |   |                                           |   |   |   |   |   |   |   |   |   |
| Deposits:                                  |   |                                            |   |                                           |   |   |   |   |   |   |   |   |   |
| Checking and  money market                 |   | $                                               | 139    |                                           | $      | (99 | ) | $ | 40 |   | $ | 415 |   | $ | (525 | ) | $ | (110 | ) |
| Savings                                    |   | 20                                              |   | (13                                            | )      | 7 |   | 62 |   | (80 | ) | (18 | ) |
| Certificates of  deposit                   |   | (267                                            | )      | (323                                           | )      | (590 | ) | (544 | ) | (1,518 | ) | (2,062 | ) |
| Total  interest-bearing deposits           |   | (108                                            | )      | (435                                           | )      | (543 | ) | (67 | ) | (2,123 | ) | (2,190 | ) |
| FHLB advances  and other borrowings        |   | (207                                            | )      | (22                                            | )      | (229 | ) | (729 | ) | 151 |   | (578 | ) |
| Subordinated  debentures payable to trusts |   | 107                                             |   | (49                                            | )      | 58 |   | 354 |   | (169 | ) | 185 |   |
|                                       |   |                                            |   |                                           |   |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities        |   | $                                               | (208   | )                                              | $      | (506 | ) | $ | (714 | ) | $ | (442 | ) | $ | (2,141 | ) | $ | (2,583 | ) |
|                                       |   |                                            |   |                                           |   |   |   |   |   |   |   |   |   |
| Net interest  income                       |   |                                            |   |                                           |   | $ | (98 | ) |   |   |   |   | $ | (1,306 | ) |

 

----

(1)   Includes loan fees and interest on accruingloans and leases past due 90 days or more.

(2)   Includes federal funds sold.

 

18

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**Application of Critical Accounting Policies**

 

GAAPrequires management to utilize estimates when reporting financial results.  The Company has identified the policiesdiscussed below as Critical Accounting Policies because the accountingestimates require management to make certain assumptions about matters that maybe uncertain at the time the estimate was made and a different method ofestimating could have been reasonably made that could have a material impact onthe presentation of the Company’s financial condition, changes in financialcondition or results of operations.

 

Allowancefor Loan and Lease Losses – GAAP requires the Company to set aside reserves ormaintain an allowance against probable loan and lease losses in the loan andlease portfolio.  Management mustdevelop a consistent and systematic approach to estimate the appropriatebalances that will cover the probable losses. Due to the uncertainty of future events, the approach includes a processthat may differ significantly from other methodologies and still produce anestimate that is in accordance with GAAP.

 

The allowance is compiled by utilizing the Company’sloan and lease risk rating system which is structured to identify weaknesses inthe loan and lease portfolio.  The riskrating system has evolved to a process whereby management believes the systemwill properly identify the credit risk associated with the loan and leaseportfolio.  Due to the stratification ofloans and leases for the allowance calculation, the estimate of the allowancefor loan and lease losses could change materially if the loan and lease riskrating system would not properly identify the strength of a large or a fewlarge loan and lease customers. Although management believes that it uses the best information availableto determine the allowance, unforeseen market or borrower conditions couldresult in adjustments and net earnings being significantly affected ifcircumstances differ substantially from the assumptions used in making thefinal determinations.

 

Mortgage Servicing Rights (“MSR”) – The Companyrecords a servicing asset for contractually separated servicing from theunderlying mortgage loans.   The assetis initially recorded at fair value and represents an intangible asset backedby an income stream from the serviced assets. The asset is amortized in proportion to and over the period of estimatednet servicing income.

 

At each balance sheet date,the MSRs are analyzed for impairment which occurs when the fair value of theMSRs is lower than the amortized book value. The Company’s MSRs are primarilyservicing rights acquired on South Dakota Housing Development Authority firsttime home buyers program.  Due to the lackof quoted markets for the Company’s servicing portfolio, the Company estimatesthe fair value of the MSRs using present value of future cash flowanalysis.  If the analysis produces afair value that is greater than or equal to the amortized book value of theMSRs, no impairment is recognized.  Ifthe fair value is less than the book value, an expense for the difference ischarged to earnings by initiating a MSR valuation account.  If the Company determines this impairment istemporary, any future changes in fair value are recorded as a change inearnings and the valuation.  If theCompany determines the impairment to be permanent, the valuation is written offagainst the MSRs which results in a new amortized balance.

 

Due to the substantialdecline in interest rates over the last fiscal year, the Company has includedMSRs as a critical accounting policy because the use of estimates fordetermining fair value using present value concepts may produce results whichmay significantly differ from other fair value analysis perhaps even to thepoint of recording impairment.  The riskto earnings is when the underlying mortgages payoff significantly faster thanthe assumptions used in the previously recorded amortization.  Estimating future cash flows on the underlyingmortgages is a difficult analysis and requires judgment based on the bestinformation available.  The Companylooks at alternative assumptions and projections when preparing a reasonableand supportable analysis.  Based on theCompany’s analysis of MSRs at quarter-end, there is no impairment to the MSRs.

 

19

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Retained Interest from Securitization – The Companyrecorded an asset as a result of the automobile securitization.  See Note 4 of the“Notes to Consolidated Financial Statements.”  This asset is recorded based onpresent value concepts of future expected cash flows.  The assumptions used to calculate the initial retained interestvalue and subsequent assumptions are based the best information available.  The value of the retained interest maychange significantly if actual cash flows differ from expected cash flows.

 

**Asset Quality and Potential Problem Loans and Leases**

 

Whena borrower fails to make a required payment on a loan within 10 to 15 daysafter the payment is due, the Bank generally institutes collection proceduresby issuing a late notice.  The customeris contacted again when the payment is between 17 and 40 days past due.  In most cases, delinquencies are curedpromptly; however, if a loan has been delinquent for more than 40 days, theBank attempts additional written as well as verbal contacts and, if necessary,personal contact with the borrower in order to determine the reason for thedelinquency and to effect a cure, and, where appropriate, reviews the conditionof the property and the financial circumstances of the borrower.  Based upon the results of any suchinvestigation, the Bank may: (i) accept a repayment program which underappropriate circumstances could involve an extension in the case of consumerloans for the arrearage from the borrower, (ii) seek evidence, in the form of alisting contract, of efforts by the borrower to sell the property if theborrower has stated that he is attempting to sell, or (iii) initiate foreclosureproceedings. When a loan payment is delinquent for 90 days, the Bank generallywill initiate foreclosure proceedings unless management is satisfied the creditproblem is correctable.

 

Loans are generally classified as nonaccrual whenthere are reasonable doubts as to the collectibility of principal and/orinterest and/or when payment becomes 90 days past due, except loans which arewell secured and in the process of collection. Interest collections on nonaccrual loans, for which the ultimatecollectibility of principal is uncertain, are applied as principal reductions.

 

Leases are generally classified as nonaccrual whenthere are reasonable doubts as to the collectibility of principal and/orinterest.  Leases may be placed onnonaccrual when the lease has experienced either four consecutive months withno payments or once the account is five months in arrears.  Interest collections on nonaccrual leases,for which the ultimate collectibility of principal is uncertain, are applied asprincipal reductions.

 

When a lessee fails to make a required lease paymentwithin 10 days after the payment is due, Mid America Leasing generallyinstitutes collection procedures.  Thelessee may be contacted by telephone on the 10th, but no later than the 30thday of delinquency.  A late notice isautomatically issued by the system on the 11th day of delinquency and is sentto the lessee.  The lease may bereferred to legal counsel when the lease is past due beyond four payments andno positive response has been received or when other considerations arepresent.

 

Nonperforming assets (nonaccrual loans and leases,accruing loans and leases delinquent more than 90 days and foreclosed assets)decreased to $3.9 million at March 31, 2004 from $6.2 million at June 30, 2003,a decrease of $2.3 million, or 37.1%. In addition, the ratio of nonperforming assets to total assets, which isone indicator of credit risk exposure, decreased to 0.48% at March 31, 2004 ascompared to 0.77% at June 30, 2003.  Thedecrease in the ratio of nonperforming assets to total assets at March 31, 2004as compared to June 30, 2003 was due to the decrease in nonperforming assets of$2.3 million.  In addition, assetquality continues to improve in part due to significant impaired loan creditresolution.

 

Nonaccruing loans and leases decreased 29.5% or $1.3million to $3.1 million at March 31, 2004 compared to $4.4 million at June 30,2003.  Included in nonaccruing loans andleases at March 31, 2004 were two loans totaling $43,000 secured by one- tofour-family real estate, five loans totaling $1.4 million secured by commercialreal estate, eight commercial business loans totaling $686,000, two equipment

 

20

----

 

finance leases totaling $13,000, two agricultural loans totaling$181,000 and 45 consumer loans totaling $789,000.  Nonaccruing commercial real estate loans increased $1.0 millionat March 31, 2004 from the levels at June 30, 2003 as the result of onepurchased participation loan in the amount of $976,000 that is experiencingfinancial difficulties.  Managementplaced the commercial participation loan on nonaccrual at December 31, 2003with specific reserve set up in the amount of $20,000 and subsequentlyincreased the specific reserve to $76,000 during the third quarter of fiscal2004.  This loan is included in theCompany’s $1.4 million of classified participation loan purchases describedbelow. Subsequent to quarter end, this loan was paid off at 90% of theprincipal balance and the reserve balance at March 31, 2004 was adequate toabsorb the loss.  Nonaccruingagricultural loans decreased $2.4 million primarily as a result of charge-offsof loans classified as nonaccrual at June 30, 2003.

 

The Company’s nonperforming loans and leases, whichrepresent nonaccrual and past due 90 days and still accruing, have decreased$2.1 million or 36.2% from the levels at June 30, 2003.  The risk rating system in place is designedto identify and manage the nonperforming loans and leases.  Commercial and agricultural loans andequipment finance leases will have specific reserve allocations based oncollateral values or based on the present value of expected cash flows if theloans and leases are deemed impaired. Loans and leases that are not performing do not necessarily result in aloss.

 

TheCompany is in the final stages of liquidating a significant agricultureimpaired loan.  A charge-off of $836,000was recorded during the third quarter of fiscal 2004.  The charge-off on this loan was increased from $808,000 to the$836,000 total during the third quarter of fiscal 2004.    The balance on the credit at March 31,2004 is less than $50,000 and should be concluded during the fourth quarter offiscal 2004.  Any additional charge-offor any recovery will be recorded as incurred.

 

As of March 31, 2004, the Company had $172,000 offoreclosed assets.  The balance offoreclosed assets at March 31, 2004 consisted of $98,000 in consumer collateraland $74,000 in single-family residences. Included in the $98,000 of consumer collateral, was $5,000 secured by amobile home.

 

At March 31, 2004, the Company had criticized $13.2 million of its assets as special mention andclassified $6.7 million of its assets that management has determinedneed to be closely monitored because of possible credit problems of theborrowers or the cash flows of the secured properties.  At March 31, 2004 the Company had $40.4million in multi-family, commercial business, commercial real estate andagricultural participation loans purchased, of which $1.4 million or 3.5%, wereincluded in the Company’s $6.7 million of classified assets.  Other potential problem loans and leases areincluded in criticized and classified assets. Criticized and classified loans and leases were considered indetermining the adequacy of the allowance for loan and lease losses.  The allowance for loan and lease losses isestablished based on management’s evaluation of the risks probable in the loanand lease portfolio and changes in the nature and volume of loan and leaseactivity.  Such evaluation, whichincludes a review of all loans and leases for which full collectibility may notbe reasonably assured, considers the estimated fair market value of theunderlying collateral, present value of expected principal and interestpayments, economic conditions, historical loss experience and other factorsthat warrant recognition in providing for an adequate loan and lease lossallowance.

 

Althoughthe Company’s management believes that the March 31, 2004 recorded allowancefor loan and lease losses was adequate to provide for probable losses on therelated loans and leases, there can be no assurance that the allowance existingat March 31, 2004 will be adequate in the future.

 

21

----

 

In accordance with the Company’s internalclassification of assets policy, management evaluates the loan and leaseportfolio on a monthly basis to identify loss potential and determines theadequacy of the allowance for loan and lease losses quarterly.  Loans and leases are placed on nonaccrualstatus when the collection of principal and/or interest become doubtful.  Foreclosed assets include assets acquired insettlement of loans.  The followingtable sets forth the amounts and categories of the Company’s nonperforming assetsfrom continuing operations for the periods indicated.

 
|                                                                   |   | **Nonperforming  Assets As Of** |       |
|------------------------------------------------------------------------|--------|---------------------------------|------------|
|                                                                   |   | **March 31,  2004**             |       | **June 30,  2003** | ** ** |
|                                                                   |   | **(Dollars  in Thousands)**     | ** ** |
| Nonaccruing  loans and leases:                                         |   |                            |       |   |   |
| One- to  four-family                                                   |   | $                               | 43         |   | $ | 103 |   |
| Commercial real  estate (1)                                            |   | 1,352                           |       | 310 |   |
| Commercial  business                                                   |   | 686                             |       | 472 |   |
| Equipment  finance leases                                              |   | 13                              |       | 30 |   |
| Consumer (2)                                                           |   | 789                             |       | 909 |   |
| Agricultural                                                           |   | 181                             |       | 2,541 |   |
| Total                                                                  |   | 3,064                           |       | 4,365 |   |
|                                                                   |   |                            |       |   |   |
| Accruing loans  and leases delinquent more than 90 days:               |   |                            |       |   |   |
| One- to four-family                                                    |   | 130                             |       | 330 |   |
| Commercial real  estate                                                |   | —                          |       | 42 |   |
| Commercial  business                                                   |   | 226                             |       | 779 |   |
| Equipment  finance leases                                              |   | 162                             |       | 313 |   |
| Consumer (2)                                                           |   | 42                              |       | 2 |   |
| Agricultural                                                           |   | 119                             |       | — |   |
| Total                                                                  |   | 679                             |       | 1,466 |   |
|                                                                   |   |                            |       |   |   |
| Foreclosed  assets: (3)                                                |   |                            |       |   |   |
| One- to  four-family                                                   |   | 74                              |       | 258 |   |
| Consumer (2)                                                           |   | 98                              |       | 77 |   |
| Total                                                                  |   | 172                             |       | 335 |   |
|                                                                   |   |                            |       |   |   |
| Total  nonperforming assets                                            |   | $                               | 3,915      |   | $ | 6,166 |   |
|                                                                   |   |                            |       |   |   |
| Ratio of  nonperforming assets to total assets                         |   | 0.48                            | %          | 0.77 | % |
|                                                                   |   |                            |       |   |   |
| Ratio of  nonperforming loans and leases to total loans and leases (4) |   | 0.60                            | %          | 0.95 | % |

 

----

(1)   Includes one loan in the amountof $976 that was subsequently resolved in April 2004.

(2)   Includes mobile home loans.

(3)   Total foreclosed assets do notinclude land or other real estate owned held for sale.

(4)   Nonperforming loans and leasesinclude both nonaccruing and accruing loans and leases delinquent more than 90days.

 

22

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The following table sets forth information withrespect to activity in the Company’s allowance for loan and lease losses fromcontinuing operations during the periods indicated.  Balances related to discontinued credit card loan operations havebeen eliminated for all periods presented.

 
|                                                                                                     |   | **Nine  Months Ended March 31,** |       |
|----------------------------------------------------------------------------------------------------------|--------|----------------------------------|------------|
|                                                                                                     |   | **2004**                         |       | **2003** |   |
|                                                                                                     |   | **(Dollars  in Thousands)**      | ** ** |
|                                                                                                     |   |                             |       |   |   |
| Balance at  beginning of period                                                                          |   | $                                | 3,842      |   | $ | 4,461 |   |
| Charge-offs:                                                                                             |   |                             |       |   |   |
| One- to  four-family                                                                                     |   | (6                               | )          | (9 | ) |
| Commercial real  estate                                                                                  |   | (16                              | )          | — |   |
| Commercial  business                                                                                     |   | (394                             | )          | (1,078 | ) |
| Equipment  finance leases                                                                                |   | (23                              | )          | (69 | ) |
| Consumer (1)                                                                                             |   | (891                             | )          | (927 | ) |
| Agriculture                                                                                              |   | (836                             | )          | — |   |
| Total  charge-offs                                                                                       |   | (2,166                           | )          | (2,083 | ) |
|                                                                                                     |   |                             |       |   |   |
| Recoveries:                                                                                              |   |                             |       |   |   |
| One- to  four-family                                                                                     |   | 4                                |       | 3 |   |
| Commercial  business                                                                                     |   | 2                                |       | 4 |   |
| Equipment  finance leases                                                                                |   | 63                               |       | 33 |   |
| Consumer (1)                                                                                             |   | 182                              |       | 248 |   |
| Agriculture                                                                                              |   | 3                                |       | 100 |   |
| Total recoveries                                                                                         |   | 254                              |       | 388 |   |
|                                                                                                     |   |                             |       |   |   |
| Net  (charge-offs)                                                                                       |   | (1,912                           | )          | (1,695 | ) |
|                                                                                                     |   |                             |       |   |   |
| Additions  charged to operations                                                                         |   | 1,678                            |       | 1,874 |   |
| Allowance  related to assets sold, net                                                                   |   | —                           |       | (264 | ) |
|                                                                                                     |   |                             |       |   |   |
| Balance at end  of period                                                                                |   | $                                | 3,608      |   | $ | 4,376 |   |
|                                                                                                     |   |                             |       |   |   |
| Ratio of net  (charge-offs) during the period to average loans and leases outstanding  during the period |   | (0.31                            | )%         | (0.29 | )% |
|                                                                                                     |   |                             |       |   |   |
| Ratio of  allowance for loan and lease losses to total loans and leases at end of  period                |   | 0.58                             | %          | 0.76 | % |
|                                                                                                     |   |                             |       |   |   |
| Ratio of  allowance for loan and lease losses to nonperforming loans and leases at end  of period (2)    |   | 96.39                            | %          | 54.31 | % |

 

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(1)   Includes mobile home loans.

(2)   Nonperforming loans and leasesinclude both nonaccruing and accruing loans and leases delinquent more than 90days.

 

23

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The distribution of the Company’s allowance for loanand lease losses and impaired loss summary at the dates indicated aresummarized in the following tables.  Thecombination of FASB 5 and FASB 114 calculations comprise the Company’sallowance for loan and lease losses.

 
|                     |   | **FASB 5  Allowance  for loan and  lease losses** |       | **FASB 114  Impaired Loan  Valuation  Allowance** | ** ** | **FASB 5  Allowance  for loan and  lease losses** | ** ** | **FASB 114  Impaired Loan  Valuation  Allowance** | ** ** |
|--------------------------|--------|---------------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|
| **Loan Type**            |   | **At March  31, 2004**                            | ** ** | **At June  30, 2003**                             | ** ** |
|                     |   | **(Dollars in Thousands)**                        | ** ** |
|                     |   |                                              |       |                                              |       |                                              |       |                                              |       |
| One- to four-family      |   | $                                                 | 16         |                                              | $          | —                                            |       | $                                                 | 28         |   | $ | — |   |
| Commercial real estate   |   | 99                                                |       | 76                                                |       | 130                                               |       | —                                            |       |
| Multi-family real estate |   | 89                                                |       | —                                            |       | 111                                               |       | —                                            |       |
| Commercial business      |   | 1,005                                             |       | —                                            |       | 652                                               |       | 132                                               |       |
| Equipment finance leases |   | 281                                               |       | —                                            |       | 250                                               |       | —                                            |       |
| Consumer (1)             |   | 1,731                                             |       | —                                            |       | 1,595                                             |       | —                                            |       |
| Agricultural             |   | 311                                               |       | —                                            |       | 230                                               |       | 714                                               |       |
| Total                    |   | $                                                 | 3,532      |                                              | $          | 76                                                |       | $                                                 | 2,996      |   | $ | 846 |   |

 

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(1)   Includes mobile home loans.

 

 

**FASB114 Impaired Loan Summary**

** **
|                        |   | **Number  of Loan  Customers** |       | **Loan  Balance** | ** ** | **Impaired  Loan  Valuation  Allowance** | ** ** |
|-----------------------------|--------|--------------------------------|------------|-------------------|------------|------------------------------------------|------------|
| **Loan Type**               |   | **At March  31, 2004**         | ** ** |
|                        |   | **(Dollars  in Thousands)**    | ** ** |
|                        |   |                           |       |
| Commercial  business        |   | 5                              |       | $                 | 652        |                                     | $          | — |   |
| Commercial real  estate (1) |   | 2                              |       | 1,051             |       | 76                                       |       |
| Agricultural                |   | 1                              |       | 42                |       | —                                   |       |
| Total                       |   | 8                              |       | $                 | 1,745      |                                     | $          | 76 |   |

 

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(1)     Includes one loan in theamount of $976 that was subsequently resolved in April 2004.

 

24

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**FASB114 Impaired Loan Summary**

** **
|                |   | **Number  of Loan  Customers** |       | **Loan  Balance** | ** ** | **Impaired  Loan  Valuation  Allowance** | ** ** |
|---------------------|--------|--------------------------------|------------|-------------------|------------|------------------------------------------|------------|
| **Loan Type**       |   | **At June  30, 2003**          | ** ** |
|                |   | **(Dollars in Thousands)**     | ** ** |
|                |   |                           |       |              |       |                                     |       |
| Commercial business |   | 8                              |       | $                 | 354        |                                     | $          | 132 |   |
| Agricultural        |   | 4                              |       | 2,320             |       | 714                                      |       |
| Total               |   | 12                             |       | $                 | 2,674      |                                     | $          | 846 |   |

 

The allowance for loan and lease losses was $3.6million at March 31, 2004 as compared to $4.4 million at March 31, 2003.  The ratio of the allowance for loan andlease losses to total loans and leases was 0.58% at March 31, 2004 compared to0.76% at March 31, 2003, a decrease of 23.7%. The Company’s management has considered nonperforming loans and leasesand potential problem loans and leases in establishing the allowance for loanand lease losses.  The Company continuesto monitor its allowance for probable loan and lease losses and make futureadditions or reductions in light of the level of loans and leases in itsportfolio and as economic conditions dictate. The current level of the allowance forloan and lease losses is a result of management’s assessment of the riskswithin the portfolio based on the information revealed in credit reportingprocesses. The Company utilizes a risk-rating system on all commercialbusiness, agricultural, construction and multi-family and commercial realestate loans, including purchased loans. A periodic credit review is performed on all types of loans and leasesto establish the necessary reserve based on the estimated risk within theportfolio. This assessment of risk takes into account the composition of theloan and lease portfolio, historical loss experience for each loan and leasecategory, previous loan and lease experience, concentrations of credit, currenteconomic conditions and other factors that in management’s judgment deserverecognition.

 

Realestate properties acquired throughforeclosure are recorded at the lower of cost or fair value (less a deductionfor disposition costs).  Valuations areperiodically updated by management and a specific provision for losses on suchproperties is established by a charge to operations if the carrying values ofthe properties exceed their estimated net realizable values.

 

Althoughmanagement believes that it uses the best information available to determinethe allowances, unforeseen market conditions could result in adjustments andnet earnings being significantly affected if circumstances differ substantiallyfrom the assumptions used in making the final determinations.  Future additions to the Company’s allowancesresult from periodic loan, property and collateral reviews and thus cannot bepredicted in advance.

 

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**Comparison of the Three Months EndedMarch 31, 2004 and March 31, 2003**

 

**ContinuedOperations:**

 

*General*.  The Company’s net income from continuingoperations was $973,000 or $0.27 and $0.26 for basic and diluted earnings pershare, respectively, for the three months ended March 31, 2004, a $543,000decrease in earnings compared to $1.5 million or $0.42 and $0.41 for basic anddiluted earnings per share, respectively, for the same period in the priorfiscal year.  For the three months endedMarch 31, 2004, the return on average equity from continuing operations was7.59%, a 37.4% decrease compared to 12.13% for the same period in the priorfiscal year.  For the three months endedMarch 31, 2004, the return on average assets from continuing operations was0.49%, a 37.2% decrease compared to 0.78% for the same period in the priorfiscal year.  As discussed in moredetail below, the decreases were due to a variety of key factors, includingdecreases in net interest income of $100,000 and noninterest income of $500,000and an increase in the provision for losses on loans and leases of $216,000offset by decreases in noninterest expense of $100,000 and income tax expenseof $167,000.

 

*Interest,Dividend and Loan Fee Income.*  Interest, dividend and loan fee income was $9.8 million for thethree months ended March 31, 2004 as compared to $10.6 million for the sameperiod in the prior fiscal year, a decrease of $800,000 or 7.5%.  A $1.2 million decrease in interest, dividendand loan fee income was the result of a 9.8% decrease in the average yield oninterest-earning assets.  The averageyield on interest-earning assets was 5.41% for the three months ended March 31,2004 as compared to 6.01% for the same period in the prior fiscal year.  For the three months ended March 31, 2004,the average yield on loans and leases receivable was 5.83%, a decrease of 11.4%from 6.58% for the same period in the prior fiscal year.  The overall decrease in interest, dividendand loan fee income was primarily due to repricing of loans and investmentsthat generally reflected the decline in national interest rates.  From June 30, 2002 to March 31, 2004, theprime rate dropped from 4.75% to 4.00%.

 

*InterestExpense.*  Interestexpense was $3.7 million for the three months ended March 31, 2004 as comparedto $4.4 million for the same period in the prior fiscal year, a decrease of$714,000 or 16.3%.  A $506,000 decreasein interest expense was the result of a 18.5% decrease in the average rate paidon interest-bearing liabilities.  Theaverage rate on interest-bearing liabilities was 2.25% for the three monthsended March 31, 2004 as compared to 2.76% for the same period in the priorfiscal year.  For the three months endedMarch 31, 2004, the average rate paid on interest-bearing deposits was 1.81%, adecrease of 21.3% from 2.30% for the same period in the prior fiscal year.  Average volume decreases on FHLB advancesand other borrowings of $17.3 million also contributed to a $207,000 decreasein interest expense for the three months ended March 31, 2004 as compared tothe same period in the prior fiscal year. While the overall average volume of interest-bearing deposits increased$18.2 million, the average volume decrease of certificates of deposit of $34.8million, included in interest-bearing deposits, was substantial enough tocontribute to an overall decrease in interest expense from interest-bearingdeposits of $267,000 for the three months ended March 31, 2004 as compared tothe same period in the prior fiscal year.

 

*NetInterest Income.* The Company’s net interest income fromcontinuing operations for the three months ended March 31, 2004 decreased$100,000, or 1.6%, to $6.2 million compared to $6.3 million for the same periodin the prior fiscal year.  The decreasein net interest income was due primarily to a decreasing net interest margin asnational rates continued to remain low over the prior year.  The Company’s net interest margin was 3.39%for the third quarter of fiscal 2004 as compared to 3.53% for the same periodin the prior fiscal year.

 

*Provisionfor Losses on Loans and Leases.*The allowance for loan and lease losses is maintained at a levelwhich is considered by management to be adequate to absorb probable losses onexisting loans and leases that may become uncollectible, based on an evaluationof the collectibility of loans and prior loan loss

 

26

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experience.  The evaluationtakes into consideration such factors as changes in the nature and volume ofthe loan and lease portfolio, overall portfolio quality, review of specificproblem loans and leases, and current economic conditions that may affect theborrower’s ability to pay.  Theallowance for loan and lease losses is established through a provision forlosses on loans and leases charged to expense.

 

During the three months ended March 31, 2004, theCompany recorded a provision for losses on loans and leases of $607,000compared to $391,000 for the three months ended March 31, 2003, an increase of$216,000.  See “Asset Quality” forfurther discussion.

 

*NoninterestIncome.*  Noninterestincome was $2.2 million for the three months ended March 31, 2004 as comparedto $2.7 million for the same period in the prior fiscal year, a decrease of$500,000 or 18.5%.  The decrease innoninterest income was due primarily to decreases in net gain on sale of loansof $366,000,  loan servicing income of$59,000 and other noninterest income of $84,000.

 

Net gain on sale of loans was $245,000 for the threemonths ended March 31, 2004 as compared to $611,000 for the same period in theprior fiscal year, a decrease of $366,000 or 59.9%.  The decrease was primarily due to a decrease in the amount ofresidential mortgage loans sold into the secondary market during the secondthird quarter of fiscal 2004 as compared to the same period in the prior fiscalyear.  Residential mortgage loanproduction decreased 50.4% in dollar volume for the three months ended March31, 2004 as compared to the same period in the prior fiscal year.  As is the case with the industry,residential mortgage loan pipelines decreased back to more historical levels atSeptember 30, 2003 and was reflected in fiscal 2004 third quarter earnings.

 

Loan servicing income decreased 13.3% to $383,000 forthe three months ended March 31, 2004 as compared to $442,000 for the sameperiod in the prior fiscal year primarily due to a decrease in the number ofloans serviced for others and the increase in loan sales to the secondarymarket.

 

Other noninterest income decreased 11.9% to $624,000for the three months ended March 31, 2004 as compared to $708,000 for the sameperiod in the prior fiscal year due to a decrease in commission and insuranceincome in the amount of $113,000 primarily due to the sale of the Company’sproperty and casualty book of business.

 

*NoninterestExpense.*  Noninterestexpense was $6.3 million for the three months ended March 31, 2004 as comparedto $6.4 million for the three months ended March 31, 2003, a decrease of$100,000 or 1.6%.  The decrease innoninterest expense was due primarily to decreases in occupancy and equipmentexpenses of $226,000 and other expenses of $140,000 offset by an increase incompensation and employee benefits of $254,000.

 

Occupancy and equipment expenses decreased 22.1%, or$226,000, for the three months ended March 31, 2004 as compared to the sameperiod in the prior fiscal year primarily due to recording a valuationimpairment of $200,000 in the third quarter of fiscal 2003.

 

Other noninterest expense decreased 8.7%, or $140,000,for the three months ended March 31, 2004 as compared to the same period in theprior fiscal year primarily due to decreases in legal expenses of $82,000,consultant services of $78,000, charitable contributions of $42,000, computerservice expenses of $42,000 and advertising of $41,000 offset by increases inpostage expense of $52,000 and accounting and auditing expenses of$32,000.  The remaining $61,000 decreasein other noninterest expense is comprised of miscellaneous and various othergeneral and administrative expenses.

 

Compensationand employee benefits increased $254,000 or 6.7%.  The increase was primarily due to increases in health claims, netof stop loss, of $567,000 and deferred compensation related to loan

 

27

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originationsof $241,000 offset by decreases on variable compensation (performanceincentives and bonuses) of $251,000.

 

*Incometax expense.* The Company’s income tax expense for the three months ended March 31,2004 decreased $167,000 or 24.2% to $524,000 compared to $691,000 for the sameperiod in the prior fiscal year.  Theeffective tax rate was 35.0% and 31.3% for the three months ended March 31,2004 and March 31, 2003, respectively. The increase in effective tax rate for the quarter was the result of anincrease in the expected effective tax rate for the year ending June 30, 2004due to permanent tax differences.

 

**Discontinued Operations:**

 

*Income from discontinued operations. *Income fromdiscontinued operations was $0 for the three months ended March 31, 2004 ascompared to $85,000 the same period in the prior fiscal year primarily due tothe sale of the credit card loan portfolio on January 31, 2003.  There has been no activity from thediscontinued operations during the third quarter of fiscal 2004.

 

**Comparisonof the Nine Months Ended March 31, 2004 and March 31, 2003**

 

**ContinuedOperations:**

 

*General*. The Company’s net income from continuing operations was $3.6 million or$1.00 and $0.97 for basic and diluted earnings per share, respectively, for thenine months ended March 31, 2004, a $900,000 decrease in earnings compared to$4.5 million or $1.24 and $1.22 for basic and diluted earnings per share,respectively, for the same period in the prior fiscal year.  For the nine months ended March 31, 2004,the return on average equity from continuing operations was 9.40%, a 22.5%decrease compared to 12.13% for the same period in the prior fiscal year.  For the nine months ended March 31, 2004,the return on average assets from continuing operations was 0.61%, a 22.8%decrease compared to 0.79% for the same period in the prior fiscal year.  As discussed in more detail below, thedecrease was primarily due to decreases in net interest income of $1.3 millionand noninterest income of $400,000 offset by decreases in provision for losseson loans and leases of $200,000, noninterest expense of $100,000 and income taxexpense of $400,000.

 

*Interest,Dividend and Loan Fee Income.*  Interest, dividend and loan fee income was $30.0 million for thenine months ended March 31, 2004 as compared to $33.9 million for the sameperiod in the prior fiscal year, a decrease of $3.9 million or 11.5%.  A $5.0 million decrease in interest, dividendand loan fee income was the result of a 13.9% decrease in the average yield oninterest-earning assets.  The averageyield on interest-earning assets was 5.51% for the nine months ended March 31,2004 as compared to 6.40% for the same period in the prior fiscal year.  For the nine months ended March 31, 2004,the average yield on loans and leases receivable was 5.95%, a decrease of 13.8%from 6.90% for the same period in the prior fiscal year.  The overall decrease in interest, dividendand loan fee income was primarily due to repricing of loans and investmentsthat generally reflected the decline in national interest rates.  From June 30, 2002 to March 31, 2004, theprime rate dropped from 4.75% to 4.00%. The decrease resulting from lower rates was partially offset by averagevolume increases of $24.1 million in loans and leases receivable which resultedin a $1.3 million increase in interest, dividend and loan fee income for thenine months ended March 31, 2004 as compared to the same period in the priorfiscal year.

 

*InterestExpense.*  Interestexpense was $11.3 million for the nine months ended March 31, 2004 as comparedto $13.9 million for the same period in the prior fiscal year, a decrease of$2.6 million or 18.7%.  A $2.1 milliondecrease in interest expense was the result of a 20.8% decrease in the averagerate paid on interest-bearing liabilities. The average rate on interest-bearing liabilities was 2.32% for the ninemonths ended March 31, 2004 as compared to 2.93% for the same period in theprior fiscal year.  For the nine months

 

28

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ended March 31, 2004, the average rate paid on interest-bearingdeposits was 1.85%, a decrease of 26.9% from 2.53% for the same period in theprior fiscal year.  Average volumedecreases in FHLB advances and other borrowings of $21.3 million alsocontributed to a $729,000 decrease in interest expense for the nine monthsended March 31, 2004 as compared to the same period in the prior fiscalyear.  Offsetting the above decreases ininterest expense for the nine months ended March 31, 2004 was an increase ininterest expense of $354,000 as a result of average volume increases of $8.5million in subordinated debentures payable to trusts as compared to the sameperiod in the prior fiscal year.

 

*NetInterest Income.* The Company’s net interest income fromcontinuing operations for the nine months ended March 31, 2004 decreased $1.3million, or 6.5%, to $18.7 million compared to $20.0 million for the sameperiod in the prior fiscal year.  Thedecrease in net interest income was due primarily to a decreasing net interestmargin as national rates continued to remain low over the prior year.  The Company’s net interest margin was 3.43%for the first nine months of fiscal 2004 as compared to 3.78% for the sameperiod in the prior fiscal year.

 

*Provisionfor Losses on Loans and Leases.*The allowance for loan and lease losses is maintained at a levelwhich is considered by management to be adequate to absorb probable losses onexisting loans and leases that may become uncollectible, based on an evaluationof the collectibility of loans and prior loan loss experience.  The evaluation takes into consideration suchfactors as changes in the nature and volume of the loan and lease portfolio,overall portfolio quality, review of specific problem loans and leases, andcurrent economic conditions that may affect the borrower’s ability to pay.  The allowance for loan and lease losses isestablished through a provision for losses on loans and leases charged toexpense.

 

During the nine months ended March 31,2004, the Company recorded a provision for losses on loans and leases of $1.7million, compared to $1.9 million for the nine months ended March 31, 2003, adecrease of $200,000.  See “AssetQuality” for further discussion.

 

*NoninterestIncome.*  Noninterestincome was $7.5 million for the nine months ended March 31, 2004 as compared to$7.9 million for the nine months ended March 31, 2003, a decrease of$400,000  or 5.1%.  The decrease in noninterest income was dueprimarily to decreases in net gain on sale of securities of $309,000, net gainon sale of loans of $200,000 and fees on deposits of $75,000  offset by an increase in other noninterestincome of $200,000.

 

Net gain on sale of securities decreased $309,000 forthe nine months ended March 31, 2004 as compared to the same period in theprior fiscal year due to fewer sales occurring during the first nine months offiscal 2004.

 

Net gain on sale of loans decreased 15.5% to $1.1million for the nine months ended March 31, 2004 as compared to $1.3 millionfor the same period in the prior fiscal year. The decrease was primarily due to a decrease in the amount ofresidential mortgage loans sold into the secondary market during the nine monthsended March 31, 2004 as compared to the same period in the prior fiscalyear.  Residential mortgage loanproduction decreased 18.7% in dollar volume for the nine months ended March 31,2004 as compared to the same period in the prior fiscal year.  As is the case with the industry,residential mortgage loan pipelines decreased back to more historical levels atSeptember 30, 2003 and was reflected in the first nine months of fiscal 2004earnings.  Offsetting the reduction inthe current year was a gain of $141,000 recorded in the second quarter offiscal 2004 resulting from the sale of $5.0 million in student loans to theStudent Loan Finance Corporation.

 

Fees on deposits decreased 3.1% to $3.1million for the nine months ended March 31, 2004 as compared to $3.2 millionfor the same period in the prior fiscal year. The overall $75,000 decrease was primarily due to a decrease innon-sufficient funds and overdraft fees on deposit accounts.

 

29

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Other noninterest income increased 10.5% to $2.1million for the nine months ended March 31, 2004 as compared to $1.9 millionfor the same period in the prior fiscal year due to income in the amount of$310,000 recorded on the retained interest obtained through the securitizationof automobile loans.  See Note 4 of the“Notes to Consolidated Financial Statements.” In addition, the Bank recorded an increase of $72,000 in othernoninterest income for BOLI and an increase of $57,000 in trust income ascompared to the same period in the prior fiscal year.  Also included in noninterest income for the nine months endedMarch 31, 2004 is $116,000 net gain on the sale of the Company’s property andcasualty book of business.  Offsettingthe above increases in noninterest income for the nine months ended March 31,2004 as compared to the same period in the prior fiscal year was a decrease incommission and insurance income in the amount of $403,000 primarily due to thesale of the Company’s property and casualty book of business.

 

*NoninterestExpense.*  Noninterestexpense was $19.0 million for the nine months ended March 31, 2004 as comparedto $19.1 million for the three months ended March 31, 2003, a decrease of$100,000 or 0.5%.  The decrease innoninterest expense was due primarily to decreases in occupancy and equipmentexpenses of $264,000 and other expenses of $265,000 offset by an increase incompensation and employee benefits of $385,000.

 

Occupancy and equipment expense decreased 9.8%, or$264,000,  for the nine months endedMarch 31, 2004 as compared to the same period in the prior fiscal yearprimarily due to recording a valuation impairment of $200,000 in the thirdquarter of fiscal 2003.

 

Other noninterest expense decreased 5.4%, or $265,000,for the nine months ended March 31, 2004 as compared to the same period in theprior fiscal year primarily due to a decrease in advertising expenses of$127,000, consultant services of $120,000 and amortization of intangible assetsof $52,000 offset by an increase in accounting and auditing expenses of$124,000.

 

Compensation and employee benefitsincreased 3.3%, or $385,000, for the nine months ended March 31, 2004 ascompared to the same period in the prior fiscal year primarily due to increasesin hospital, dental and life insurance expense of $462,000 and deferred compensationrelated to loan originations of $361,000 offset by decreases in variablecompensation (performance incentives and bonuses) of $452,000 and pension planexpense of $194,000 due to a combination of changes in payroll covered and theinvestment performance of the pension trust account.

 

*Incometax expense.* The Company’s income tax expense for the nine months ended March 31,2004 decreased $400,000 or 16.7% to $2.0 million compared to $2.4 million forthe same period in the prior fiscal year, primarily due to a reduction in netincome of $981,000.  The effective taxrate was 35.7% and 34.4% for the nine months ended March 31, 2004 and March 31,2003, respectively.

 

**Discontinued Operations:**

 

*Incomefrom discontinued operations. *Incomefrom discontinued operations was $0 for the nine months ended March 31, 2004 ascompared to $34,000 for the same period in the prior fiscal year primarily dueto the sale of the credit card loan portfolio on January 31, 2003.  There has been no activity from thediscontinued operations during the first nine months of fiscal 2004.

 

**Liquidity and Capital Resources**

 

The Bank’s primary sources of funds are earnings,in-market deposits, FHLB advances and other borrowings,  repayments of loan principal,mortgage-backed securities and callable agency securities and, to a

 

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lesser extent, sales of mortgage loans, sales and maturities ofsecurities, mortgage-backed securities, out-of-market deposits and short-terminvestments.  While scheduled loanpayments and maturing securities are relatively predictable, deposit flows andloan prepayments are more influenced by interest rates, general economicconditions and competition. The Bank attempts to price its deposits to meet itsasset/liability objectives consistent with local market conditions.  Excess balances are invested in overnightfunds.

 

Liquidity management is both a daily and long-termresponsibility of management.  The Bankadjusts its investments in liquid assets based upon management’s assessment of(i) expected loan demand, (ii) projected loan sales, (iii) expected depositflows, (iv) yields available on interest-bearing deposits, and (v) theobjectives of its asset/liability management program. Excess liquidity isinvested generally in interest-bearing overnight deposits and other short-termgovernment and agency obligations.

 

The Bank anticipates that it will have sufficientfunds available to meet current loan commitments.  At March 31, 2004, the Bank had outstanding commitments tooriginate residential mortgage loans of $5.6 million, commercial andagricultural real estate loans of $15.3 million and commercial business loansof $8.5 million.  In addition, the Bankhad outstanding commitments to sell residential mortgage loans of $12.9 millionand consumer student loans of $1.9 million. Commitments by the Bank to originate loans are not necessarily executedby the customer.  The Bank monitors theratio of commitments to fundings for use in liquidity management.  At March 31, 2004, the Bank had nocommitments to purchase or sell securities available for sale.

 

Althoughin-market deposits are the Bank’s primary source of funds, the Bank’s policyhas been to utilize borrowings where the funds can be invested in either loansor securities at a positive rate of return or to use the funds for short-termliquidity purposes.  The Bank currentlyhas two $10.0 million unsecured lines of federal funds with correspondentbanks.  There were no funds drawn oneither line of credit at March 31, 2004. Additionally, as of March 31, 2004, the Bank had $23.2 million inout-of-market certificates of deposit and $16.4  million in out-of-market money market accounts.  The Bank may also seek other sources ofcontingent liquidity including additional federal funds purchased lines withcorrespondent banks and lines of credit with the Federal Reserve Bank.

 

TheCompany uses its capital resources to pay dividends to its stockholders, torepurchase Company stock in the market pursuant to Board of Directors’ approvedplans, to support organic growth, to make acquisitions, to service its debtobligations and to provide funding for investment into the Bank of Tier 1(core) capital.

 

TheCompany currently has in effect a stock buy back program in which up to 10% ofthe common stock of the Company outstanding on May 1, 2003 may be acquiredthrough April 30, 2004.  A total of154,300 shares of common stock have been purchased pursuant to the currentprogram, with 80,100 shares purchased during the three months ended March 31,2004.   In addition, the Companyapproved a new stock buy back program in which up to 10% of the common stock ofthe Company outstanding on May 1, 2004 may be acquired through April 30, 2005.  No shares of common stock have beenpurchased pursuant to the new program. See Part II, Item 2 “Changes in Securities, Use of Proceeds and IssuerPurchases of Equity Securities.”

 

Savingsinstitutions insured by the Federal Deposit Insurance Corporation are requiredby the Financial Institutions Reform, Recovery and Enforcement Act of 1989(“FIRREA”) to meet three regulatory capital requirements.  If a requirement is not met, regulatoryauthorities may take legal or administrative actions, including restrictions ongrowth or operations or, in extreme cases, seizure.  Institutions not in compliance may apply for an exemption fromthe requirements and submit a recapitalization plan.  Under these capital requirements, at March 31, 2004, the Bank metall current capital requirements.

 

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The OTS has adopted capital requirement for savingsinstitutions comparable to the requirement for national banks.  The minimum OTS Tier 1 (core) capitalrequirement for well capitalized institutions is 5.00% of total adjusted assetsfor thrifts.  The Bank had Tier 1 (core)capital of 8.39% at March 31, 2004.  Theminimum OTS total risk-based capital requirement for well capitalizedinstitutions is 10.00% of risk-weighted assets.  The Bank had risk-based capital of 10.66% at March 31, 2004.

 

**Off-Balance Sheet Financing Arrangements**

 

During fiscal 2003, the Bank securitized and soldconsumer automobile loans in the amount of $50.0 million through HFSC andAutomobile Securitization Trust.  Theoutstanding balance of the securitized automobile loans was $21.0 million atMarch 31, 2004.  As part of the salestransaction, the Bank retains servicing responsibilities and a retainedinterest in the receivables which is subordinated to third party investors’interests.  The receivables were soldwithout legal recourse.  The saleprovided the Bank with an additional source of liquidity at interest rates morefavorable than it could receive through other forms of financing.  It also assisted in reducing capitalrequirements and credit risk to the Bank, in addition to giving the Bank accessto the national capital markets.  SeeNote 4 of the “Notes to Consolidated Financial Statements”  for further detail.

 

**Impact of Inflation and Changing Prices**

 

TheConsolidated Financial Statements and Notes thereto presented in this Form 10-Qhave been prepared in accordance with GAAP, which require the measurement offinancial position and operating results in terms of historical dollars withoutconsidering the change in the relative purchasing power of money over time dueto inflation.  The impact of inflationis reflected in the increased cost of the Bank’s operations. Unlike mostindustrial companies, nearly all the assets and liabilities of the Bank aremonetary in nature.  As a result,interest rates have a greater impact on the Bank’s performance than do theeffects of general levels of inflation. Interest rates do not necessarily move in the same direction or to thesame extent as the prices of goods and services.

 

**Recent Accounting Pronouncements**

 

InMarch 2003, the FASB started a project, pursuant to FASB Statement No. 123, *“Accounting for Stock-Based Compensation”,*toaddress issues related to stock-based compensation (“SBC”).  The objective of this project is tocooperate with the International Accounting Standards Board to achieveconvergence to one single, high-quality global accounting standard on SBC.   The FASB has discussed several issuesrelating to SBC arrangements, and issued an exposure draft on March 31, 2004which would amend FASB Statement No. 123 and APB Opinion No. 25.  The comment period for the exposure draftends June 30, 2004.

 

TheCompany accounts for stock-based compensation in accordance with APB OpinionNo. 25, “*Accounting for Stock Issued toEmployees”*, and related interpretations.  No stock-based employee compensation cost has been recognized forgrants under the Company’s fixed stock option plans, as all options grantedunder those plans had an exercise price equal to the market value of theunderlying common stock on the date of grant.

 

The Company continues to monitor the progress of theFASB regarding its SBC project and will continue applying the guidance of APBOpinion No. 25.  The Company willreevaluate its accounting policy on SBC upon the expiration of the exposuredraft comment period and final accounting standard regarding SBC as a result ofits current SBC project.

 

InJanuary 2003, the FASB issued Interpretation No. 46 *“Consolidation of Variable Interest Entities.”*  This Interpretation was issued in an effortto expand upon and strengthen existing accounting guidance that

 

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addresseswhen a company should include in its financial statements the assets,liabilities and activities of another entity. In general, a variable interest entity is a corporation, partnership,trust, or any other legal structure used for business purposes that either (i)does not have equity investors with voting rights or (ii) has equity investorsthat do not provide sufficient financial resources for the entity to supportits activities.  A variable interestentity often holds financial assets, including loans or receivables, realestate or other property.  To furtherassist financial statement users in assessing a company’s risks, the Interpretationalso requires disclosures about variable interest entities that the Company isnot required to consolidate but in which it has a significant variableinterest.  The consolidationrequirements of Interpretation No. 46 apply immediately to variable interestentities created after January 31, 2003. The consolidation requirements for older entities were effective at thebeginning of the first interim period beginning after June 15, 2003, however,on October 8, 2003 the FASB deferred the implementation date of InterpretationNo. 46 until the first period ending after December 15, 2003.  The Company implemented this standard, asrevised, as of March 31, 2004.  As aresult, the Company deconsolidated its Capital Trust entities, which resultedin mandatorily redeemable preferred securities of subsidiary trusts, which wereclassified as liabilities, being excluded from the Company’s financialstatements and replaced with subordinated debentures payable to the trusts,also classified as liabilities, of approximately the same amount.  The overall effect on the Company’sfinancial position and operating results of the deconsolidation was notmaterial, and did not affect reported equity or net income.

 

The Accounting Standards Executive Committee hasissued Statement of Position 03-3 *“Accountingfor Certain Loans or Debt Securities Acquired in a Transfer”*.  This Statement applies to all loans acquiredin a transfer, including those acquired in the acquisition of a bank or abranch, and provides that such loans be accounted for at fair value with noallowance for loan losses, or other valuation allowance, permitted at the timeof acquisition.  The difference betweencash flows expected at the acquisition date and the investment in the loanshould be recognized as interest income over the life of the loan.  If contractually required payments forprincipal and interest are more than expected cash flows, this amount shouldnot be recognized as a yield adjustment, a loss accrual, or a valuationallowance.   For the Company, thisStatement is effective for calendar year 2005 and, early adoption, althoughpermitted, is not planned.  Nosignificant impact is expected on the Company’s financial statements at thetime of adoption.

 

InApril 2003, FASB issued SFAS Statement No. 149, *“Amendment of Statement 133 on Derivative Instruments and HedgingActivities.”*  This Statementimproves financial reporting by requiring that contracts with comparablecharacteristics be accounted for similarly. In particular, this Statement (i) clarifies under what circumstances acontract with an initial net investment meets the characteristics of aderivative, (ii) clarifies when a derivative contains a financing component,(iii) amends the definition of an underlying to conform it to language used inFASB Interpretation No. 45, *“Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others”* and (iv) amends certain otherexisting pronouncements.  The changeswill result in more consistent reporting on contracts and hedging relationshipsentered into or modified after June 30, 2003. The Company extends to borrowers interest rate lock commitments (“IRLC”)and sells the resulting loans to secondary markets on a “best efforts”basis.  The Company is continuing toreview guidance from FASB and the SEC with respect to valuation of IRLC.

 

In May 2003, FASB issued SFAS Statement No. 150, *“Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity”*.  This Statement establishes standards for howan issuer classifies and measures certain financial instruments withcharacteristics of both liabilities and equity. It requires that an issuerclassify a financial instrument that is within its scope as a liability. This Statementwas effective at the beginning of the first interim period beginning after June15, 2003.  The adoption of thisStatement did not have a material effect on the Company’s financial position,liquidity or results of operations, however, management continues to reviewguidance from the FASB.

 

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**ITEM 3****.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

Interest rate risk is the most significant market riskaffecting the Company.  Other types ofmarket risk, such as foreign currency exchange rate risk and commodity pricerisk, do not arise in the normal course of the Company’s businessactivities.  The Bank, like otherfinancial institutions, is subject to interest rate risk to the extent that itsinterest-bearing liabilities with short- and medium-term maturities mature orreprice more rapidly than its interest-earning assets.  The Company does not currently engage intrading activities or use derivative instruments to control interest rate riskalthough it may in the future, if necessary, to manage interest rate risk.

 

Thecomposition of the Bank’s balance sheet results in maturity mismatches betweeninterest-earning assets and interest-bearing liabilities.  The scheduled maturities of the Bank’s fixedrate interest-earning assets are longer than the scheduled maturities of itsfixed rate interest-bearing liabilities. This mismatch exposes the Bank to interest rate risk.  In a rising rate scenario, as measured bythe OTS interest rate risk exposure simulation model, the estimated market orportfolio value (“PV”) of the Bank’s assets would decline in value to a greaterdegree than the change in the PV of the Bank’s liabilities, thereby reducingnet portfolio value (“NPV”), the estimated market value of its shareholders’equity.

 

As set forth below,depending upon the volatility of the rate change, the change in asset orliability mix of the Company or other factors may produce a decrease in netinterest margin in an upward moving rate environment even as the NPV estimateindicates an increase in net value.  Theconverse situation can also be expected. One approach used to quantify interest rate risk is the NPVanalysis.  In essence, this analysiscalculates the difference between the present value of the liabilities and thepresent value of expected cash flows from assets and off-balance sheetcontracts.  The following tables setforth, at December 31, 2003 (the most recent report available) and June 30, 2003,an analysis of the Company’s interest rate risk as measured by the estimatedchanges in NPV resulting from instantaneous and sustained parallel shifts inthe yield curve (+ 300 or -100 basis points, measured in 100 basis pointincrements).  Due to the abnormally lowprevailing interest rate environment, -200 and -300 NPV were not estimated bythe OTS.  Management does not believethat the Company has experienced any material changes in its market riskposition from that disclosed in the Company’s Annual Report on Form 10-K forthe fiscal year ended June 30, 2003 or that the Company’s primary market riskexposures and how those exposures were managed during the nine months endedMarch 31, 2004 changed significantly when compared to June 30, 2003.

 

Thedata in the following tables is based on assumptions utilized by the OTS inassessing interest rate risk of thrift institutions and published in “SelectedAsset and Liability Price Tables as of June 30, 2003” and “Selected Asset andLiability Price Tables as of December 31, 2003”.  Even if interest rates change in the designated amounts, therecan be no assurance that the Company’s assets and liabilities would perform asset forth below.

 

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December 31, 2003

 
| **Change in**      |   | **Estimated  NPV**          |       | **Estimated  Increase  (Decrease) in NPV** |       |
|--------------------|--------|-----------------------------|------------|--------------------------------------------|------------|
| **Interest Rates** |   | **Amount**                  |       | **Amount**                                 |       | **Percent** |   |
|               |   | **(Dollars  in thousands)** | ** ** |                                       | ** ** |
|               |   |                        |       |                                       |       |   |   |
| Basis Points       |   |                        |       |                                       |       |   |   |
| +300               |   |                        | $          | 88,563                                     |       | $ | (2,124 | ) | (2 | )% |
| +200               |   |                        | 91,073     |                                       | 386        |   | — |   |
| +100               |   |                        | 92,198     |                                       | 1,511      |   | 2 |   |
| —             |   |                        | 90,687     |                                       | —     |   | — |   |
| -100               |   |                        | 87,645     |                                       | (3,042     | ) | (3 | ) |
|                    |        |                             |            |                                            |            |  |  |  |  |  |

 

June 30, 2003

 
| **Change in**      |   | **Estimated  NPV**          |       | **Estimated  Increase  (Decrease) in NPV** |       |
|--------------------|--------|-----------------------------|------------|--------------------------------------------|------------|
| **Interest Rates** |   | **Amount**                  |       | **Amount**                                 |       | **Percent** |   |
|               |   | **(Dollars  in thousands)** | ** ** |                                       | ** ** |
|               |   |                        |       |                                       |       |   |   |
| Basis Points       |   |                        |       |                                       |       |   |   |
|               |   |                        |       |                                       |       |   |   |
| +300               |   |                        | $          | 80,157                                     |       | $ | 2,306 |   | 3 | % |
| +200               |   |                        | 80,555     |                                       | 2,703      |   | 3 |   |
| +100               |   |                        | 79,200     |                                       | 1,348      |   | 2 |   |
| —             |   |                        | 77,852     |                                       | —     |   | — |   |
| -100               |   |                        | 76,488     |                                       | (1,364     | ) | (2 | ) |
|                    |        |                             |            |                                            |            |  |  |  |  |  |

 

In managing market risk and the asset/liability mix,the Bank has placed its emphasis on developing a portfolio in which, to theextent practicable, assets and liabilities reprice within similar periods. Theeffect of this policy will generally be to reduce the Bank’s sensitivity tointerest rate changes.  The goal of thispolicy is to provide a relatively consistent level of net interest income invarying interest rate cycles and to minimize the potential for significantfluctuations from period to period.

 

**ITEM4.  CONTROLSAND PROCEDURES**

 

The Company’s management hasevaluated, with the participation of the Company’s Chairman, President andChief Executive Officer and the Executive Vice President, Chief FinancialOfficer and Treasurer, the effectiveness of the design and operation of theCompany’s disclosure controls and procedures, and have concluded that, as ofthe end of the period covered by this Quarterly Report, the Company’sdisclosure controls and procedures (as defined in Rule 13(a)-15(e) under theExchange Act) are effective for gathering, analyzing and disclosing informationthe Company is required to disclose in its periodic reports filed under suchAct.

 

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**PART II**

 

**Item1.****             Legal Proceedings**

 

TheCompany, Home Federal and its subsidiaries are involved as plaintiff ordefendant in various legal actions arising in the normal course of their businesses.  While the ultimate outcome of theseproceedings cannot be predicted with certainty, it is the opinion ofmanagement, after consultation with counsel representing the Company and/orHome Federal in the proceedings, that the resolution of these proceedings arenot likely to have a material effect on the Company’s consolidated financialposition or results of operations.  TheCompany and its direct and indirect subsidiaries are not aware of any legalactions or proceedings outside of the normal course of business.

 

**Item2.****             Changes in Securities, Use of Proceeds and IssuerPurchases of Equity Securities**

 

The following table sets forth the purchases by theCompany of its common stock during the quarterly period ended March 31,2004.  

 
| **Period**            |   | **Total  Number  of Shares  Purchased** | ** ** | **Average  Price Paid  per Share** | ** ** | **Total  Number  of Shares Purchased  as Part of Publicly  Announced Programs** | ** ** | **Maximum  Number of  Shares that May Yet  Be Purchased Under  the Current Program** | ** ** |
|-----------------------|--------|-----------------------------------------|------------|------------------------------------|------------|---------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| January 1 - 31, 2004  |   | 0                                       |       | $                                  | 0.00       |                                                                            | 0          |                                                                                 | 252,261    |   |
| February 1 - 29, 2004 |   | 19,800                                  |       | $                                  | 17.57      |                                                                            | 19,800     |                                                                                 | 232,461    |   |
| March 1 - 31, 2004    |   | 60,300                                  |       | $                                  | 17.96      |                                                                            | 60,300     |                                                                                 | 172,161    |   |
|                  |   |                                    |       |                               |       |                                                                            |       |                                                                                 |       |
| 3rd Quarter Total     |   | 80,100                                  |       | $                                  | 17.86      |                                                                            | 80,100     |                                                                                 |       |   |

 

All of the repurchases were made under the Company’sstock buy back program, which was publicly announced on April 28, 2003,pursuant to which it may repurchase up to 10% of the common stock of theCompany that was outstanding on May 1, 2003. This stock buy back program expires on April 30, 2004.  A total of 154,300 shares of common stockhave been purchased pursuant to the current program, with 80,100 sharespurchased during the three months ended March 31, 2004.  All of the 80,100 shares repurchased in thethird quarter ended March 31, 2004 were purchased in the open-market, exceptfor 11,000 shares that were purchased at a price of $17.60 through a privatetransaction.

 

The Company approved a new stock buy back programeffective as of May 1, 2004 and publicly announced on April 26, 2004, in whichup to 10% of the common stock of the Company outstanding on May 1, 2004 may beacquired through April 30, 2005.  Noshares of common stock have been purchased pursuant to the new program.  

 

**Item3.****             Defaults upon Senior Securities**

 

None

 

**Item4.****             Submission of Matters to a Vote of SecurityHolders**

 

None

 

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**Item5.****             Other Information**

 

None

 
| **Item  6.** |   | **Exhibits and Reports****on Form 8-K** |
|--------------|--------|-----------------------------------------|
|         |   |
| (a)          |   | Exhibits                                |
|              |        |                                         |  |

 
| **Regulation S-K Exhibit  Number** |   | **Document**                                                                                                                                 |
|------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1                               |   | Certification of Chairman, President and Chief  Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                  |
| 31.2                               |   | Certification of Executive Vice President, Chief  Financial Officer and Treasurer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 |
| 32.1                               |   | Certification of Chairman, President and Chief  Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                  |
| 32.2                               |   | Certification of Executive Vice President, Chief  Financial Officer and Treasurer Pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 |

 
| (b)    |   | Reports on Form 8-K                                                                                                                                                                                                                       |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                      |
|   |   | On January 28, 2004,  the Company filed Form 8-K, reporting under Item 12, “Results of Operations  and Financial Condition,” the issuance of a press release regarding results  for the second quarter ended December 31, 2003. |

 

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**HFFINANCIAL CORP.**

 

**FORM 10-Q**

**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|   |                      |   |                                           | HF Financial  Corp.     |
|--------|---------------------------|--------|------------------------------------------------|-------------------------|
|   |                      |   |                                           |                    | (Registrant) |
|   |                      |   |                                           |                    |   |   |   |
|   |                      |   |                                           |                    |   |   |   |
| Date:  |   May 13,  2004 |   | By:                                            | /s/  Curtis L. Hage     |   |
|   |                      |   | Curtis L. Hage,  Chairman, President           |
|   |                      |   | And Chief Executive  Officer                   |
|   |                      |   | (Principal Executive  Officer)                 |
|   |                      |   |                                           |                    |   |   |   |
|   |                      |   |                                           |                    |   |   |   |
| Date:  |   May  13, 2004 |   | By:                                            | /s/  Darrel L. Posegate |   |
|   |                      |   | Darrel L. Posegate,  Executive Vice President, |
|   |                      |   | Chief Financial Officer  and Treasurer         |
|   |                      |   | (Principal Financial  and Accounting Officer)  |
|        |                           |        |                                                |                         |  |  |  |  |  |

 

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