**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C.  20549**

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**FORM 10-Q**

**x****     QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

**For the Quarterly Period ended March 31, 2007**

**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         |   | (I.R.S. Employer  Identification Number) |
| incorporation or  organization)          |   |                                     |
|                                     |   |                                     |
| **225  South Main Avenue,**              |   |                                     |
| **Sioux  Falls, SD**                     |   | **57104**                                |
| (Address of  principal executive office) |   | (ZIP Code)                               |

 

**(605) 333-7556**(Registrant’stelephone number, including area code)

Indicateby 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 x    NO o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act.

LARGE ACCELERATEDFILER o     ACCELERATED FILER o     NON-ACCELERATED FILER x

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

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

Asof May 9, 2007 there were 4,002,383 issued and outstanding shares of theRegistrant’s Common Stock, with $.01 par value per share.

 

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**HF FINANCIAL CORP.**

**Form 10-Q**

**Table of Contents**
| **PART I – FINANCIAL  INFORMATION** |   |                                                                                                   |
|------------------------------------------|--------|--------------------------------------------------------------------------------------------------------|
| ** **                               |   |                                                                                                   |
| Item 1.                                  |   | Financial  Statements (Unaudited):                                                                     |   |   |
|                                     |   |                                                                                                   |   |   |
|                                     |   | Consolidated  Statements of Financial Condition  As of March 31, 2007 and June 30, 2006                |   |   |
|                                     |   |                                                                                                   |   |   |
|                                     |   | Consolidated  Statements of Income for the  Three Months and Nine Months Ended March 31, 2007 and 2006 |   |   |
|                                     |   |                                                                                                   |   |   |
|                                     |   | Consolidated  Statements of Cash Flows for the  Nine Months Ended March 31, 2007 and 2006              |   |   |
|                                     |   |                                                                                                   |   |   |
|                                     |   | 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 – OTHER  INFORMATION**    |   |                                                                                                   |
| ** **                               |   |                                                                                                   |
| Item 1.                                  |   | Legal Proceedings                                                                                      |   |   |
|                                     |   |                                                                                                   |   |   |
| Item  1A.                                |   | Risk  Factors                                                                                          |   |   |
|                                     |   |                                                                                                   |   |   |
| Item 2.                                  |   | Unregistered  Sales of Equity Securities and Use of Proceeds                                           |   |   |
|                                     |   |                                                                                                   |   |   |
| Item  6.                                 |   | Exhibits                                                                                               |   |   |
|                                     |   |                                                                                                   |   |   |
| Form  10-Q                               |   | Signature  Page                                                                                        |   |   |

 

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**PART I  - FINANCIALINFORMATION**

**Item1.             Financial Statements**

**HFFINANCIAL CORP. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF FINANCIAL CONDITION**

**(Dollarsin Thousands)**
| ** **                                                                                                                                            | ** ** | **March 31, 2007** | ** ** | **June 30, 2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                            | ** ** | **(Unaudited)**              | ** ** | **(Audited)**               | ** ** |
| **ASSETS**                                                                                                                                            |       |                         |       |                        |       |
| Cash and cash equivalents                                                                                                                             |       | $                            | 30,465     |                        | $          | 27,037 |   |
| Securities available  for sale                                                                                                                        |       | 138,675                      |       | 145,518                     |       |
| Federal Home Loan Bank  stock                                                                                                                         |       | 6,381                        |       | 5,647                       |       |
| Loans held for sale                                                                                                                                   |       | 9,210                        |       | 7,623                       |       |
| Loans and leases  receivable                                                                                                                          |       | 756,024                      |       | 727,260                     |       |
| Allowance for loan and  lease losses                                                                                                                  |       | (5,778                       | )          | (5,657                      | )          |
| Net loans and  leases receivable                                                                                                                      |       | 750,246                      |       | 721,603                     |       |
|                                                                                                                                                  |       |                         |       |                        |       |
| Accrued interest  receivable                                                                                                                          |       | 8,319                        |       | 6,880                       |       |
| Office properties and  equipment, net of accumulated depreciation                                                                                     |       | 15,810                       |       | 14,459                      |       |
| Foreclosed real estate  and other properties                                                                                                          |       | 1,780                        |       | 1,889                       |       |
| Cash value of life  insurance                                                                                                                         |       | 13,391                       |       | 13,013                      |       |
| Servicing rights                                                                                                                                      |       | 10,855                       |       | 5,648                       |       |
| Goodwill, net                                                                                                                                         |       | 4,951                        |       | 4,951                       |       |
| Other assets                                                                                                                                          |       | 6,041                        |       | 7,026                       |       |
| Total assets                                                                                                                                          |       | $                            | 996,124    |                        | $          | 961,294 |   |
|                                                                                                                                                  |       |                         |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                        | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| **LIABILITIES**                                                                                                                                       | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Deposits                                                                                                                                              |       | $                            | 787,114    |                        | $          | 769,002 |   |
| Advances from Federal  Home Loan Bank and other borrowings                                                                                            |       | 90,500                       |       | 91,620                      |       |
| Subordinated debentures  payable to trusts                                                                                                            |       | 27,837                       |       | 27,837                      |       |
| Advances by borrowers  for taxes and insurance                                                                                                        |       | 14,134                       |       | 6,969                       |       |
| Accrued expenses and  other liabilities                                                                                                               |       | 14,776                       |       | 9,808                       |       |
| Total  liabilities                                                                                                                                    |       | 934,361                      |       | 905,236                     |       |
|                                                                                                                                                  |       |                         |       |                        |       |
| **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, 5,965,632 and 5,926,496 shares issued at  March 31, 2007 and June 30, 2006, respectively |       | 60                           |       | 59                          |       |
| Common stock subscribed  for but not issued, 4,078 shares at June 30, 2006                                                                            |       | —                       |       | 65                          |       |
| Additional paid-in  capital                                                                                                                           |       | 20,501                       |       | 19,384                      |       |
| Retained earnings,  substantially restricted                                                                                                          |       | 71,181                       |       | 68,179                      |       |
| Accumulated other  comprehensive income (loss), net of related deferred tax effect                                                                    |       | (812                         | )          | (2,462                      | )          |
| Less cost of treasury  stock, 1,977,836 and 1,977,836 shares at March 31, 2007 and June 30, 2006,  respectively                                       |       | (29,167                      | )          | (29,167                     | )          |
| Total  stockholders’ equity                                                                                                                      |       | 61,763                       |       | 56,058                      |       |
| Total liabilities and  stockholders’ equity                                                                                                      |       | $                            | 996,124    |                        | $          | 961,294 |   |

 

*See accompanying notes to unauditedconsolidated financial statements.*

1

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**HFFINANCIAL CORP. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF INCOME**

**(Dollarsin Thousands, Except Per Share Data)**

**(Unaudited)**
| ** **                                                              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                              | ** ** | **March 31,**               | ** ** | **March 31,**              | ** ** |
| ** **                                                              | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Interest,  dividend and loan fee income:                                |       |                             |       |                            |       |   |   |   |   |
| Loans and leases receivable                                             |       | $                                | 13,435     |                            | $          | 11,829 |   | $ | 40,403 |   | $ | 34,543 |   |
| Investment securities and interest-earning deposits                     |       | 1,925                            |       | 1,637                           |       | 5,698 |   | 4,538 |   |
|                                                                    |       | 15,360                           |       | 13,466                          |       | 46,101 |   | 39,081 |   |
| Interest expense:                                                       |       |                             |       |                            |       |   |   |   |   |
| Deposits                                                                |       | 7,268                            |       | 5,239                           |       | 21,168 |   | 14,328 |   |
| Advances from Federal Home Loan Bank and other  borrowings              |       | 1,689                            |       | 1,845                           |       | 6,052 |   | 5,643 |   |
|                                                                    |       | 8,957                            |       | 7,084                           |       | 27,220 |   | 19,971 |   |
| **Net interest income**                                                 |       | 6,403                            |       | 6,382                           |       | 18,881 |   | 19,110 |   |
| ** **                                                              |       |                             |       |                            |       |   |   |   |   |
| Provision for losses  on loans and leases                               |       | 34                               |       | 418                             |       | 786 |   | 4,510 |   |
|                                                                    |       |                             |       |                            |       |   |   |   |   |
| **Net interest income after provision for losses  on loans and leases** | ** ** | 6,369                            | ** ** | 5,964                           | ** ** | 18,095 | ** ** | 14,600 | ** ** |
|                                                                    |       |                             |       |                            |       |   |   |   |   |
| Noninterest  income:                                                    |       |                             |       |                            |       |   |   |   |   |
| Gain on sale of branches, net                                           |       | —                           |       | —                          |       | 2,763 |   | — |   |
| Fees on deposits                                                        |       | 1,232                            |       | 1,029                           |       | 3,740 |   | 3,375 |   |
| Loan servicing income                                                   |       | 525                              |       | 118                             |       | 1,295 |   | 805 |   |
| Gain on sale of loans, net                                              |       | 223                              |       | 280                             |       | 679 |   | 688 |   |
| Trust income                                                            |       | 238                              |       | 214                             |       | 684 |   | 609 |   |
| Gain on sale of land, net                                               |       | —                           |       | —                          |       | — |   | 3,557 |   |
| Gain on sale of securities, net                                         |       | —                           |       | 2                               |       | — |   | 2 |   |
| Other                                                                   |       | 395                              |       | 434                             |       | 1,218 |   | 1,415 |   |
|                                                                    |       | 2,613                            |       | 2,077                           |       | 10,379 |   | 10,451 |   |
| Noninterest  expense:                                                   |       |                             |       |                            |       |   |   |   |   |
| Compensation and employee benefits                                      |       | 4,768                            |       | 4,044                           |       | 13,402 |   | 12,559 |   |
| Occupancy and equipment                                                 |       | 962                              |       | 861                             |       | 2,858 |   | 2,470 |   |
| Advertising                                                             |       | 217                              |       | 173                             |       | 1,364 |   | 604 |   |
| Check and data processing expense                                       |       | 578                              |       | 543                             |       | 1,697 |   | 1,602 |   |
| Other                                                                   |       | 946                              |       | 804                             |       | 2,750 |   | 2,556 |   |
|                                                                    |       | 7,471                            |       | 6,425                           |       | 22,071 |   | 19,791 |   |
| **Income before income taxes**                                          |       | 1,511                            |       | 1,616                           |       | 6,403 |   | 5,260 |   |
| ** **                                                              |       |                             |       |                            |       |   |   |   |   |
| Income tax  expense                                                     |       | 477                              |       | 366                             |       | 2,161 |   | 1,688 |   |
| **Net income**                                                          |       | $                                | 1,034      |                            | $          | 1,250 |   | $ | 4,242 |   | $ | 3,572 |   |
| ** **                                                              |       |                             |       |                            |       |   |   |   |   |
| **Comprehensive  income**                                               |       | $                                | 1,306      |                            | $          | 799 |   | $ | 5,892 |   | $ | 2,375 |   |
| **Cash  dividends declared per share (1)**                              |       | $                                | 0.1050     |                            | $          | 0.1023 |   | $ | 0.3125 |   | $ | 0.3045 |   |
|                                                                    |       |                             |       |                            |       |   |   |   |   |
| **Earnings  per share:(1)**                                             | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                                   |       | $                                | 0.26       |                            | $          | 0.32 |   | $ | 1.07 |   | $ | 0.91 |   |
| Diluted                                                                 |       | $                                | 0.25       |                            | $          | 0.31 |   | $ | 1.05 |   | $ | 0.89 |   |

 

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(1) Retroactivelyadjusted for the 10% stock dividend paid on April 24, 2006 to stockholders ofrecord as of April 10, 2006

*See accompanying notes to unauditedconsolidated financial statements.*

2

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**HFFINANCIAL CORP. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Dollarsin Thousands)**

**(Unaudited)**
| ** **                                                                                    | ** ** | **Nine Months Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                    | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| **Cash  flows from operating activities**                                                     |       |                                                |       |   |   |
| Net income                                                                                    |       | $                                                   | 4,242      |   | $ | 3,572 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:            |       |                                                |       |   |   |
| Provision for losses on loans and leases                                                      |       | 786                                                 |       | 4,510 |   |
| Depreciation                                                                                  |       | 1,221                                               |       | 1,127 |   |
| Amortization of discounts and premiums on securities  and other                               |       | 1,406                                               |       | 1,446 |   |
| Stock based compensation                                                                      |       | 715                                                 |       | 409 |   |
| Deferred income taxes (credits)                                                               |       | (534                                                | )          | (544 | ) |
| Loans originated for resale                                                                   |       | (60,900                                             | )          | (71,516 | ) |
| Proceeds from the sale of loans                                                               |       | 55,736                                              |       | 73,199 |   |
| (Gain) on sale of loans, net                                                                  |       | (679                                                | )          | (688 | ) |
| Realized (gain) on sale of securities, net                                                    |       | —                                              |       | (2 | ) |
| (Gain) on sale of land                                                                        |       | —                                              |       | (3,557 | ) |
| (Gain) on sale of branches                                                                    |       | (2,763                                              | )          | — |   |
| Losses and provision for losses on sales of  foreclosed real estate and other properties, net |       | 48                                                  |       | 33 |   |
| (Gain) loss on disposal of office properties and  equipment, net                              |       | (9                                                  | )          | 20 |   |
| Change in other assets and liabilities                                                        |       | 6,072                                               |       | (2,541 | ) |
| Net cash provided by operating activities                                                     |       | 5,341                                               |       | 5,468 |   |
|                                                                                          |       |                                                |       |   |   |
| **Cash  flows from investing activities**                                                     |       |                                                |       |   |   |
| Loan participations purchased                                                                 |       | (19,329                                             | )          | (2 | ) |
| Loan participations sold                                                                      |       | —                                              |       | 6,123 |   |
| Loans and leases originated and held                                                          |       | (301,097                                            | )          | (291,782 | ) |
| Principal collected on loans and leases                                                       |       | 290,238                                             |       | 258,009 |   |
| Proceeds from sale of land                                                                    |       | —                                              |       | 4,863 |   |
| Proceeds from sale of loans associated with branch  sales                                     |       | 4,256                                               |       | — |   |
| Securities available for sale:                                                                |       |                                                |       |   |   |
| Sales and maturities and repayments                                                           |       | 27,781                                              |       | 35,816 |   |
| Purchases                                                                                     |       | (18,564                                             | )          | (39,362 | ) |
| Purchase of Federal Home Loan Bank stock                                                      |       | (3,844                                              | )          | (3,031 | ) |
| Redemption of Federal Home Loan Bank stock                                                    |       | 3,110                                               |       | 4,241 |   |
| Proceeds from sale of office properties and  equipment                                        |       | 9                                                   |       | 2 |   |
| Proceeds from sale of office properties and  equipment associated with branch sales           |       | 341                                                 |       | — |   |
| Purchase of office properties and equipment                                                   |       | (2,913                                              | )          | (2,118 | ) |
| Purchase of servicing rights                                                                  |       | (5,858                                              | )          | (840 | ) |
| Proceeds from sale of foreclosed real estate and  other properties, net                       |       | 703                                                 |       | 580 |   |
| Net cash (used  in) investing activities                                                      |       | (25,167                                             | )          | (27,501 | ) |
|                                                                                               |            |                                                     |            |  |  |  |  |

 

*Seeaccompanying notes to unaudited consolidated financial statements.*

3

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| ** **                                                             | ** ** | **Nine Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                             | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
|                                                                   |       |                                                |       |   |   |
| **Cash  flows from financing activities**                              |       |                                                |       |   |   |
| Net increase in deposit accounts                                       |       | $                                                   | 51,675     |   | $ | 24,049 |   |
| Proceeds of advances from Federal Home Loan Bank and  other borrowings |       | 529,615                                             |       | 366,973 |   |
| Payments on advances from Federal Home Loan Bank and  other borrowings |       | (530,735                                            | )          | (372,122 | ) |
| Proceeds from issuance of subordinated debentures                      |       | 10,000                                              |       | — |   |
| Deposit account disbursements associated with branch  sales            |       | (33,563                                             | )          | — |   |
| Redemption of subordinated debentures                                  |       | (10,000                                             | )          | — |   |
| Increase in advances by borrowers                                      |       | 7,165                                               |       | 3,040 |   |
| Proceeds from issuance of common stock                                 |       | 337                                                 |       | 460 |   |
| Cash dividends paid                                                    |       | (1,240                                              | )          | (1,189 | ) |
| Net cash provided by financing activities                              |       | 23,254                                              |       | 21,211 |   |
|                                                                   |       |                                                |       |   |   |
| Increase (decrease) in cash and cash equivalents                       |       | 3,428                                               |       | (822 | ) |
|                                                                   |       |                                                |       |   |   |
| Cash and cash  equivalents                                             |       |                                                |       |   |   |
| Beginning                                                              |       | 27,037                                              |       | 18,248 |   |
| Ending                                                                 |       | $                                                   | 30,465     |   | $ | 17,426 |   |
|                                                                   |       |                                                |       |   |   |
| Supplemental  Disclosures of Cash Flows Information                    |       |                                                |       |   |   |
| Cash payments  for interest                                            |       | $                                                   | 26,085     |   | $ | 18,777 |   |
| Cash payments  for income and franchise taxes, net                     |       | 647                                                 |       | 3,513 |   |

 

*Seeaccompanying notes to unaudited consolidated financial statements.*

4

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**HF FINANCIAL CORP. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

For The Three and Nine Months Ended March31, 2007 and 2006

(Unaudited)

**NOTE1.          SELECTED ACCOUNTING POLICIES**

*Basis ofpresentation:*

Theconsolidated financial information of HF Financial Corp. (the “Company”) andits wholly-owned subsidiaries included in this Quarterly Report on Form 10-Q isunaudited.  However, in the opinion ofmanagement, adjustments (consisting of normal recurring adjustments) necessaryfor a fair presentation for the interim periods have been included.  Results for any interim period are notnecessarily indicative of results to be expected for the fiscal year.  Interim consolidated financial statements andthe notes thereto should be read in conjunction with the consolidated financialstatements and notes thereto included in the Company’s Annual Report on Form10-K for the fiscal year ended June 30, 2006 (“Fiscal 2006”), filed with theSecurities and Exchange Commission.  Theaccounting and reporting policies of the Company and its subsidiaries conformto accounting principles generally accepted in the United States of America (“GAAP”)and to general practice within the industry.

Theinterim consolidated financial statements include the accounts of the Company,its wholly-owned subsidiaries, Home Federal Bank (the “Bank”), HF FinancialGroup, Inc. (“HF Group”) and HomeFirst Mortgage Corp. (the “Mortgage Corp.”),and the Bank’s wholly-owned subsidiaries, Mid America Capital Services, Inc. (“MidAmerica Capital”), Hometown Insurors, Inc. (“Hometown”), Home FederalSecuritization Corp. (“HFSC”), Mid-America Service Corporation and PMD,Inc.  The interim consolidated financialstatements reflect the deconsolidation of the wholly-owned subsidiary trusts ofthe Company, HF Financial Capital Trust I (“Trust I”), HF Financial CapitalTrust II (“Trust II”), HF Financial Capital Trust III (“Trust III”), HFFinancial Capital Trust IV (“Trust IV”) and HF Financial Capital Trust V (“TrustV”). Trust V was formed during the fiscal second quarter ended December 31,2006.  See Note 10 of “Notes toConsolidated Financial Statements.”  Allintercompany balances and transaction have been eliminated in consolidation.

Stock-basedcompensation:  InDecember 2004, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 123R, *“Share-Based Payment,”* which requires all companies tomeasure compensation cost for all share-based payments (including stock options)at fair value and to record such expense in their consolidated financialstatements.  SFAS No. 123R is a revisionof SFAS No. 123, *“Accounting for Stock-BasedCompensation,”*and supersedes Accounting Principles Board (“APB”)Opinion No. 25, *“Accounting for Stock Issuedto Employees”*.

The Company adopted SFASNo. 123R effective as of July 1, 2005, using the Black-Scholes option-pricingmodel and the modified prospective method in which compensation cost isrecognized for all awards granted subsequent to the Company’s adoption of thisstatement, as well as for the unvested portion of awards outstanding as of theCompany’s adoption of this statement. Prior to July 1, 2005, the Company accounted for stock-basedcompensation in accordance with APB No. 25 and related interpretations. Assuch, no stock-based employee compensation cost was recognized for grants underthe Company’s stock option and incentive plans, as all options granted underthose plans had an exercise price equal to the market value of the underlyingcommon stock on the date of grant.  Thesestock option and incentive plans are described more fully in Part II, Item 8 “FinancialStatements and Supplementary Data” of the Company’s Annual Report on Form 10-Kfor Fiscal 2006, under Note 17 of “Notes to Consolidated Financial Statements.”

5

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**NOTE 2.          REGULATORY CAPITAL**

Thefollowing table sets forth the Bank’s compliance with its minimum capitalrequirements for a well-capitalized institution at March 31, 2007:
|                                                    | ** ** | **Amount**                           | ** ** | **Percent** | ** ** |
|----------------------------------------------------|------------|--------------------------------------|------------|-------------|------------|
| ** **                                         | ** ** | **(Dollars in Thousands)** | ** ** |
| Tier I (core)  capital (to adjusted total assets): |       |                                 |       |        |       |
| Required                                           |       | $                                    | 49,548     |        | 5.00       | % |
| Actual                                             |       | 81,960                               |       | 8.27        |       |
| Excess over required                               |       | 32,412                               |       | 3.27        |       |
|                                               |       |                                 |       |        |       |
| Risk-based  capital (to risk-weighted assets):     |       |                                 |       |        |       |
| Required                                           |       | $                                    | 80,194     |        | 10.00      | % |
| Actual                                             |       | 87,738                               |       | 10.94       |       |
| Excess over  required                              |       | 7,544                                |       | 0.94        |       |

 

**NOTE 3.          EARNINGS PER SHARE**

Basicearnings per share is computed by dividing income available to commonstockholders (the numerator) by the weighted-average number of common sharesoutstanding  (the denominator) during theperiod.  Shares issued during the periodand shares reacquired during the period are weighted for the portion of theperiod that they were outstanding. The weighted average number of basic commonshares outstanding for the three months ended March 31, 2007 and 2006 was3,982,096 and 3,937,219, respectively. The weighted average number of basic common shares outstanding for thenine months ended March 31, 2007 and 2006 was 3,970,119 and 3,905,120,respectively.

Dilutiveearnings per share is similar to the computation of basic earnings per shareexcept that the denominator is increased to include the number of additionalcommon shares that would have been outstanding if the dilutive optionsoutstanding had been exercised. The weighted average number of common anddilutive potential common shares outstanding for the three months ended March31, 2007 and 2006 was 4,065,310 and 4,025,351, respectively.  The weighted average number of common anddilutive potential common shares outstanding for the nine months ended March31, 2007 and 2006 was 4,048,119 and 3,992,671, respectively.

All earnings per share data and number of commonshares outstanding have been retroactively adjusted for the 10% stock dividendpaid on April 24, 2006 to stockholders of record as of April 10, 2006.

6

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**NOTE 4.          INVESTMENTSIN SECURITIES**

The amortized cost and fair values of investments insecurities, all of which are classified as available for sale according tomanagement’s intent, are as follows:
|                             | ** ** | **March 31, 2007**         | ** ** |
|-----------------------------|------------|--------------------------------------|------------|
| ** **                  | ** ** | ** **                           | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                  | ** ** | **Amortized**                        | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| ** **                  | ** ** | **Cost**                             | ** ** | **Gains** | ** ** | **(Losses)** | ** ** | **Value** | ** ** |
| ** **                  | ** ** | **(Dollars in Thousands)** | ** ** |
|                        |       |                                 |       |   |   |   |   |   |   |
| Debt securities:            |       |                                 |       |   |   |   |   |   |   |
| U.S. government agencies    |       | $                                    | 12,079     |   | $ | 40 |   | $ | (57 | ) | $ | 12,062 |   |
| Federal Home Loan Bank      |       | 13,474                               |       | 34 |   | (46 | ) | 13,462 |   |
| Municipal bonds             |       | 7,671                                |       | 30 |   | (72 | ) | 7,629 |   |
| Preferred Term Securities   |       | 11,018                               |       | 28 |   | (76 | ) | 10,970 |   |
| Other Investments           |       | 5,072                                |       | 70 |   | — |   | 5,142 |   |
|                        |       | 49,314                               |       | 202 |   | (251 | ) | 49,265 |   |
|                        |       |                                 |       |   |   |   |   |   |   |
| Common Stock:               |       |                                 |       |   |   |   |   |   |   |
| FNMA                        |       | 8                                    |       | 14 |   | — |   | 22 |   |
| Federal Ag Mortgage         |       | 7                                    |       | 3 |   | — |   | 10 |   |
| Other Investments           |       | 134                                  |       | — |   | — |   | 134 |   |
|                        |       | 149                                  |       | 17 |   | — |   | 166 |   |
|                        |       |                                 |       |   |   |   |   |   |   |
| Mortgage-backed  securities |       | 90,522                               |       | 154 |   | (1,432 | ) | 89,244 |   |
|                        |       | $                                    | 139,985    |   | $ | 373 |   | $ | (1,683 | ) | $ | 138,675 |   |

 
|                             | ** ** | **March 31, 2006**         | ** ** |
|-----------------------------|------------|--------------------------------------|------------|
| ** **                  | ** ** | ** **                           | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                  | ** ** | **Amortized**                        | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| ** **                  | ** ** | **Cost**                             | ** ** | **Gains** | ** ** | **(Losses)** | ** ** | **Value** | ** ** |
| ** **                  | ** ** | **(Dollars in Thousands)** | ** ** |
|                        |       |                                 |       |   |   |   |   |   |   |
| Debt securities:            |       |                                 |       |   |   |   |   |   |   |
| U.S. government agencies    |       | $                                    | 9,513      |   | — |   | $ | (129 | ) | $ | 9,384 |   |
| Federal Home Loan Bank      |       | 8,977                                |       | — |   | (139 | ) | $ | 8,838 |   |
| Municipal bonds             |       | 3,510                                |       | — |   | (75 | ) | $ | 3,435 |   |
| Preferred Term Securities   |       | 11,019                               |       | 73 |   | (123 | ) | $ | 10,969 |   |
|                        |       | 33,019                               |       | 73 |   | (466 | ) | 32,626 |   |
|                        |       |                                 |       |   |   |   |   |   |   |
| Equity  securities:         |       |                                 |       |   |   |   |   |   |   |
| FNMA                        |       | 8                                    |       | 12 |   | — |   | 20 |   |
| Federal Ag Mortgage         |       | 7                                    |       | 4 |   | — |   | 11 |   |
| Other Investments           |       | 38                                   |       | — |   | — |   | 38 |   |
|                        |       | 53                                   |       | 16 |   | — |   | 69 |   |
|                        |       |                                 |       |   |   |   |   |   |   |
| Mortgage-backed  securities |       | 113,433                              |       | 1 |   | (2,903 | ) | 110,531 |   |
|                        |       | $                                    | 146,505    |   | $ | 90 |   | $ | (3,369 | ) | $ | 143,226 |   |
|                             |            |                                      |            |  |  |  |  |  |  |  |  |  |  |

 

7

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The following table presentsthe fair value and age of gross unrealized losses by investment category atMarch 31, 2007 in accordance with FASB Staff Position (“FSP”) No. FAS 115-1, *The Meaning of Other-Than-Temporary Impairment andIts Application to Certain Investments,*which supersedes EmergingIssues Task Force Issue No. 03-1:
| ** **                  | ** ** | **Less than 12 Months** | ** ** | **12 Months or More** | ** ** | **Total**  | ** ** |
|-----------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|------------|------------|
| ** **                  | ** ** | ** **                             | ** ** | **Gross**                            | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Gross** | ** ** |
| ** **                  | ** ** | **Fair**                               | ** ** | **Unrealized**                       | ** ** | **Fair**   | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| ** **                  | ** ** | **Value**                              | ** ** | **(Losses)**                         | ** ** | **Value**  | ** ** | **(Losses)** | ** ** | **Value** | ** ** | **(Losses)** | ** ** |
| ** **                  | ** ** | **(Dollars in Thousands)**   | ** ** |
| Debt securities:            |       |                                   |       |                                 |       |       |       |   |   |   |   |   |   |
| U.S. government agencies    |       | $                                      | —     |                                 | $          | —     |       | $ | 7,967 |   | $ | (57 | ) | $ | 7,967 |   | $ | (57 | ) |
| Federal Home Loan Bank      |       | —                                 |       | —                               |       | 7,518      |       | (46 | ) | 7,518 |   | (46 | ) |
| Municipal bonds             |       | 3,076                                  |       | (37                                  | )          | 1,753      |       | (35 | ) | 4,829 |   | (72 | ) |
| Preferred term securities   |       | —                                 |       | —                               |       | 1,943      |       | (76 | ) | 1,943 |   | (76 | ) |
| Mortgage-backed  securities |       | 5,875                                  |       | (16                                  | )          | 65,239     |       | (1,416 | ) | 71,114 |   | (1,432 | ) |
|                        |       | $                                      | 8,951      |                                 | $          | (53        | )          | $ | 84,420 |   | $ | (1,630 | ) | $ | 93,371 |   | $ | (1,683 | ) |

 

Management doesnot believe any individual unrealized losses as of March 31, 2007 represent another-than-temporary impairment.  Theunrealized losses reported for mortgage-backed securities relate to securitiesissued by the Federal National Mortgage Association (“FNMA”), the GovernmentNational Mortgage Association and the Federal Home Loan Mortgage Corporation (“FHLMC”).  These unrealized losses in total areprimarily attributable to changes in interest rates and the contractualcashflows of those investments are guaranteed by an agency of the U.S.government.  As a group, the unrealizedlosses were less than 1.8% of their respective amortized cost basis at March31, 2007.  Because the decline in marketvalue is attributable to changes in interest rates and not credit quality, andbecause the Company has the ability and intent to hold those investments untila recovery of fair value, which may be at maturity, the Company does notconsider those investments to be other-than-temporarily impaired at March 31,2007.

8

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**NOTE5.          SEGMENT REPORTING**

Operatingsegments are defined as components of an enterprise for which separatefinancial information is available that is evaluated regularly by the chiefoperating decision makers in deciding how to allocate resources and inassessing performance.  The Company’sreportable segments are “banking” (including leasing activities) and “other”.  The “banking” segment is conducted throughthe Bank and Mid America Capital and the “other” segment is composed of smallernonreportable segments, the Company and inter-segment eliminations.

Themanagement approach is used as the conceptual basis for identifying reportablesegments and is based on the way that management organizes the segments withinthe enterprise for making operating decisions, allocating resources andmonitoring performance, which is primarily based on products.
| Three Months Ended March 31, 2007 | ** ** | **Banking**                          | ** ** | **Other** | ** ** | **Total** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------|------------|-----------|------------|-----------|------------|
| ** **                                                 | ** ** | **(Dollars in Thousands)** | ** ** |
|                                                       |       |                                 |       |      |       |      |       |
| Net interest  income                                       |       | $                                    | 7,140      |      | $          | (737      | )          | $ | 6,403 |   |
| Intersegment  interest income                              |       | (211                                 | )          | 211       |       | —    |       |
| Provision for  losses on loans and leases                  |       | (34                                  | )          | —    |       | (34       | )          |
| Noninterest  income                                        |       | 2,665                                |       | (52       | )          | 2,613     |       |
| Intersegment  noninterest income                           |       | (108                                 | )          | 108       |       | —    |       |
| Noninterest  expense                                       |       | —                               |       | (7,471    | )          | (7,471    | )          |
| Intersegment  noninterest expense                          |       | 3                                    |       | (3        | )          | —    |       |
| Income (loss) before income taxes                          |       | $                                    | 9,455      |      | $          | (7,944    | )          | $ | 1,511 |   |
|                                                       |       |                                 |       |      |       |      |       |
| Total assets at  March 31, 2007                            |       | $                                    | 994,613    |      | $          | 1,511     |       | $ | 996,124 |   |

 
| Three Months Ended March 31, 2006 | ** ** | **Banking**                          | ** ** | **Other** | ** ** | **Total** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------|------------|-----------|------------|-----------|------------|
| ** **                                                 | ** ** | **(Dollars in Thousands)** | ** ** |
|                                                       |       |                                 |       |      |       |      |       |
| Net interest  income                                       |       | $                                    | 7,171      |      | $          | (789      | )          | $ | 6,382 |   |
| Intersegment  interest income                              |       | (279                                 | )          | 279       |       | —    |       |
| Provision for losses  on loans and leases                  |       | (418                                 | )          | —    |       | (418      | )          |
| Noninterest  income                                        |       | 2,262                                |       | (185      | )          | 2,077     |       |
| Intersegment  noninterest income                           |       | (45                                  | )          | 45        |       | —    |       |
| Noninterest  expense                                       |       | (6,347                               | )          | (78       | )          | (6,425    | )          |
| Intersegment  noninterest expense                          |       | 1                                    |       | (1        | )          | —    |       |
| Income (loss) before income taxes                          |       | $                                    | 2,345      |      | $          | (729      | )          | $ | 1,616 |   |
|                                                       |       |                                 |       |      |       |      |       |
| Total assets at March  31, 2006                            |       | $                                    | 919,427    |      | $          | 1,822     |       | $ | 921,249 |   |

 

9

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| Nine Months Ended March 31, 2007 | ** ** | **Banking**                          | ** ** | **Other** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------|------------|-----------|------------|-----------|------------|
| ** **                                                | ** ** | **(Dollars in Thousands)** | ** ** |
|                                                      |       |                                 |       |      |       |      |       |
| Net interest  income                                      |       | $                                    | 21,593     |      | $          | (2,712    | )          | $ | 18,881 |   |
| Intersegment  interest income                             |       | (688                                 | )          | 688       |       | —    |       |
| Provision for  losses on loans and leases                 |       | (786                                 | )          | —    |       | (786      | )          |
| Noninterest  income                                       |       | 10,566                               |       | (187      | )          | 10,379    |       |
| Intersegment  noninterest income                          |       | (316                                 | )          | 316       |       | —    |       |
| Noninterest  expense                                      |       | (14,179                              | )          | (7,892    | )          | (22,071   | )          |
| Intersegment  noninterest expense                         |       | 7                                    |       | (7        | )          | —    |       |
| Income (loss) before income taxes                         |       | $                                    | 16,197     |      | $          | (9,794    | )          | $ | 6,403 |   |
|                                                      |       |                                 |       |      |       |      |       |
| Total assets at March  31, 2007                           |       | $                                    | 994,613    |      | $          | 1,511     |       | $ | 996,124 |   |

 
| Nine Months Ended March 31, 2006 | ** ** | **Banking**                          | ** ** | **Other** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------|------------|-----------|------------|-----------|------------|
| ** **                                                | ** ** | **(Dollars in Thousands)** | ** ** |
|                                                      |       |                                 |       |      |       |      |       |
| Net interest  income                                      |       | $                                    | 21,535     |      | $          | (2,425    | )          | $ | 19,110 |   |
| Intersegment  interest income                             |       | (878                                 | )          | 878       |       | —    |       |
| Provision for  losses on loans and leases                 |       | (4,510                               | )          | —    |       | (4,510    | )          |
| Noninterest  income                                       |       | 7,098                                |       | 3,353     |       | 10,451    |       |
| Intersegment  noninterest income                          |       | (141                                 | )          | 141       |       | —    |       |
| Noninterest  expense                                      |       | (19,324                              | )          | (467      | )          | (19,791   | )          |
| Intersegment  noninterest expense                         |       | 4                                    |       | (4        | )          | —    |       |
| Income before income taxes                                |       | $                                    | 3,784      |      | $          | 1,476     |       | $ | 5,260 |   |
|                                                      |       |                                 |       |      |       |      |       |
| Total assets at March  31, 2006                           |       | $                                    | 919,427    |      | $          | 1,822     |       | $ | 921,249 |   |

 

10

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**NOTE6.****                             DEFINEDBENEFIT PLAN**

The Company has a noncontributory (cash balance)defined benefit pension plan covering all employees of the Company and itswholly-owned subsidiaries who have attained the age of 21 and have completed1,000 hours of service in a plan year. The benefits are based on 6% of each eligible participant’s annualcompensation, plus income earned in the accounts at a rate determined annuallybased on 30-year treasury note rates. The Company’s funding policy is to make the minimum annual requiredcontribution plus such amounts as the Company may determine to be appropriatefrom time to time.  Participants are 100%vested after five years of service with a normal retirement age of 65.  Information relative to the components of netperiodic benefit cost for the Company’s defined benefit plan is presentedbelow:
|                                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | **March 31,**               | ** ** | **March 31,**              | ** ** |
| ** **                         | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
|                               |       |                             |       |                            |       |   |   |   |   |
| Service cost                       |       | $                                | 116,521    |                            | $          | 116,367 |   | $ | 349,563 |   | $ | 349,101 |   |
| Interest cost                      |       | 97,748                           |       | 91,239                          |       | 293,244 |   | 273,715 |   |
| Expected return  on plan assets    |       | (109,101                         | )          | (93,185                         | )          | (327,303 | ) | (279,555 | ) |
| Amortization of  transition asset  |       | —                           |       | 2,907                           |       | — |   | 8,722 |   |
| Total costs  recognized in expense |       | $                                | 105,168    |                            | $          | 117,328 |   | $ | 315,504 |   | $ | 351,983 |   |

 

TheCompany previously disclosed in its consolidated financial statements forFiscal 2006, which are included in Part II, Item 8 “Financial Statements andSupplementary Data” of the Company’s Annual Report on Form 10-K for Fiscal2006, that it contributed $610,000 to fund its qualified pension plan.  During the first quarter of the fiscal yearending June 30, 2007 (“Fiscal 2007”), the Company made contributions of$621,000 to fund its qualified pension plan. The Company anticipates no additional contributions for Fiscal 2007.

**NOTE7.****                             SELF-INSUREDHEALTHCARE PLAN**

TheCompany has had a self-insured health plan for its employees, subject tocertain limits, since January 1994.  TheBank is named the plan administrator for this plan and has retained theservices of an independent third party administrator to process claims andhandle other duties for this plan.  Thethird party administrator does not assume liability for benefits payable underthis plan.

TheCompany assumes the responsibility for funding the plan benefits out of generalassets, however employees cover some of the costs of covered benefits throughcontributions, deductibles, co-pays and participation amounts.  An employee is eligible for coverage uponcompletion of 30 calendar days of regular employment.  The plan, which is on a calendar year basis,is intended to comply with, and be governed by, the Employee Retirement IncomeSecurity Act of 1974, as amended.

11

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Totalnet healthcare costs are inclusive of health claims expenses and administrationfees offset by stop loss and employee reimbursement.  Reported below is a summary of net healthcarecosts by quarter for the fiscal years ended June 30, 2006 and 2007.

|                            | ** ** | **Fiscal Years Ended June 30,** | ** ** |
|----------------------------|------------|---------------------------------|------------|
| ** **                 | ** ** | **2007**                        | ** ** | **2006** | ** ** |
| ** **                 | ** ** | **(Dollars in Thousands)**      | ** ** |
|                       |       |                            |       |   |   |
| Quarter ended September 30 |       | $                               | 436        |   | $ | 419 |   |
| Quarter ended December 31  |       | 357                             |       | 409 |   |
| Quarter ended March 31     |       | 760                             |       | 382 |   |
| Quarter ended June 30      |       | —                          |       | 285 |   |
| Net healthcare costs       |       | $                               | 1,553      |   | $ | 1,495 |   |

 

**NOTE8.****                             FASBSTATEMENT NO. 140**

During the thirdquarter of Fiscal 2006, the Company completed a line item change ofits income recorded on originated mortgage servicing rights for loans soldto South Dakota Housing Development Authority.  This process was doneupon a fuller interpretation of Statement No. 140, *“Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities”*as issued by theFASB.   All periods presented have been revised in presentation toreflect this line item and there was no change to net income, earningsper share, or recorded value of servicing rights as a result ofthis line item change.  Thefollowing table reflects the effects of the line item change on theCompany’s consolidated statements of income for the three and nine monthsended March 31, 2007 and 2006.
|                             | ** ** | **Three Months Ended**     | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                  | ** ** | **March 31,**                   | ** ** | **March 31,**              | ** ** |
| ** **                  | ** ** | **2007**                             | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                  | ** ** | **(Dollars in Thousands)** | ** ** |
|                        |       |                                 |       |                            |       |   |   |   |   |
| Loan servicing  income      |       | $                                    | —     |                            | (66        | ) | $ | — |   | (159 | ) |
| Gain on sale of  loans, net |       | —                               |       | 66                              |       | — |   | 159 |   |
|                        |       |                                 |       |                            |       |   |   |   |   |
| Net income change           |       | $                                    | —     |                            | $          | — |   | $ | — |   | $ | — |   |
|                             |            |                                      |            |                                 |            |  |  |  |  |  |  |  |  |

 

12

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**NOTE9.****                             STOCK-BASEDCOMPENSATION PLANS**

Thefair value of each incentive stock option grant and stock appreciation right isestimated at the grant date using the Black-Scholes option-pricing model.  The following weighted average assumptionswere used for grants in the nine months ended March 31, 2007 and 2006:
|                           | ** ** | **For the Nine Months Ended** | ** ** |
|---------------------------|------------|---------------------------------------------------|------------|
| ** **                | ** ** | **March 31,**                                | ** ** |
| ** **                | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| Expected  volatility      |       | 23.00                                             | %          | 24.00 | % |
| Expected dividend  yield  |       | 2.56                                              | %          | 2.75 | % |
| Risk-free  interest rate  |       | 4.61                                              | %          | 4.09 | % |
| Expected term (in  years) |       | 4                                                 |       | 7 |   |

 

Stockoption and stock appreciation right activity for the nine months ended March 31follows:
|                            | ** ** | **2007**   | ** ** |
|----------------------------|------------|------------|------------|
| ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | ** ** | ** ** | **Weighted** | ** ** | **Remaining** | ** ** | **Aggregate** | ** ** |
| ** **                 | ** ** | ** ** | ** ** | **Average** | ** ** | **Contractual** | ** ** | **Intrinsic** | ** ** |
| ** **                 | ** ** | ** ** | ** ** | **Exercise** | ** ** | **Term** | ** ** | **Value** | ** ** |
| ** **                 | ** ** | **Shares** | ** ** | **Price** | ** ** | **(in years)** | ** ** | **(In thousands)** | ** ** |
| Balance,  beginning July 1 |       | 318,977    |       | $ | 12.77 |   |   |   |   |   |
| Granted                    |       | 20,953     |       | 16.00 |   |   |   |   |   |
| Forfeited                  |       | (13,796    | )          | 16.54 |   |   |   |   |   |
| Exercised                  |       | (32,968    | )          | 12.90 |   |   |   |   |   |
| Balance, ending  March 31  |       | 293,166    |       | $ | 12.81 |   | 5.46 |   | $ | 1,595 |   |
|                       |       |       |       |   |   |   |   |   |   |
| Exercisable at March 31    |       | 232,428    |       | $ | 12.02 |   | 4.70 |   | $ | 1,447 |   |

 
|                            | ** ** | **2006**   | ** ** |
|----------------------------|------------|------------|------------|
| ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | ** ** | ** ** | **Weighted** | ** ** | **Remaining** | ** ** | **Aggregate** | ** ** |
| ** **                 | ** ** | ** ** | ** ** | **Average** | ** ** | **Contractual** | ** ** | **Intrinsic** | ** ** |
| ** **                 | ** ** | ** ** | ** ** | **Exercise** | ** ** | **Term** | ** ** | **Value** | ** ** |
| ** **                 | ** ** | **Shares** | ** ** | **Price** | ** ** | **(in years)** | ** ** | **(In thousands)** | ** ** |
| Balance,  beginning July 1 |       | 325,422    |       | $ | 12.22 |   |   |   |   |   |
| Granted                    |       | 30,769     |       | 17.27 |   |   |   |   |   |
| Forfeited                  |       | (3,278     | )          | 14.85 |   |   |   |   |   |
| Exercised                  |       | (25,635    | )          | 11.41 |   |   |   |   |   |
| Balance, ending  March 31  |       | 327,278    |       | $ | 12.73 |   | 6.01 |   | $ | 1,437 |   |
|                       |       |       |       |   |   |   |   |   |   |
| Exercisable at  March 31   |       | 233,202    |       | $ | 11.55 |   | 4.92 |   | $ | 1,295 |   |

 

13

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Theweighted-average grant date fair value of options and appreciation rightsgranted during the nine months ended March 31, 2007 and 2006 was $3.11 and$3.83, respectively.  The total intrinsicvalue of options exercised during the nine months ended March 31, 2007 and 2006was $176,000 and $146,000, respectively. As of March 31, 2007, there was $28,000 of total unrecognizedcompensation cost related to nonvested stock option awards.  The cost is expected to be recognized over aperiod of two years.  Cash received fromthe exercise of options for the nine months ended March 31, 2007 and 2006 was$425,000 and $293,000, respectively.  Thetax benefit realized for the tax deductions from cashless option exercisestotaled $42,000 and $28,000 for the nine months ended March 31, 2007 and 2006,respectively.

Restrictedshare activity for the nine months ended March 31 follows:
|                               | ** ** | **2007**   | ** ** | **2006**     | ** ** |
|-------------------------------|------------|------------|------------|--------------|------------|
| ** **                    | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                    | ** ** | ** ** | ** ** | **Average**  | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                    | ** ** | ** ** | ** ** | **Grant**    | ** ** | ** ** | ** ** | **Grant** | ** ** |
| ** **                    | ** ** | ** ** | ** ** | **Date**     | ** ** | ** ** | ** ** | **Date** | ** ** |
| ** **                    | ** ** | ** ** | ** ** | **Fair**     | ** ** | ** ** | ** ** | **Fair** | ** ** |
| ** **                    | ** ** | **Shares** | ** ** | **Value**    | ** ** | **Shares** | ** ** | **Value** | ** ** |
| Nonvested  Balance, beginning |       | 158,159    |       | $            | 15.85      |   | 91,888 |   | $ | 13.62 |   |
| Granted                       |       | 11,603     |       | 16.75        |       | 85,572 |   | 17.42 |   |
| Vested                        |       | (17,467    | )          | 13.63        |       | (15,533 | ) | 11.41 |   |
| Forfeited                     |       | (5,417     | )          | 15.32        |       | (3,346 | ) | 15.85 |   |
| Nonvested  Balance, ending    |       | 146,878    |       | $            | 16.08      |   | 158,581 |   | $ | 15.73 |   |

 

Pretaxcompensation expense recognized for restricted shares for the nine months endedMarch 31, 2007 and 2006 was $344,000 and $313,000, respectively.  The tax benefit for the nine months endedMarch 31, 2007 and 2006 was $117,000 and $107,000, respectively.  As of March 31, 2007, there was $1.5 millionof total unrecognized compensation cost related to restricted shares grantedunder the Company’s 2002 Stock Option and Incentive Plan, as amended (“thePlan”).  That cost is expected to berecognized over a weighted-average period of five years.  The total fair value of shares vested duringthe nine months ended March 31, 2007 and 2006 was $238,000 and $179,000,respectively.

TheCompany has a Director Restricted Stock Plan which provides that awards ofrestricted shares of the Company’s common stock be made to outside directors ofthe Company.  The plan is designed toallow for payment of the annual retainer fee in shares of the Company’s commonstock, with the inclusion of an annual cost of living adjustment based on theConsumer Price Index.  Each outsidedirector is entitled to all voting, dividend and distribution rights during therestriction period.  The effective dateof the plan was July 1, 1997.  The planhas 90,750 shares allocated to it and is in effect for a period of tenyears.  During the nine months endedMarch 31, 2007 and 2006, 5,760 and 4,824 shares were awarded and $74,000 and$72,000 of expense was incurred under the plan, respectively, as the annualretainer for the Company’s Board of Directors.

Thesestock option and incentive plans are described more fully in Part II, Item 8“Financial Statements and Supplementary Data” of the Company’s Annual Report onForm 10-K for Fiscal 2006, under Note 17 of “Notes to Consolidated FinancialStatements.”

14

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**NOTE 10.****                       SUBORDINATEDDEBENTURES PAYABLE TO TRUSTS**

OnDecember 7, 2006, the Company issued 10,000 shares totaling $10.0 million ofCompany Obligated Mandatorily Redeemable Preferred Securities of Trust V.  Trust V was established and exists for thesole purpose of issuing trust preferred securities and investing the proceedsin subordinated debentures of the Company. These subordinated debentures constitute the sole asset of Trust V.  The securities provide for cumulative cashdistributions calculated at a rate based on three-month LIBOR plus 1.83%, fixedfor the first five years, adjusted quarterly thereafter.  The Company may, at one or more times, deferinterest payments on the capital securities for up to 20 consecutive quarterlyperiods, but not beyond March 1, 2037. At the end of the deferral period, all accumulated and unpaiddistributions must be paid.  The capitalsecurities must be redeemed on March 1, 2037; however, the Company has theoption to shorten the maturity date to a date not earlier than March 1,2012.  Holders of the capital securitieshave no voting rights, are unsecured, and rank junior in priority of thepayment to all of the Company’s indebtedness and senior to the Company’scapital stock.

OnDecember 8, 2006, the Company exercised its option to redeem $10.0 million ofCompany Obligated Mandatorily Redeemable Preferred Securities of Trust I.

**NOTE 11. **                SALE OF BRANCHES

During the second quarter of Fiscal 2007, the Bankclosed on the sale of three branches and their associated book of business,along with one physical location, to Great Western Bank.  The Bank recognized a gain on sale of $2.8million that resulted in the sale of $4.2 million in loans and $33.6 million indeposits.

15

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**Item2.  Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

**Forward-Looking Statements**

ThisQuarterly Report on Form 10-Q and other reports issued by the Company,including reports filed with the Securities and Exchange Commission, contain“forward-looking statements” that deal with future results, expectations, plansand performance.  In addition, theCompany’s management may make forward-looking statements orally to the media,securities analysts, investors or others. These forward-looking statements might include one or more of thefollowing:

·                  Projections ofincome, loss, revenues, earnings or losses per share, dividends, capitalexpenditures, capital structure, tax benefit or other financial items.

·                  Descriptions ofplans or objectives of management for future operations, products or services,transactions, investments and use of subordinated debentures payable to trusts.

·                  Forecasts offuture economic performance.

·                  Use and descriptions of assumptionsand estimates underlying or relating to such matters.

Forward-looking statements can be identified by thefact that they do not relate strictly to historical or current facts.  They often include words such as “optimism,”“look-forward,” “bright,” “believe,” “expect,” “anticipate,” “intend,” “plan,”“estimate” or words of similar meaning, or future or conditional verbs such as“will,” “would,” “should,” “could” or “may.”

Forward-looking statements about the Company’sexpected financial results and other plans are subject to certain risks,uncertainties and assumptions.  Theseinclude, but are not limited to, the risks discussed in Part I, Item 1A “RiskFactors” in the Company’s Annual Report on Form 10-K for Fiscal 2006 and thefollowing: possible legislative changes and adverse economic, business andcompetitive conditions and developments (such as shrinking interest margins andcontinued short-term rate environments); deposit outflows; reduced demand forfinancial services and loan products; changes in accounting policies orguidelines, 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 of the Company to manage interest rate and other risks;unexpected, continuing or excessive claims against the Company’s self-insuredhealth plan; the Company’s use of trust preferred securities; the ability orinability of the Company to successfully enter into a definitive agreement forand close anticipated transactions; technological, computer-related oroperational difficulties; adverse changes in securities markets; results oflitigation; or other significant uncertainties.

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

16

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**Executive Summary**

The Company’s net income for the thirdquarter of Fiscal 2007 was $1.0 million, or $0.25 per diluted share, comparedto $1.3 million, or $0.31 per diluted share, for the third quarter of Fiscal2006.  For the first nine months ofFiscal 2007, net income was $4.2 million, or $1.05 per diluted share, comparedto $3.6 million, or $0.89 per diluted share, for the first nine months ofFiscal 2006.    Return on average equitywas 9.59% at March 31, 2007 compared to 8.74% at March 31, 2006.

Thenet interest margin on a fully taxable equivalent basis for the nine monthsended March 31, 2007 was 2.80%, compared to 3.04% for the same period a yearago, a decline of 24 basis points.  Thedecrease over the same period last year is primarily attributable to anincrease in interest rates for the Company’s variable priced trust preferredsecurities, which are tied to LIBOR.  Inaddition, there was a $290,000 expense of unamortized debt issuance costsrelated to the early redemption of the Trust I trust preferred securities inthe second quarter of Fiscal 2007, causing a decrease of four basispoints.  During the nine months endedMarch 31, 2007, $1.9 million in loans were placed into nonaccrual for the firsttime, resulting in a reversal of $154,000 in interest income.  Comparatively, for the same period a yearago, $2.3 million in loans were placed into nonaccrual for the first time, witha reversal of $103,000 in interest income.

Netinterest income for the first nine months of Fiscal 2007 was $18.9 million, adecrease of  $229,000, or 1.2%, over thesame period a year ago.  Net interestincome increased $21,000, or 0.3%, to $6.4 million for the three months endedMarch 31, 2007 from $6.4 million for same period in the prior fiscal year.  For the nine months ended March 31, 2007,average interest-earning assets and average interest-bearing liabilitiesincreased 8.2% and 7.7%, respectively, compared to the same period a year ago.  Yields on earning assets increased to 6.70%in the first nine months of Fiscal 2007, compared to 6.15% a year ago, anincrease of 55 basis points.  For thesame time period, cost of funds increased to 4.40%, compared to 3.47%, anincrease of 93 basis points.

Netinterest margin ratio may vary due to many factors, including Federal Reservepolicies for short-term interest rates, competitive and economic factors andcustomer preferences for various products and services.  From July 1, 2005 to March 31, 2006, theFederal Reserve increased short-term interest rates six times at 25 basispoints each, for a total increase of 150 basis points.  There has been no change since June 30,2006.  The flattening and subsequentinversion of the treasury yield curve caused by increasing short-term rates andlagging and declining long-term rates continued to affect the Company’s netinterest margin ratio during the quarter. This inverted yield curve is evidenced by the interest rate spread of 23basis points between the 3-month Treasury Bill and the 10-year Treasury Note atMarch 31, 2006, decreasing to a negative 39 basis points at March 31, 2007.

TheCompany had previously issued trust preferred securities primarily to providefunding for stock repurchases and to repay other borrowings.  Interest expense on the $27.8 million oftrust preferred securities outstanding increased to $2.4 million for the ninemonths ended March 31, 2007, compared to $1.6 million for the same period ayear ago, an increase of $778,000 or 47.8%. The average rate paid on these securities increased 234 basis points,from 7.78% at March 31, 2006 to 10.12% at March 31, 2007.  In December 2006, the Company refinanced$10.0 million of trust preferred securities, originally issued in November2001.  This new funding was calculated ata rate based on three-month LIBOR plus 1.83%, fixed for five years, andadjusted quarterly thereafter.  Thiscompares to the original issuance which is based on six-month LIBOR plus3.75%.  As a result of this refinancing,the Company expensed $290,000 of unamortized debt issuance costs.  Excluding this expense, the overall cost onthe trust preferred securities was 8.99%, compared to 10.12%, a 113 basis pointdecrease.  The Company expects torefinance additional trust preferred securities outstanding over the next yeardepending upon the yield curve spreads, which exist at the time of refinancing.

17

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Theallowance for loan and lease losses increased to $5.8 million at March 31,2007, compared to $5.4 million at March 31, 2006, an increase of $409,000 or7.6%.  The ratio of allowance for loanand lease losses to total loans and leases was 0.76% as of March 31, 2007compared to 0.76% at March 31, 2006. Total nonperforming assets at March 31, 2007 were $4.1 million ascompared to $4.7 million a year ago, a decrease of $627,000 or 13.2%.  The ratio of nonperforming assets to totalassets decreased to 0.41% at March 31, 2007, compared to 0.51% at March 31,2006.  The allowance for loan and leaselosses is calculated based on loan and lease levels, loan and lease losshistory, credit quality of the loan and lease portfolio, and environmentalfactors such as economic health of the region and management experience.  This risk rating analysis is designed to givethe Company a consistent and systematic methodology to determine proper levelsfor the allowance at a given time.

Totaldeposits at March 31, 2007 were $787.1 million, an increase of $81.8 million,or 11.6%, from March 31, 2006.  Interestexpense on these deposits was $21.2 million for the nine months ended March 31,2007, an increase of $6.8 million, or 47.7%, over the same period a yearago.  In-market deposits increased from$661.6 million at March 31, 2006 to $699.3 million at March 31, 2007, anincrease of $37.7 million, or 5.7%.  Forthe same period, out-of-market deposits increased from $43.7 million to $87.8million, respectively.  Public funds haveincreased, from $92.2 million at March 31, 2006 to $107.9 million at March 31,2007.  The primary factor affectinginterest expense on deposits was the increase in average fiscal year-to-datevolume of certificates of deposits by $68.3 million, or 23.3%, from March 2006to March 2007.  Average out-of-marketcertificates of deposits accounted for $42.2 million or nearly 62% of this increase.  Interest expense for certificates of depositsincreased by $4.8 million or 62.6% in the first nine months of Fiscal 2007,compared to the same period in the prior fiscal year, driving its average costof funds to 4.57% from 3.46%.

Thetotal risk-based capital ratio of 10.94% at March 31, 2007 is above the 10.81%at March 31, 2006, an increase of 13 basis points.  This continues to place the Bank in the “wellcapitalized” category within OTS regulation at March 31, 2007 and is consistentwithin the “well capitalized” OTS category in which the Company plans tooperate.  The Company historically hasbeen able to manage the size of its assets through secondary market loan salesof single-family mortgages and student loans and a loan securitization.

Noninterestincome was $2.6 million for the quarter ended March 31, 2007 compared to $2.1million at March 31, 2006, an increase of $536,000 or 25.8%.  The primary factor affecting noninterestincome was an increase of $407,000 in loan servicing income due to the purchaseof mortgage servicing rights at September 30, 2006 and an increase of $203,000in fees on deposits, due to higher activity and increased service pricing.

Noninterestexpense was $7.5 million for the quarter ended March 31, 2007 compared to $6.4million at March 31, 2006, an increase of $1.0 million or 16.3%.  The primary factors affecting noninterestexpense include increases of $724,000 in employee compensation andbenefits.  Specific increases in employeecompensation and benefits include $378,000 in net healthcare costs and $257,000in variable pay related to performance incentives.  In addition, occupancy and equipment costsincreased $101,000, primarily attributable to several new branches opened overthe last year.

18

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**General**

The Company is a financial servicesprovider and, as such, has inherent risks that must be managed in order toachieve net income.  Primary risks thataffect net income include credit risk, liquidity risk, operational risk,regulatory compliance 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 from thenet 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 loanservices.  Personnel costs are theprimary expenses required to deliver the services to customers.  Other costs include occupancy and equipmentand general and administrative expenses.

**Financial Condition Data**

AtMarch 31, 2007, the Company had total assets of $996.1 million, an increase of$34.8 million from the level at June 30, 2006. The increase in assets was due primarily to increases in net loans andleases receivable of $28.6 million, loan servicing rights of $5.2 million andcash and cash equivalents of $3.4 million. The increase in liabilities of $29.1 million from June 30, 2006 to March31, 2007 was primarily due to increases in deposits of $18.1 million, advancesby borrowers for taxes and insurance of $7.2 million and accrued expenses andother liabilities of $5.0 million.  Inaddition, stockholders’ equity increased $5.7 million to $61.8 million at March31, 2007 from $56.1 million at June 30, 2006, primarily due to net income of$4.2 million.

Theincrease in net loans and leases receivable of $28.6 million was due primarilyto an increase in purchases and originations over sales, amortization and repaymentsof principal**.** In addition, net deferred (fees), costs anddiscounts decreased $110,000 from the levels at June 30, 2006 to $773,000 atMarch 31, 2007.

Thedecrease in securities available for sale of $6.8 million was primarily theresult of sales, maturities and repayments of $27.8 million exceeding purchasesof $18.6 million.  The purchases of $18.6million included fixed-rate, mortgage-backed securities of $12.2 million.

Loanservicing rights increased $5.2 million primarily due to the purchase of $4.9million in mortgage servicing rights from Great Western Bank at the end of thefirst quarter of Fiscal 2007.

Cashand cash equivalents increased $3.4 million due primarily to an increase indeposits of $18.1 million resulting primarily from out-of-market certificatesof deposits.

The $18.1 million increase in deposits was due toincreases in out-of-market certificates of deposit of $30.4  million, interest-bearing checking accountsof $13.0 million and in-market certificates of deposit of $9.5 million, offsetby decreases in savings accounts of $27.1 million, noninterest-bearing checkingaccounts of $5.7 million and money market accounts of $2.0 million.  The $27.1 million decrease in savingsaccounts was primarily due to temporary fluctuations experienced with onepublic fund entity, while the increase in out-of-market certificates ofdeposits was primarily driven by wholesale funding sources.

Advancesby borrowers for taxes and insurance increased $7.2 million primarily due tothe purchase of $4.9 million in mortgage servicing rights during the firstquarter of fiscal 2007 which resulted in an increase in escrow accounts fortaxes and insurance of $3.7 million.

Accruedexpenses and other liabilities increased $5.0 million from the level at June30, 2006 in part due to an increase in accrued income taxes payable of $1.8million resulting primarily from the Company’s net income of $4.2 million forthe nine months ended March 31, 2007 and an increase in accrued interestpayable of $1.1 million.

19

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During the time period of fiscal years 2002 through2004, the Company issued a total of $27.8 million in subordinated debenturespayable to trusts at various times through its trust subsidiaries.  Each of the issuances included an option toshorten the maturity date at a specific time as stated in the contract.  The issuance of $10.0 million of CompanyObligated Mandatorily Redeemable Preferred Securities of Trust I on November28, 2001 included an option to shorten the maturity date to December 8,2006.  The Company exercised this optionto redeem $10.0 million of trust preferred securities.  Also during the second quarter of Fiscal2007, the Company issued $10.0 million of Company Obligated MandatorilyRedeemable Preferred Securities of Trust V. The new funding is calculated at a rate based on three-month LIBOR plus1.83%, fixed for five years, compared to the original issuance which is basedon six-month LIBOR plus 3.75%.  Theunamortized amount of $290,000 deferred debt issuance costs related to theoriginal issuance was expensed.

 

20

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The following tables show the compositionof the Company’s loan and lease portfolio and deposit accounts:
|                                              | ** ** | **At March 31, 2007** | ** ** | **At June 30, 2006** | ** ** |
|----------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                                   | ** ** | **Amount**                           | ** ** | **Percent**                         | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| ** **                                   | ** ** | **(Dollars in Thousands)** | ** ** |
| One-to  four-family (1)                      |       | $                                    | 107,090    |                                | 14.16      | % | $ | 100,585 |   | 13.83 | % |
| Commercial  business and real estate (2) (3) |       | 282,903                              |       | 37.42                               | %          | 247,643 |   | 34.05 | % |
| Multi-family  real estate                    |       | 32,757                               |       | 4.33                                | %          | 34,066 |   | 4.69 | % |
| Equipment  finance leases                    |       | 23,248                               |       | 3.08                                | %          | 29,406 |   | 4.04 | % |
| Consumer Direct  (4)                         |       | 102,825                              |       | 13.60                               | %          | 110,493 |   | 15.19 | % |
| Consumer  Indirect                           |       | 87,754                               |       | 11.61                               | %          | 91,601 |   | 12.60 | % |
| Agricultural                                 |       | 106,643                              |       | 14.11                               | %          | 89,437 |   | 12.30 | % |
| Construction and  development                |       | 12,804                               |       | 1.69                                | %          | 24,029 |   | 3.30 | % |
| Total Loans and  Leases Receivable (5)       |       | $                                    | 756,024    |                                | 100.00     | % | $ | 727,260 |   | 100.00 | % |

 

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(1)                        Excludes $6,392 and $6,980 loans held forsale at March 31, 2007 and June 30, 2006, respectively. 

(2)                        Includes $3,297 tax exempt leases atMarch 31, 2007 and June 30, 2006.

(3)                        Excludes $223 commercial loans held forsale at March 31, 2007 and June 30, 2006.

(4)                        Excludes $2,595 and $420 student loansheld for sale at March 31, 2007 and June 30, 2006, respectively. 

(5)                        Includes deferred loan fees and discountsand undisbursed portion of loans in process.
|                                        | ** ** | **At March 31, 2007** | ** ** | **At June 30, 2006** | ** ** |
|----------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                             | ** ** | **Amount**                           | ** ** | **Percent**                         | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| ** **                             | ** ** | **(Dollars in Thousands)** | ** ** |
|                                   |       |                                 |       |                                |       |   |   |   |   |
| Noninterest  bearing checking accounts |       | $                                    | 79,117     |                                | 10.05      | % | $ | 84,757 |   | 11.02 | % |
| Interest bearing  checking accounts    |       | 67,884                               |       | 8.63                                | %          | 54,862 |   | 7.14 | % |
| Money market  accounts                 |       | 230,479                              |       | 29.28                               | %          | 232,471 |   | 30.23 | % |
| Savings accounts                       |       | 49,592                               |       | 6.30                                | %          | 76,695 |   | 9.97 | % |
| Certificates of  deposit               |       | 360,042                              |       | 45.74                               | %          | 320,217 |   | 41.64 | % |
| Total Deposits                         |       | $                                    | 787,114    |                                | 100.00     | % | $ | 769,002 |   | 100.00 | % |

 

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**Analysisof Net Interest Income**

Net interest income represents thedifference between income on interest-earning assets and expense oninterest-bearing liabilities.  Netinterest income depends upon the volume of interest-earning assets and interest-bearingliabilities and the interest rates earned or paid on them.

*Average Balances, 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.  Average balances consist of daily averagebalances for the Bank with simple average balances for all other subsidiariesof the Company.  The average balancesinclude nonaccruing loans and leases. The yields on loans and leases include origination fees, net of costs,which are considered adjustments to yield.
| ** **                                     | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                     | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| ** **                                     | ** ** | **Average**                                          | ** ** | **Interest** | ** ** | ** ** | ** ** | **Average** | ** ** | **Interest** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **Outstanding**                                      | ** ** | **Earned/** | ** ** | **Yield/** | ** ** | **Outstanding** | ** ** | **Earned/** | ** ** | **Yield/** | ** ** |
| ** **                                     | ** ** | **Balance**                                          | ** ** | **Paid** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Paid** | ** ** | **Rate** | ** ** |
| ** **                                     | ** ** | **(Dollars in Thousands)**                 | ** ** |
| Interest-earning  assets:                      |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Loans and leases  receivable (1) (3)           |       | $                                                    | 758,370    |   | $ | 13,435 |   | 7.18 | % | $ | 701,325 |   | $ | 11,829 |   | 6.84 | % |
| Investment  securities (2) (3)                 |       | 156,671                                              |       | 1,869 |   | 4.84 | % | 147,910 |   | 1,589 |   | 4.36 | % |
| FHLB stock                                     |       | 5,768                                                |       | 56 |   | 3.94 | % | 6,334 |   | 48 |   | 3.07 | % |
|                                           |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Total interest-earning  assets                 |       | 920,809                                              |       | $ | 15,360 |   | 6.77 | % | 855,569 |   | $ | 13,466 |   | 6.38 | % |
| Noninterest-earning  assets                    |       | 70,682                                               |       |   |   |   |   | 68,562 |   |   |   |   |   |
| Total assets                                   |       | $                                                    | 991,491    |   |   |   |   |   | $ | 924,131 |   |   |   |   |   |
|                                           |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                 |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                      |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Checking and  money market                     |       | $                                                    | 286,371    |   | $ | 2,639 |   | 3.74 | % | $ | 274,445 |   | $ | 2,111 |   | 3.12 | % |
| Savings                                        |       | 48,029                                               |       | 344 |   | 2.90 | % | 53,818 |   | 320 |   | 2.41 | % |
| Certificates of  deposit                       |       | 367,374                                              |       | 4,285 |   | 4.73 | % | 306,466 |   | 2,808 |   | 3.72 | % |
| Total  interest-bearing deposits               |       | 701,774                                              |       | 7,268 |   | 4.20 | % | 634,729 |   | 5,239 |   | 3.35 | % |
| FHLB advances and other  borrowings            |       | 99,139                                               |       | 1,132 |   | 4.63 | % | 111,937 |   | 1,274 |   | 4.62 | % |
| Subordinated debentures  payable to trusts     |       | 27,837                                               |       | 557 |   | 8.11 | % | 27,837 |   | 571 |   | 8.32 | % |
| Total interest-bearing  liabilities            |       | 828,750                                              |       | 8,957 |   | 4.38 | % | 774,503 |   | 7,084 |   | 3.71 | % |
| Noninterest-bearing  deposits                  |       | 74,017                                               |       |   |   |   |   | 74,359 |   |   |   |   |   |
| Other  liabilities                             |       | 27,685                                               |       |   |   |   |   | 19,907 |   |   |   |   |   |
| Total liabilities                              |       | 930,452                                              |       |   |   |   |   | 868,769 |   |   |   |   |   |
| Equity                                         |       | 61,039                                               |       |   |   |   |   | 55,362 |   |   |   |   |   |
| Total liabilities and  equity                  |       | $                                                    | 991,491    |   |   |   |   |   | $ | 924,131 |   |   |   |   |   |
|                                           |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Net interest income;  interest rate spread (4) |       |                                                 |       | $ | 6,403 |   | 2.39 | % |   |   | $ | 6,382 |   | 2.67 | % |
|                                           |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Net interest margin (4)  (5)                   |       |                                                 |       |   |   | 2.82 | % |   |   |   |   | 3.03 | % |
|                                           |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Net interest margin, TE (6)                    |       |                                                 |       |   |   | 2.87 | % |   |   |   |   | 3.06 | % |

 

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

(2)                        Includesfederal funds sold.

(3)                        Yieldsdo not reflect the tax-exempt nature of loans, equipment leases and municipalsecurities. 

(4)                        Percentagesfor the three months ended March 31, 2007 and March 31, 2006 have beenannualized. 

(5)                        Netinterest margin is net interest income divided by average interest-earningassets.

(6)                        Netinterest margin expressed on a fully taxable equivalent basis.

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| ** **                                     | ** ** | **Nine Months Ended March 31,** | ** ** |
|------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                     | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| ** **                                     | ** ** | **Average**                                         | ** ** | **Interest** | ** ** | ** ** | ** ** | **Average** | ** ** | **Interest** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **Outstanding**                                     | ** ** | **Earned/** | ** ** | **Yield/** | ** ** | **Outstanding** | ** ** | **Earned/** | ** ** | **Yield/** | ** ** |
| ** **                                     | ** ** | **Balance**                                         | ** ** | **Paid** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Paid** | ** ** | **Rate** | ** ** |
| ** **                                     | ** ** | **(Dollars in Thousands)**                | ** ** |
| Interest-earning  assets:                      |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Loans and leases  receivable (1) (3)           |       | $                                                   | 755,079    |   | $ | 40,403 |   | 7.13 | % | $ | 692,707 |   | $ | 34,543 |   | 6.64 | % |
| Investment  securities (2) (3)                 |       | 155,158                                             |       | 5,488 |   | 4.71 | % | 147,542 |   | 4,423 |   | 3.99 | % |
| FHLB stock                                     |       | 6,466                                               |       | 210 |   | 4.33 | % | 6,866 |   | 115 |   | 2.23 | % |
|                                           |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Total interest-earning  assets                 |       | 916,703                                             |       | $ | 46,101 |   | 6.70 | % | 847,115 |   | $ | 39,081 |   | 6.15 | % |
| Noninterest-earning  assets                    |       | 68,177                                              |       |   |   |   |   | 69,433 |   |   |   |   |   |
| Total assets                                   |       | $                                                   | 984,880    |   |   |   |   |   | $ | 916,548 |   |   |   |   |   |
|                                           |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                 |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                      |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Checking and  money market                     |       | $                                                   | 281,144    |   | $ | 7,953 |   | 3.77 | % | $ | 271,898 |   | $ | 5,885 |   | 2.88 | % |
| Savings                                        |       | 43,302                                              |       | 812 |   | 2.50 | % | 51,325 |   | 817 |   | 2.12 | % |
| Certificates of  deposit                       |       | 361,828                                             |       | 12,403 |   | 4.57 | % | 293,528 |   | 7,626 |   | 3.46 | % |
| Total  interest-bearing deposits               |       | 686,274                                             |       | 21,168 |   | 4.11 | % | 616,751 |   | 14,328 |   | 3.09 | % |
| FHLB advances and other  borrowings            |       | 110,696                                             |       | 3,938 |   | 4.74 | % | 121,392 |   | 4,017 |   | 4.41 | % |
| Subordinated debentures  payable to trusts (4) |       | 27,837                                              |       | 2,114 |   | 10.12 | % | 27,837 |   | 1,626 |   | 7.78 | % |
|                                           |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Total interest-bearing  liabilities            |       | 824,807                                             |       | 27,220 |   | 4.40 | % | 765,980 |   | 19,971 |   | 3.47 | % |
| Noninterest-bearing  deposits                  |       | 77,069                                              |       |   |   |   |   | 76,791 |   |   |   |   |   |
| Other  liabilities                             |       | 23,998                                              |       |   |   |   |   | 19,278 |   |   |   |   |   |
| Total liabilities                              |       | 925,874                                             |       |   |   |   |   | 862,049 |   |   |   |   |   |
| Equity                                         |       | 59,006                                              |       |   |   |   |   | 54,499 |   |   |   |   |   |
| Total liabilities and  equity                  |       | $                                                   | 984,880    |   |   |   |   |   | $ | 916,548 |   |   |   |   |   |
|                                           |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Net interest income;  interest rate spread (5) |       |                                                |       | $ | 18,881 |   | 2.30 | % |   |   | $ | 19,110 |   | 2.68 | % |
|                                           |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Net interest margin (5)  (6)                   |       |                                                |       |   |   | 2.74 | % |   |   |   |   | 3.01 | % |
|                                           |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Net interest margin, TE (7)                    |       |                                                |       |   |   | 2.80 | % |   |   |   |   | 3.04 | % |

 

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

(2)                        Includesfederal funds sold.

(3)                        Yields donot reflect the tax-exempt nature of loans, equipment leases and municipalsecurities. 

(4)                        Includes$290 expense in December 2006 for unamortized debt issuance costs.

(5)                        Percentagesfor the nine months ended March 31, 2007 and March 31, 2006 have beenannualized. 

(6)                        Netinterest margin is net interest income divided by average interest-earningassets.

(7)                        Netinterest margin expressed on a fully taxable equivalent basis.

23

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**Rate/VolumeAnalysis 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 be segregated,have been allocated proportionately to the change due to volume and the changedue to rate.
| ** **                                 | ** ** | **Three Months Ended March 31,** | ** ** | **Nine Months Ended March 31,** | ** ** |
|--------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                 | ** ** | **2007 vs 2006**                           | ** ** | **2007 vs 2006**                          | ** ** |
| ** **                                 | ** ** | **Increase**                                         | ** ** | **Increase**                                        | ** ** | ** ** | ** ** | **Increase** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **(Decrease)**                                       | ** ** | **(Decrease)**                                      | ** ** | **Total** | ** ** | **(Decrease)** | ** ** | **Increase** | ** ** | **Total** | ** ** |
| ** **                                 | ** ** | **Due to**                                      | ** ** | **Due to**                                     | ** ** | **Increase** | ** ** | **Due to** | ** ** | **Due to** | ** ** | **Increase** | ** ** |
| ** **                                 | ** ** | **Volume**                                           | ** ** | **Rate**                                            | ** ** | **(Decrease)** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **(Decrease)** | ** ** |
| ** **                                 | ** ** | **(Dollars in Thousands)**                 | ** ** |
| Interest-earning  assets:                  |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Loans and leases  receivable (1)           |       | $                                                    | 962        |                                                | $          | 644 |   | $ | 1,606 |   | $ | 3,110 |   | $ | 2,750 |   | $ | 5,860 |   |
| Investment  securities (2)                 |       | 94                                                   |       | 186                                                 |       | 280 |   | 228 |   | 837 |   | 1,065 |   |
| FHLB stock                                 |       | (4                                                   | )          | 12                                                  |       | 8 |   | (10 | ) | 105 |   | 95 |   |
|                                       |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Total interest-earning  assets             |       | $                                                    | 1,052      |                                                | $          | 842 |   | $ | 1,894 |   | $ | 3,328 |   | $ | 3,692 |   | $ | 7,020 |   |
|                                       |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:             |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Deposits:                                  |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Checking and  money market                 |       | $                                                    | 92         |                                                | $          | 436 |   | $ | 528 |   | $ | 200 |   | $ | 1,868 |   | $ | 2,068 |   |
| Savings                                    |       | (34                                                  | )          | 58                                                  |       | 24 |   | (128 | ) | 123 |   | (5 | ) |
| Certificates of  deposit                   |       | 558                                                  |       | 919                                                 |       | 1,477 |   | 1,774 |   | 3,003 |   | 4,777 |   |
| Total interest-bearing  deposits           |       | 616                                                  |       | 1,413                                               |       | 2,029 |   | 1,846 |   | 4,994 |   | 6,840 |   |
| FHLB advances and other  borrowings        |       | (146                                                 | )          | 4                                                   |       | (142 | ) | (354 | ) | 275 |   | (79 | ) |
| Subordinated debentures  payable to trusts |       | —                                               |       | (14                                                 | )          | (14 | ) | — |   | 488 |   | 488 |   |
|                                       |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Total interest-bearing  liabilities        |       | $                                                    | 470        |                                                | $          | 1,403 |   | $ | 1,873 |   | $ | 1,492 |   | $ | 5,757 |   | $ | 7,249 |   |
|                                       |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Net interest income increase (decrease)    |       |                                                 |       |                                                |       | $ | 21 |   |   |   |   |   | $ | (229 | ) |

 

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

(2)                                  Includesfederal funds sold.

24

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**Applicationof 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.

*Allowance for Loan and Lease Losses*– GAAP requires the Company to set aside reserves or maintain an allowanceagainst probable loan and lease losses in the loan and lease portfolio.  Management must develop a consistent andsystematic approach to estimate the appropriate balances that will cover theprobable losses.  Due to the uncertaintyof future events, the approach includes a process that may differ significantlyfrom other methodologies and still produce an estimate that is in accordancewith GAAP.

Theallowance is compiled by utilizing the Company’s loan and lease risk ratingsystem, which is structured to identify weaknesses in the loan and leaseportfolio.  The risk rating system hasevolved to a process whereby management believes the system will properlyidentify the credit risk associated with the loan and lease portfolio.  Due to the stratification of loans and leasesfor the allowance calculation, the estimate of the allowance for loan and leaselosses could change materially if the loan and lease risk rating system wouldnot properly identify the strength of a large or a few large loan and leasecustomers.  Although management believesthat it uses the best information available to determine the allowance,unforeseen market or borrower conditions could result in adjustments and netearnings being significantly affected if circumstances differ substantiallyfrom the assumptions used in making the final determinations.

*Mortgage Servicing Rights (“MSR”)* –The Company records a servicing asset for contractually separated servicingfrom the underlying mortgage loans.   Theasset is initially recorded at fair value and represents an intangible assetbacked by an income stream from the serviced assets.  The asset is amortized in proportion to andover the period of estimated net servicing income.

Ateach balance sheet date, the MSRs are analyzed for impairment, which occurswhen the fair value of the MSRs is lower than the amortized book value. TheCompany’s MSRs are primarily servicing rights acquired on South Dakota HousingDevelopment Authority first time homebuyers program.  Due to the lack of quoted markets for theCompany’s servicing portfolio, the Company estimates the fair value of the MSRsusing present value of future cash flow analysis.  If the analysis produces a fair value that isgreater than or equal to the amortized book value of the MSRs, no impairment isrecognized.  If the fair value is lessthan the book value, an expense for the difference is charged to earnings byinitiating a MSR valuation account.  Ifthe Company determines this impairment is temporary, any future changes in fairvalue are recorded as a change in earnings and the valuation.  If the Company determines the impairment tobe permanent, the valuation is written off against the MSRs, which results in anew amortized balance.

TheCompany has included MSRs as a critical accounting policy because the use ofestimates for determining fair value using present value concepts may produceresults which may significantly differ from other fair value analysis perhapseven to the point of recording impairment. The risk to earnings is when the underlying mortgages payoffsignificantly faster than the assumptions used in the previously recordedamortization.  Estimating future cashflows on the underlying mortgages is a difficult analysis and requires judgmentbased on the best information available. The Company looks at alternative assumptions and projections whenpreparing a reasonable and supportable analysis.  Based on the Company’s quarterly analysis ofMSRs, there was no impairment to the MSRs at March 31, 2007.

25

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*Self-Insurance*- The Company has a self-insured health plan for itsemployees up to certain limits.  Tomitigate a portion of these risks, the Company has a stop-loss insurance policythrough a commercial insurance carrier for coverage in excess of $65,000 perindividual occurrence with a maximum aggregate limitation of $2.0 million.  The estimate of self-insurance liability isbased upon known claims and an estimate of incurred, but not reported (“IBNR”)claims.  IBNR claims are estimated usinghistorical claims lag information received by a third party claimsadministrator.  Due to the uncertainty ofhealth claims, the approach includes a process that may differ significantlyfrom other methodologies and still produce an estimate that is in accordancewith GAAP.  Although management believesthat it uses the best information available to determine the accrual,unforeseen health claims could result in adjustments to the accrual.  These adjustments could significantly affectnet earnings if circumstances differ substantially from the assumptions used inestimating the accrual.

**AssetQuality and Potential Problem Loans and Leases**

Nonperformingassets (nonaccrual loans and leases, accruing loans and leases delinquent morethan 90 days and foreclosed assets) increased to $4.1 million at March 31, 2007from $3.9 million at June 30, 2006, an increase of $218,000, or 5.6%.  Nonaccruing loans and leases increased$988,000 to $2.0 million at March 31, 2007 from $1.0 million at June 30,2006.  In addition, the ratio ofnonperforming assets to total assets, which is one indicator of credit riskexposure, increased to 0.41% at March 31, 2007 from 0.40% at June 30, 2006.

Nonaccruingloans and leases increased 95.5%, or $988,000, to $2.0 million at March 31,2007 compared to $1.0 million at June 30, 2006. Included in nonaccruing loans and leases at March 31, 2007 were fourloans totaling $203,000 secured by one- to four-family real estate, one loantotaling $25,000 secured by commercial real estate loans, twelve loans totaling$1.2 million secured by commercial business, two leases totaling $139,000 and41 consumer loans totaling $441,000.

Therisk rating system in place is designed to identify and manage thenonperforming loans and leases. Commercial and agricultural loans and equipment finance leases will havespecific reserve allocations based on collateral values or based on the presentvalue of expected cash flows if the loans and leases are deemed impaired.  Loans and leases that are not performing donot necessarily result in a loss.

Asof March 31, 2007, the Company had $570,000 of foreclosed assets.  The balance of foreclosed assets at March 31,2007 consisted of $163,000 of single-family collateral owned, $286,000 ofequipment finance leases and $121,000 of consumer collateral owned.

AtMarch 31, 2007, the Company had designated$19.5 million of its assets as special mention and classified $4.7 million ofits assets that management has determined need to be closely monitoredbecause of possible credit problems of the borrowers or the cash flows of thesecured properties.  At March 31, 2007the Company had $22.2 million in multi-family, commercial business, commercialreal estate and agricultural participation loans purchased, of which $243,000were classified as of March 31, 2007. These loans and leases were considered in determining the adequacy ofthe allowance for loan and lease losses. The allowance for loan and lease losses is established based onmanagement’s evaluation of the risks probable in the loan and lease portfolioand changes in the nature and volume of loan and lease activity.  Such evaluation, which includes a review ofall loans and leases for which full collectibility may not be reasonablyassured, considers the estimated fair market value of the underlyingcollateral, present value of expected principal and interest payments, economicconditions, historical loss experience and other factors that warrantrecognition in providing for an adequate loan and lease loss allowance.

Althoughthe Company’s management believes that the March 31, 2007 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, 2007 will be adequate in the future.

26

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Inaccordance with the Company’s internal classification of assets policy, managementevaluates the loan and lease portfolio on a monthly basis to identify losspotential and determines the adequacy of the allowance for loan and leaselosses quarterly.  Loans and leases areplaced on nonaccrual status when the collection of principal and/or interestbecome doubtful.  Foreclosed assetsinclude assets acquired in settlement of loans and leases.  The following table sets forth the amountsand categories of the Company’s nonperforming assets for the periods indicated.
|                                                                            | ** ** | **Nonperforming Assets As Of** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                 | ** ** | **March 31,**                            | ** ** | **June 30,** | ** ** |
| ** **                                                                 | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| ** **                                                                 | ** ** | **(Dollars in Thousands)**          | ** ** |
| Nonaccruing  loans and leases:                                             |       |                                          |       |   |   |
| One- to four-family                                                        |       | $                                             | 203        |   | $ | 371 |   |
| Commercial real estate                                                     |       | 25                                            |       | — |   |
| Commercial business                                                        |       | 1,215                                         |       | 341 |   |
| Equipment finance leases                                                   |       | 139                                           |       | 36 |   |
| Consumer (1)                                                               |       | 441                                           |       | 287 |   |
| Agricultural                                                               |       | —                                        |       | — |   |
| Total                                                                      |       | 2,023                                         |       | 1,035 |   |
|                                                                       |       |                                          |       |   |   |
| Accruing loans  and leases delinquent more than 90 days:                   |       |                                          |       |   |   |
| One- to four-family                                                        |       | 224                                           |       | 358 |   |
| Commercial real estate                                                     |       | —                                        |       | 308 |   |
| Commercial business                                                        |       | 131                                           |       | 814 |   |
| Equipment finance leases                                                   |       | 348                                           |       | 302 |   |
| Consumer (1)                                                               |       | 8                                             |       | 7 |   |
| Agricultural                                                               |       | 806                                           |       | 541 |   |
| Total                                                                      |       | 1,517                                         |       | 2,330 |   |
|                                                                       |       |                                          |       |   |   |
| Foreclosed  assets: (2)                                                    |       |                                          |       |   |   |
| One- to four-family                                                        |       | 163                                           |       | 96 |   |
| Equipment finance leases                                                   |       | 286                                           |       | 254 |   |
| Consumer (1)                                                               |       | 121                                           |       | 177 |   |
| Total                                                                      |       | 570                                           |       | 527 |   |
|                                                                       |       |                                          |       |   |   |
| Total  nonperforming assets                                                |       | $                                             | 4,110      |   | $ | 3,892 |   |
|                                                                       |       |                                          |       |   |   |
| Ratio of  nonperforming assets to total assets                             |       | 0.41                                          | %          | 0.40 | % |
|                                                                       |       |                                          |       |   |   |
| Ratio of nonperforming  loans and leases to total loans and leases (3) (4) |       | 0.46                                          | %          | 0.46 | % |

 

----

(1)                                  Includes mobile home loans.

(2)                                  Total foreclosed assets do not includeland or other real estate owned held for sale.

(3)                                  Nonperforming loans and leases includeboth nonaccruing and accruing loans and leases delinquent more than 90 days.

(4)                                  Total loans and leases include loans heldfor sale.

27

----

The followingtable sets forth information with respect to activity in the Company’sallowance for loan and lease lossesduring the periods indicated.
|                                                                                                          | ** ** | **Nine Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                               | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| ** **                                                                                               | ** ** | **(Dollars in Thousands)**                | ** ** |
|                                                                                                     |       |                                                |       |   |   |
| Balance at  beginning of period                                                                          |       | $                                                   | 5,657      |   | $ | 5,076 |   |
| Charge-offs:                                                                                             |       |                                                |       |   |   |
| One- to four-family                                                                                      |       | (12                                                 | )          | (1 | ) |
| Commercial business                                                                                      |       | (216                                                | )          | (3,290 | ) |
| Equipment finance leases                                                                                 |       | (133                                                | )          | (17 | ) |
| Consumer (1)                                                                                             |       | (527                                                | )          | (764 | ) |
| Agriculture                                                                                              |       | (31                                                 | )          | (377 | ) |
| Total charge-offs                                                                                        |       | (919                                                | )          | (4,449 | ) |
|                                                                                                     |       |                                                |       |   |   |
| Recoveries:                                                                                              |       |                                                |       |   |   |
| One- to four-family                                                                                      |       | 3                                                   |       | 1 |   |
| Commercial business                                                                                      |       | —                                              |       | 14 |   |
| Equipment finance leases                                                                                 |       | —                                              |       | 40 |   |
| Consumer (1)                                                                                             |       | 171                                                 |       | 177 |   |
| Agriculture                                                                                              |       | 80                                                  |       | — |   |
| Total recoveries                                                                                         |       | 254                                                 |       | 232 |   |
|                                                                                                     |       |                                                |       |   |   |
| Net (charge-offs)                                                                                        |       | (665                                                | )          | (4,217 | ) |
|                                                                                                     |       |                                                |       |   |   |
| Additions  charged to operations                                                                         |       | 786                                                 |       | 4,510 |   |
|                                                                                                     |       |                                                |       |   |   |
| Balance at end  of period                                                                                |       | $                                                   | 5,778      |   | $ | 5,369 |   |
|                                                                                                     |       |                                                |       |   |   |
| Ratio of net  (charge-offs) during the period to average loans and leases outstanding  during the period |       | (0.09                                               | )%         | (0.61 | )% |
|                                                                                                     |       |                                                |       |   |   |
| Ratio of  allowance for loan and lease losses to total loans and leases at end of  period (2)            |       | 0.76                                                | %          | 0.76 | % |
|                                                                                                     |       |                                                |       |   |   |
| Ratio of allowance for  loan and lease losses to nonperforming loans and leases at end of period (3)     |       | 163.22                                              | %          | 116.44 | % |

 

----

(1)                                  Includes mobile home loans.

(2)                                  Total loans and leases include loans heldfor sale.

(3)                                  Nonperforming loans and leases includeboth nonaccruing and accruing loans and leases delinquent more than 90 days.

28

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Thedistribution of the Company’s allowance for loan and lease losses and impairedloss summary as required by FASB Statement No. 114, “Accounting by Creditorsfor Impairment of a Loan” are summarized in the following tables.  The combination of FASB Statement No. 5“Accounting for Contingencies” and FASB Statement No. 114 calculations comprisethe Company’s allowance for loan and lease losses.

|                                        | ** ** | **Allowance**                        | ** ** | **Impaired Loan**              | ** ** | **Allowance**              | ** ** | **Impaired Loan** | ** ** |
|----------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|----------------------------|------------|------------------------|------------|
| ** **                             | ** ** | **for Loan and**           | ** ** | **Valuation**                       | ** ** | **for Loan and** | ** ** | **Valuation**          | ** ** |
| ** **                             | ** ** | **Lease Losses**                | ** ** | **Allowance**                       | ** ** | **Lease Losses**      | ** ** | **Allowance**          | ** ** |
| **Loan and Lease Type** | ** ** | **At March 31, 2007** | ** ** | **At June 30, 2006** | ** ** |
| ** **                             | ** ** | **(Dollars in Thousands)** | ** ** |
|                                   |       |                                 |       |                                |       |                       |       |                   |       |
| One- to four-family                    |       | $                                    | 211        |                                | $          | —                     |       | $                      | 193        |   | $ | — |   |
| Commercial real estate                 |       | 358                                  |       | —                              |       | 317                        |       | —                 |       |
| Multi-family real  estate              |       | 79                                   |       | —                              |       | 79                         |       | —                 |       |
| Commercial business                    |       | 2,775                                |       | —                              |       | 2,563                      |       | —                 |       |
| Equipment finance  leases              |       | 458                                  |       | —                              |       | 570                        |       | —                 |       |
| Consumer (1)                           |       | 1,215                                |       | —                              |       | 1,432                      |       | —                 |       |
| Agricultural                           |       | 682                                  |       | —                              |       | 503                        |       | —                 |       |
| Total                                  |       | $                                    | 5,778      |                                | $          | —                     |       | $                      | 5,657      |   | $ | — |   |

 

----

(1) Includesmobile home loans.

**ImpairedLoan Summary**
|                                        | ** ** | ** **                           | ** ** | ** **                           | ** ** | **Impaired**  | ** ** | ** **       | ** ** | ** **  | ** ** | **Impaired**  | ** ** |
|----------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|---------------|------------|------------------|------------|-------------|------------|---------------|------------|
| ** **                             | ** ** | **Number**                           | ** ** | ** **                           | ** ** | **Loan**      | ** ** | **Number**       | ** ** | ** **  | ** ** | **Loan**      | ** ** |
| ** **                             | ** ** | **of Loan**                     | ** ** | **Loan**                             | ** ** | **Valuation** | ** ** | **of Loan** | ** ** | **Loan**    | ** ** | **Valuation** | ** ** |
| ** **                             | ** ** | **Customers**                        | ** ** | **Balance**                          | ** ** | **Allowance** | ** ** | **Customers**    | ** ** | **Balance** | ** ** | **Allowance** | ** ** |
| **Loan and Lease Type** | ** ** | **At March 31, 2007** | ** ** | **At June 30, 2006**  | ** ** |
| ** **                             | ** ** | **(Dollars in Thousands)** | ** ** | **(Dollars in Thousands)** | ** ** |
| Commercial business                    |       | 6                                    |       | $                                    | 825        |          | —     |             | 4          |        | $          | 325           |       | — |   |
| Total                                  |       | 6                                    |       | $                                    | 825        |          | $          | —           |       | 4           |       | $             | 325        |   | $ | — |   |
|                                        |            |                                      |            |                                      |            |               |            |                  |            |             |            |               |            |  |  |  |  |

 

29

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Theallowance for loan and lease losses was $5.8 million at March 31, 2007 ascompared to $5.4 million at March 31, 2006. The ratio of the allowance for loan and lease losses to total loans andleases was 0.76% at March 31, 2007 compared to 0.76% at March 31, 2006.  The Company’s management has considerednonperforming loans and leases and potential problem loans and leases inestablishing the allowance for loan and lease losses.  The Company continues to monitor itsallowance for probable loan and lease losses and make future additions orreductions in light of the level of loans and leases in its portfolio and aseconomic conditions dictate.  Thecurrent level of the allowance for loan and lease losses is a result ofmanagement’s assessment of the risks within the portfolio based on theinformation revealed in credit reporting processes. The Company utilizes arisk-rating system on all commercial business, agricultural, construction andmulti-family and commercial real estate loans, including purchased loans andleases.  A periodic credit review isperformed on all types of loans and leases to establish the necessary reservebased on the estimated risk within the portfolio. This assessment of risk takesinto account the composition of the loan and lease portfolio, historical lossexperience for each loan and lease category, previous loan and leaseexperience, concentrations of credit, current economic conditions and otherfactors that in management’s judgment deserve recognition.

Real estate properties acquired through foreclosure are recorded at the lower ofcost or fair value (less a deduction for disposition costs).  Valuations are periodically updated by managementand a specific provision for losses on such properties is established by acharge to operations if the carrying values of the properties exceed theirestimated 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 Ended March 31,2007 and March 31, 2006**

*General*.  The Company’s net income was $1.0 million, or$0.26 for basic and $0.25 for diluted earnings per share for the three monthsended March 31, 2007, a $216,000 decrease in earnings compared to $1.3 million,or $0.32 for basic and $0.31 for diluted earnings per share for the same periodin the prior fiscal year.  For the threemonths ended March 31, 2007, the return on average equity was 6.78%, a 24.9%decrease compared to 9.03% for the same period in the prior fiscal year.  For the three months ended March 31, 2007,the return on average assets was 0.42%, a decrease of 22.2% compared to 0.54%for the same period in the prior fiscal year. As discussed in more detail below, the decreases were due to a varietyof key factors, including an increase in noninterest expense of $1.0 millionoffset by a decrease in provision for losses on loans of $384,000 and anincrease in noninterest income of $536,000.

*Interest, Dividend and Loan Fee Income.*  Interest, dividend and loan fee income was$15.4 million for the three months ended March 31, 2007 as compared to $13.5million for the same period in the prior fiscal year, an increase of $1.9million or 14.1%.  A $962,000 increase ininterest, dividend and loan fee income was due to a 8.1% increase in theaverage volume of loans and leases receivable and a $644,000 increase ininterest, dividend and loan fee income was the result of an increase in theaverage yield on loans and leases receivable from 6.84% for the three monthsended March 31, 2006 to 7.18% for the three months ended March 31, 2007.  The average yield on total interest-earningassets was 6.77% for the three months ended March 31, 2007 as compared to 6.38%for the same period in the prior fiscal year.

*Interest Expense.*  Interest expense was $9.0 million for thethree months ended March 31, 2007 as compared to $7.1 million for the sameperiod in the prior fiscal year, an increase of $1.9 million or 26.4%.  A $1.4 million increase in interest expensewas the result of an increase in average rate paid on interest-bearing depositsfrom 3.35% for the three months ended March 31, 2006 to 4.20% for the threemonths ended March 31, 2007.  An increaseof $1.4 million in interest expense was the result of an increase in theaverage rate paid on total interest-bearing liabilities from 3.71% for thethree months ended March 31, 2006 to 4.38% for the three months ended March 31,2007.

*Net Interest Income.* TheCompany’s net interest income for the three months ended March 31, 2007increased $21,000, *or* 0.33%, to$6.4 million compared to $6.4 million for the same period in the prior fiscalyear.  The increase in net interestincome was due primarily to increases in the average yield on interest-earning assetsand average volume of interest-earning asset offset by increases in the averagerate paid on interest-bearing liabilities for the three months ended March 31,2007 compared to the same period in the prior fiscal year.  The Company’s net interest margin was 2.82%for the three months ended March 31, 2007 as compared to 3.03% for the sameperiod in the prior fiscal year.

*Provision for Losses on Loans and Leases.*The allowance for loan and leaselosses is maintained at a level which is considered by management to beadequate to absorb probable losses on existing loans and leases that may becomeuncollectible, based on an evaluation of the collectibility of loans and leasesand prior loan and lease loss experience. The evaluation takes into consideration such factors as changes in thenature 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.

Duringthe three months ended March 31, 2007, the Company recorded a provision forlosses on loans and leases of $34,000 compared to $418,000 for the three monthsended March 31, 2006, a decrease of $384,000. See “Asset Quality” for further discussion.

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*Noninterest Income.*  Noninterest income was $2.6 million for thethree months ended March 31, 2007 as compared to $2.1 million *for* the same period in the prior fiscal year, an increase of$536,000, or 25.8%.  The increase innoninterest income was primarily attributable to increases in loan servicingincome of $407,000 and fees on deposits of $203,000 for the three months endedMarch 31, 2007 as compared to the same period in the prior fiscal year.

Loanservicing income increased $407,000 from $118,000 for the three months endedMarch 31, 2006 to $525,000 for the three *months* endedMarch 31, 2007 primarily due to an increase of $410.7 million in the balancesof loans serviced by the Bank from $562.5 million at March 31, 2006 to $973.2million at March 31, 2007.

Feeson deposits increased $203,000 for the three months ended March 31, 2007compared to the same period in the prior fiscal year primarily due to anincrease of higher activity and increased service pricing.

*Noninterest Expense.*  Noninterest expense was $7.5 million for thethree months ended March 31, 2007 as compared to $6.4 million for the threemonths ended March 31, 2006, an increase of $1.0 million, or 16.3%.  The increase in noninterest expense wasprimarily due to increases in compensation and employee benefits of $724,000,occupancy and equipment of $101,000 and other noninterest expense of $142,000.

Compensationand employee benefits increased $724,000, or 17.9%, from $4.0 million for thethree months ended March 31, 2006 to $4.8 million for the three months endedMarch 31, 2007.  Specific increases inemployee compensation and benefits include $378,000 in net healthcare costswhich reflects a higher incidence of medical claims and $257,000 in variablepay related to *performance* incentives.

Occupancyand equipment expense increased $101,000 for the three months ended March 31,2007 compared to the same period in the prior fiscal year primarily due toincreases in rent expense of $33,000, building and property maintenance of$31,000 and depreciation expense of $30,000.  These increases wereprimarily attributable to several new branches opened one year or less andexisting branch renovations.

Othernoninterest expense increased $142,000 for the three months ended March 31,2007 compared to the same period in the prior fiscal year primarily due toincreases in legal expense of $87,000 and telephone expense of $47,000 offsetby a decrease in community contributions for reinvestment in the communities weserve of $50,000.

*Income tax expense.*  The Company’s income tax expense for thethree months ended March 31, 2007 increased $111,000 or 30.3% to $477,000compared to $366,000 for the same period in the prior fiscal year.  The effective tax rate was 31.6% and 22.7%for the three months ended March 31, 2007 and 2006, respectively.

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**Comparison of the Nine Months Ended March 31, 2007and March 31, 2006**

*General*.  The Company’s net income was $4.2 million, or$1.07 for basic and $1.05 for diluted earnings per share for the nine monthsended March 31, 2007, a $670,000 increase in earnings compared to $3.6 million,or $0.91 for basic and $0.89 for diluted earnings per share for the same periodin the prior fiscal year.  For the ninemonths ended March 31, 2007, the return on average equity was 9.59%, a 9.7%increase compared to 8.74% for the same period in the prior fiscal year.  For the nine months ended March 31, 2007, thereturn on average assets was 0.57%, an increase of 9.6% compared to 0.52% forthe same period in the prior fiscal year. As discussed in more detail below, the increases were due to a varietyof key factors, including a decrease in provision for losses on loans of $3.7million offset by decreases in net interest income of $229,000 and noninterestincome of $72,000 and an increase in noninterest expense of $2.3 million.

*Interest, Dividend and Loan Fee Income.*  Interest, dividend and loan fee income was$46.1 million for the nine months ended March 31, 2007 as compared to $39.1million for the same period in the prior fiscal year, an increase of $7.0million or 18.0%.  A $3.1 millionincrease in interest, dividend and loan fee income was due to a 9.0% increasein the average volume of loans and leases receivable and a $2.8 millionincrease in interest, dividend and loan fee income was the result of anincrease in the average yield on loans and leases receivable from 6.64% for thenine months ended March 31, 2006 to 7.13% for the nine months ended March 31,2007.  The average yield on totalinterest-earning assets was 6.70% for the nine months ended March 31, 2007 ascompared to 6.15% for the same period in the prior fiscal year.

*Interest Expense.*  Interest expense was $27.2 million for thenine months ended March 31, 2007 as compared to $20.0 million for the sameperiod in the prior fiscal year, an increase of $7.2 million or 36.3%.  A $5.0 million increase in interest expensewas the result of an increase in average rate paid on interest-bearing depositsfrom 3.09% for the nine months ended March 31, 2006 to 4.11% for the ninemonths ended March 31, 2007.  A $488,000increase in interest expense was the result of an increase in the average ratepaid on subordinated debentures payable to trusts increasing from 7.78% for thenine months ended March 31, 2006 to 10.12% for the nine months ended March 31,2007.  Higher interest rates and theexpensing of $290,000 of unamortized debt issuance costs relating to theredemption of Trust I trust preferred securities during the fiscal secondquarter ended December 31, 2006 increased the interest expense by$488,000.  An increase of $5.8 million ininterest expense was the result of an increase in the average rate paid ontotal interest-bearing liabilities from 3.47% for the nine months ended March31, 2006 to 4.40% for the nine months ended March 31, 2007.

*Net Interest Income.* TheCompany’s net interest income for the nine months ended March 31, 2009decreased $229,000, or 1.2%, to $18.9 million compared to $19.1 million for thesame period in the prior fiscal year. The decrease in net interest income was due primarily to increases inthe average rate paid on interest-bearing liabilities offset by increases inthe average yield on interest-earning assets and average volume ofinterest-earning assets for the nine months ended March 31, 2007 compared tothe same period in the prior fiscal year. The Company’s net interest margin was 2.74% for the nine months endedMarch 31, 2007 as compared to 3.01% for the same period in the prior fiscalyear.

*Provision for Losses on Loans and Leases.*The allowance for loan and leaselosses is maintained at a level which is considered by management to beadequate to absorb probable losses on existing loans and leases that may becomeuncollectible, based on an evaluation of the collectibility of loans and leasesand prior loan and lease loss experience. The evaluation takes into consideration such factors as changes in thenature and volume of the loan and lease portfolio, overall portfolio quality,review of specific problem loans and leases, and current economic conditionsthat may affect the borrower’s ability to pay. The allowance for loan and lease losses is established through a provisionfor losses on loans and leases charged to expense.

Duringthe nine months ended March 31, 2007, the Company recorded a provision forlosses on loans and leases of $786,000 compared to $4.5 million for the ninemonths ended March 31, 2006, a decrease of $3.7 million.  The primary factor for this decrease wasduring the second quarter of fiscal 2006, there were additional provisions tothe loan loss allowance of $3.1 million for a large impaired commercialparticipation loan, which was sold in December 2005.  See “Asset Quality” for further discussion.

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*Noninterest Income.*  Noninterest income was $10.4 million for thenine months ended March 31, 2007 as compared to $10.5 million for the sameperiod in the prior fiscal year, a decrease of $72,000, or 0.7%.  The decrease in noninterest income was primarilyattributable to one-time events in the second quarter of each of fiscal 2006and fiscal 2007.  In the second quarterof Fiscal 2007, there was a $2.8 million gain on the sale of branches.  See Note 11 of “Notes to ConsolidatedFinancial Statements.”  In the secondquarter of Fiscal 2006, there was a $3.6 million gain on a land sale.  In addition, there were increases in loanservicing income of $490,000 and fees on deposits of $365,000 for the ninemonths ended March 31, 2007 as compared to the same period in the prior fiscalyear.

Loanservicing income increased $490,000 from $805,000 for the nine months endedMarch 31, 2006 to $1.3 million for the nine months ended March 31, 2007primarily due to an increase of $410.7 million in the balances of loansserviced by the Bank from $562.5 million at March 31, 2006 to $973.2 million atMarch 31, 2007.

Feeson deposits increased $365,000 for the nine months ended March 31, 2007compared to the same period in the prior fiscal year primarily due in part to increasedhouseholds served and to increased service pricing during the second quarter offiscal 2007.

*Noninterest Expense.*  Noninterest expense was $22.1 million for thenine months ended March 31, 2007 as compared to $19.8 million for the ninemonths ended March 31, 2006, an increase of $2.3 million, or 11.5%.  The increase in noninterest expense wasprimarily due to increases in compensation and employee benefits of $843,000,advertising of $760,000, occupancy and equipment of $388,000 and other noninterestexpense of $194,000.

Compensationand employee benefits increased $843,000, or 6.7%, from $12.6 million for thenine months ended March 31, 2006 to $13.4 million for the nine months endedMarch 31, 2007.  Specific increases inemployee compensation and benefits include $372,000 in short-term compensationvariable pay and $343,000 in net healthcare costs.

Advertisingexpense increased $760,000, or 125.8%, from $604,000 for the nine months endedMarch 31, 2006 to $1.4 million for the nine months ended March 31, 2007primarily due to several deposit product package programs.

Occupancyand equipment expense increased $388,000 for the nine months ended March 31,2007 compared to the same period in the prior fiscal year primarily due toincreases in rent expense of $161,000, depreciation expense of $106,000 andbuilding and property maintenance of $58,000. These increases were primarily attributable to several new branchesopened one year or less and existing branch renovations.

Othernoninterest expense increased $194,000 for the nine months ended March 31, 2007compared to the same period in the prior fiscal year primarily due to increasesin telephone expense of $88,000 and legal expense of $72,000.

*Income tax expense.*  The Company’s income tax expense for the ninemonths ended March 31, 2007 increased $473,000 or 28.0% to $2.2 millioncompared to $1.7 million for the same period in the prior fiscal year.  The effective tax rate was 33.8% and 32.1%for the nine months ended March 31, 2007 and 2006, respectively.  The increase in the effective tax rate forthe quarter was the primarily the result of an increase in income before incometaxes of $1.1 million compared to the same period in the prior fiscal year.

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**Liquidity and Capital Resources**

TheBank’s primary sources of funds are earnings, in-market deposits, FHLB advancesand other borrowings, repayments of loan principal, mortgage-backed securitiesand callable agency securities and, to a lesser extent, sales of mortgageloans, sales and maturities of securities, out-of-market deposits andshort-term investments.  While scheduledloan payments and maturing securities are relatively predictable, deposit flowsand loan and security prepayments are more influenced by interest rates,general economic conditions and competition. The Bank attempts to price itsdeposits to meet its asset/liability objectives consistent with local marketconditions.  Excess balances are investedin overnight funds.

Liquiditymanagement is both a daily and long-term responsibility of management.  The Bank adjusts its investments in liquidassets based upon management’s assessment of (i) expected loan demand, (ii)projected loan sales, (iii) expected deposit flows, (iv) yields available oninterest-bearing deposits, and (v) the objectives of its asset/liabilitymanagement program.  Excess liquidity isinvested generally in interest-bearing overnight deposits and other short-termgovernment and agency obligations.

TheBank anticipates that it will have sufficient funds available to meet currentloan commitments.  At March 31, 2007, theBank had outstanding commitments to originate residential mortgage loans of$32.6 million and commercial business loans of $2.2 million.  In addition, the Bank had outstandingcommitments to sell residential mortgage loans of $16.3 million, commercialbusiness loans of $223,000, consumer student loans of $2.6 million andagricultural loans of $850,000. Commitments by the Bank to originate loans are not necessarily executedby the customer.  The Bank monitors theratio of commitments to funding for use in liquidity management.  At March 31, 2007, the Bank had nocommitments to purchase securities available for sale and no commitments tosell 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 an unsecured line of federal funds totaling $25.0 million with acorrespondent bank.  In addition, theCompany has a line of credit totaling $6.0 million with a correspondentbank.  There were no funds drawn oneither line of credit at March 31, 2007. Additionally, as of March 31, 2007, the Bank had $87.8 million inout-of-market certificates of deposit. The Bank may also seek other sources of contingent liquidity includingadditional federal funds purchased lines with correspondent banks and lines ofcredit with the Federal Reserve Bank.

TheCompany uses its capital resources to pay dividends to its stockholders, torepurchase Company stock pursuant to Board of Directors approved plans, tosupport organic growth, to make acquisitions, to service its debt obligationsand to provide funding for investment into the Bank of Tier 1 (core) capital.

OnMarch 31, 2007, the Company had in effect a stock buyback program in which upto 10% of the common stock of the Company outstanding on May 1, 2006 could beacquired through April 30, 2007.  As ofMarch 31, 2007, no shares of common stock had been purchased pursuant to theprogram.  In addition, the Companyapproved a new stock buyback program in which up to 10% of the common stock ofthe Company outstanding on May 1, 2007 may be acquired through April 30,2008.  See Part II, Item 2 “UnregisteredSales of Equity Securities and Use of Proceeds” of this Form 10-Q.

Savingsinstitutions insured by the Federal Deposit Insurance Corporation are requiredby the Financial Institutions Reform, Recovery and Enforcement Act of 1989 tomeet three regulatory capital requirements. If a requirement is not met, regulatory authorities may take legal oradministrative actions, including restrictions on growth or operations or, inextreme cases, seizure.  Institutions notin compliance may apply for an exemption from the requirements and submit arecapitalization plan.  At March 31,2007, the Bank met all current regulatory capital requirements.

Theminimum OTS Tier 1 (core) capital requirement for well-capitalized institutionsis 5.00% of total adjusted assets for thrifts. The Bank had Tier 1 (core) capital of 8.27% at March 31, 2007.  The minimum OTS total risk-based capitalrequirement for well-capitalized institutions is 10.00% of risk-weightedassets.  The Bank had total risk-basedcapital of 10.94% at March 31, 2007.

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**Impact ofInflation and Changing Prices**

Theunaudited consolidated financial statements and notes thereto presented in thisQuarterly Report on Form 10-Q have been prepared in accordance with GAAP, whichrequire the measurement of financial position and operating results in terms ofhistorical dollars without considering the change in the relative purchasingpower of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Bank’soperations. Unlike most industrial companies, nearly all the assets andliabilities of the Bank are monetary in nature. As a result, interest rates have a greater impact on the Bank’sperformance than do the effects of general levels of inflation.  Interest rates do not necessarily move in thesame direction or to the same extent as the prices of goods and services.

**Recent Accounting Pronouncements**

In December 2004, FASBissued SFAS No. 123R, “Share-Based Payment”, which requires all companies tomeasure compensation costs for all share-based payments (including stockoptions) at fair value.  SFAS No. 123Rprovides two alternatives for adoption: (1) a “modified prospective” method inwhich compensation cost is recognized for all awards granted subsequent to theeffective date of this statement as well as for the unvested portion of awardsoutstanding as of the effective date, and (2) a “modified retrospective” methodwhich follows the approach in the “modified prospective” method, but alsopermits entities to restate prior periods to reflect compensation costcalculated under SFAS No. 123 for pro forma amounts disclosure.  The Company adopted SFAS No. 123R, using theBlack-Scholes option-pricing model and the modified prospective methodeffective as of July 1, 2005.

In May 2005, FASB issuedSFAS No. 154, “Accounting Changes and Error Corrections”, which replaces APBOpinion No. 20 and SFAS No. 3.  SFAS No.154 requires that a voluntary change in accounting principle be appliedretrospectively with all prior period financial statements presented, unless itis impracticable to do so.  The newstandard is effective for accounting changes and correction of errors made infiscal years beginning after December 15, 2005. The Company adopted SFAS No. 154 as of July 1, 2006.

In November 2005, theFASB issued FASB Staff Position (“FSP”) No. FAS 115-1,**“The Meaning of Other-Than-TemporaryImpairment and Its Application to Certain Investments”,**which supersedes EITF No. 03-1.  This FSP provides additional guidance when aninvestment in a debt or equity security should be considered impaired and whenthat impairment should be considered other-than-temporary and recognized as aloss in earnings. Specifically, the guidance clarifies that an investor shouldrecognize an impairment loss no later than when the impairment is deemedother-than-temporary, even if a decision to sell has not been made. The FSPalso requires certain disclosures about unrealized losses that have not been recognizedas other-than-temporary impairments. The Company adopted the guidance in  FSP No. FAS 115-1 as of April 1, 2006.

In March 2006, FASBissued SFAS No. 156, “Accounting for Servicing of Financial Assets”, whichamends SFAS No. 140.  SFAS No. 156 requiresthe recognition of all separately recognized servicing assets and servicingliabilities to be initially measured at fair value utilizing the amortizationmethod or fair market value method. SFAS 156 is effective the beginning of thefirst fiscal year that begins after September 15, 2006.  Under the amortization method, an entityshall amortize the value of servicing assets or liabilities in proportion toand over the period of estimated net servicing income or net servicing loss andassess servicing assets or liabilities for impairment or increased obligationbased on fair value at each reporting date. Under the fair value method, anentity shall measure servicing assets or liabilities at fair value at eachreporting date and report changes in fair value in earnings in the period inwhich the changes occur.  The Company hasnot determined the effect the adoption of SFAS No. 156 will have on itsfinancial statements.

In June 2006, FASB issuedFASB Interpretation No. 48, (“FIN 48”) “Accounting for Uncertainty in IncomeTaxes,” an Interpretation of SFAS No. 109, “Accounting for Income Taxes.”  FIN No. 48 prescribes a recognition thresholdand measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a taxreturn.  FIN No. 48 is effective forfiscal years beginning after December 15, 2006. The Company has not determinedthe effect the adoption of FIN No. 48 will have on its consolidated financialstatements.

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In September 2006, FASBissued SFAS No. 157, “Fair Value Measurements,” which defines fair value,establishes guidelines for measuring fair value and expands disclosuresregarding fair value measurements.  SFASNo. 157 does not require any new fair value measurements but rather eliminatesinconsistencies in guidance found in various prior accountingpronouncements.  SFAS No. 157 iseffective for fiscal years beginning after November 15, 2007. The Company hasnot determined the effect the adoption of SFAS No. 157 will have on itsconsolidated financial statements.

In September 2006, FASBissued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension andOther Postretirement Plans,” which amends several prior FASB statements.  SFAS No. 158 requires the measurement and recognitionof an overfunded or underfunded status of a defined benefit postretirement planas an asset or liability.  SFAS No. 158is effective for the end of the fiscal year ending after December 15, 2006.  The Company has not determined the effect theadoption of SFAS No. 158 will have on its consolidated financial statements.

In February 2007, FASBissued SFAS No. 159, “The Fair Value Option for Financial Assets and FinancialLiabilities,” which includes an amendment to SFAS No. 115.  SFAS No. 159 provides the measurement of manyfinancial instruments and certain other items at fair value.  SFAS No. 159 is effective for fiscal yearsbeginning after November 15, 2007.  TheCompany has not determined the effect the adoption of SFAS No. 159 will have onits consolidated financial statements.

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**Item3.  Quantitative and QualitativeDisclosures About Market Risk**

TheCompany’s net income is largely dependent on its net interest income.  Net interest income is susceptible tointerest rate risk to the degree that interest-bearing liabilities with short-and medium-term maturities mature or reprice more rapidly than itsinterest-earning assets.  Wheninterest-bearing liabilities mature or reprice more quickly thaninterest-earning assets in a given period, a significant increase in marketrates of interest could adversely affect net interest income.  Similarly, when interest-earning assetsmature or reprice more quickly than interest-bearing liabilities, fallinginterest rates could result in a decrease in net income.

Inan attempt to manage its exposure to change in interest rates, managementmonitors the Company’s interest rate risk. The Company’s Asset-Liability Committee meets periodically to review theCompany’s interest rate risk position and profitability, and to recommend adjustmentsfor consideration by executive management. Management also reviews the Bank’ssecurities portfolio, formulates investment strategies, and oversees the timingand implementation of transactions to assure attainment of the Board’sobjectives in the most effective manner. In managing market risk and the asset/liability mix, the Bank has placedits emphasis on developing a portfolio in which, to the extent practicable,assets and liabilities reprice within similar periods.  Notwithstanding the Company’s interest raterisk management activities, the potential for changing interest rates is anuncertainty that can have an adverse effect on net income.  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.

Inadjusting the Company’s asset/liability position, management attempts to managethe Company’s interest rate risk while enhancing net interest margins.  At times, depending on the level of generalinterest rates, the relationship between long and short-term interest rates,market conditions and competitive factors, management may determine to increasethe Company’s interest rate risk position somewhat in order to increase its netinterest margin.

As set forth below, depending upon the volatility ofthe rate change, the change in asset or liability mix of the Company or otherfactors may produce a decrease in net interest margin in an upward moving rateenvironment even as the net portfolio value (“NPV”) estimate indicates anincrease in net value.  The conversesituation can also be expected.  Oneapproach used to quantify interest rate risk is the NPV analysis.  In essence, this analysis calculates thedifference between the present value of the liabilities and the present valueof expected cash flows from assets and off-balance sheet contracts.  The following tables set forth, at December31, 2006 (the most recent report available) and March 31, 2006, an analysis ofthe Company’s interest rate risk as measured by the estimated changes in NPVresulting from instantaneous and sustained parallel shifts in the yield curve(+300 or —200 basis points, measured in 100 basis point increments).  Management does not believe that the Companyhas experienced any material changes in its market risk position from thatdisclosed in the Company’s Annual Report on Form 10-K for Fiscal 2006 or thatthe Company’s primary market risk exposures and how those exposures weremanaged during the nine months ended March 31, 2007 changed significantly whencompared to June 30, 2006.

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 December 31, 2006” and “Selected Assetand Liability Price Tables as of March 31, 2006”.  Even if interest rates change in thedesignated amounts, there can be no assurance that the Company’s assets andliabilities would perform as set forth below.

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|                         | ** ** | **December 31, 2006**      | ** ** |
|-------------------------|------------|--------------------------------------|------------|
| **Change in**      | ** ** | **Estimated  NPV**                   | ** ** | **Estimated Increase  (Decrease) in NPV** | ** ** |
| **Interest Rates** | ** ** | **Amount**                           | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| **Basis Points**   | ** ** | **(Dollars in thousands)** | ** ** |
|                    |       |                                 |       |   |   |   |   |
| +300                    |       | $                                    | 98,526     |   | $ | (24,353 | ) | (20 | )% |
| +200                    |       | 107,462                              |       | (15,416 | ) | (13 | ) |
| +100                    |       | 115,964                              |       | (6,914 | ) | (6 | ) |
| —                  |       | 122,878                              |       | — |   | — |   |
| -100                    |       | 124,943                              |       | 2,065 |   | 2 |   |
| -200                    |       | 123,352                              |       | 473 |   | — |   |
|                         |            |                                      |            |  |  |  |  |  |  |

 

|                         | ** ** | **March 31, 2006**                   | ** ** |
|-------------------------|------------|--------------------------------------|------------|
| **Change in**      | ** ** | **Estimated  NPV**                   | ** ** | **Estimated Increase  (Decrease) in NPV** | ** ** |
| **Interest Rates** | ** ** | **Amount**                           | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| **Basis Points**   | ** ** | **(Dollars in thousands)** | ** ** |
|                    |       |                                 |       |   |   |   |   |
| +300                    |       | $                                    | 88,565     |   | $ | (23,926 | ) | (21 | )% |
| +200                    |       | 97,225                               |       | (15,266 | ) | (14 | ) |
| +100                    |       | 105,442                              |       | (7,049 | ) | (6 | ) |
| —                  |       | 112,491                              |       | — |   | — |   |
| -100                    |       | 116,496                              |       | 4,005 |   | 4 |   |
| -200                    |       | 115,172                              |       | 2,681 |   | 2 |   |
|                         |            |                                      |            |  |  |  |  |  |  |

 

Inmanaging market risk and the asset/liability mix, the Bank has placed itsemphasis on developing a portfolio in which, to the extent practicable, assetsand liabilities reprice within similar periods. The effect of this policy willgenerally be to reduce the Bank’s sensitivity to interest rate changes.  The goal of this policy is to provide arelatively consistent level of net interest income in varying interest ratecycles and to minimize the potential for significant fluctuations from periodto period.

**Item4.  Controls and Procedures**

The Company’s management hasevaluated, under the supervision and with the participation of the Company’sChairman, President and Chief Executive Officer and the Company’s ExecutiveVice President, Chief Financial Officer and Treasurer, the effectiveness of thedesign and operation of the Company’s disclosure controls and procedures, asdefined in Rule 13a-15(e), and have concluded that, as of the end of the periodcovered by this Quarterly Report, the Company’s disclosure controls andprocedures are effective for gathering, analyzing and disclosing informationthe Company is required to disclose in its periodic reports filed under theExchange Act.  There were no significantchanges in the Company’s internal control over financial reporting during theperiod covered by the Quarterly Report that materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

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**PART II  — OTHER INFORMATION**

**Item 1.**                          LegalProceedings

OnJune 26, 2006, the Company filed a $3.8 million lawsuit against MetaBank and two individuals, J. Tyler Haahrand Daniel A. Nelson, for their role in a participation loan, alleging fraud, breach offiduciary duty, conspiracy and negligent misrepresentation.  Thesedamages were the result of a failure by the lead bank to make disclosuresregarding an investigation of the commercial customer by the Iowa AttorneyGeneral at the time the Bank agreed to an extension of loan participationagreements.  The defendants denied allclaims set forth in the lawsuit and no trial date has yet been set.  Legal proceedings are currently pending inthe Second Judicial Circuit Court, Minnehaha County, South Dakota.

Inaddition, the Company, the Bank and each of their subsidiariesare, from time to time, involved as plaintiff or defendant in various legalactions arising in the normal course of their businesses.  While the ultimate outcome of any suchproceedings cannot be predicted with certainty, it is generally the opinion ofmanagement, after consultation with counsel representing the Bank and theCompany in any such proceedings, that the resolution of any such proceedingsshould not have a material effect on the Company’s consolidated financialposition or results of operations.  TheCompany, the Bank and each of their subsidiaries are not aware of any legalactions or other proceedings contemplated by governmental authorities outsideof the normal course of business.

**Item 1A.**                 Risk Factors

There have been no material changes from the riskfactors disclosed in Part 1, Item 1A “Risk Factors” in the Company’s AnnualReport on Form 10-K for Fiscal 2006.

**Item 2.**                          UnregisteredSales of Equity Securities and Use of Proceeds

The followingtable sets forth the purchases by the Company of its common stock during thequarterly period ended March 31, 2007.

|                        | ** ** | **Total**          | ** ** | ** **          | ** ** | **Total Number**                  | ** ** | **Maximum Number of**        | ** ** |
|------------------------|------------|--------------------|------------|---------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **             | ** ** | **Number**         | ** ** | **Average**         | ** ** | **of Shares Purchased**      | ** ** | **Shares that May Yet** | ** ** |
| ** **             | ** ** | **of Shares** | ** ** | **Price Paid** | ** ** | **as Part of Publicly** | ** ** | **Be Purchased Under**       | ** ** |
| **Period**             | ** ** | **Purchased**      | ** ** | **per Share**  | ** ** | **Announced Programs**            | ** ** | **the Current Program**      | ** ** |
| January 1 - 31,  2007  |       | 0                  |       | $                   | 0.00       |                                   | 0          |                                   | 394,035    |   |
| February 1 - 28,  2007 |       | 0                  |       | $                   | 0.00       |                                   | 0          |                                   | 394,035    |   |
| March 1 - 31,  2007    |       | 0                  |       | $                   | 0.00       |                                   | 0          |                                   | 394,035    |   |
|                   |       |               |       |                |       |                                   |       |                                   |       |
| 3rd Quarter  Total     |       | 0                  |       | $                   | 0.00       |                                   | 0          |                                   |       |   |

 

TheCompany currently has in effect a stock buyback program, which was publiclyannounced on April 24, 2006 and pursuant to which up to 10% of the common stockof the Company that was outstanding on May 1, 2006, which equals 394,035shares, may be acquired through April 30, 2007. As of March 31, 2007, no shares of common stock have been purchasedpursuant to the program.

TheCompany approved a new stock buyback program effective as of May 1, 2007,which was publicly announced on April 30, 2007, in which up to 10% of thecommon stock of the Company outstanding on May 1, 2007, which equals399,141 shares, may be acquired through April 30, 2008.

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**Item6.            ***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 |

 

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**HF FINANCIAL GROUP**

**FORM 10-QSIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|          |         |     |                                           | HF Financial  Corp. |
|----------|--------------|----------|------------------------------------------------|---------------------|
| * * | * *     | * * | * *                                       | * *            |
|     |         |     |                                           | (Registrant)        |
|     |         |     |                                           |
|     |         |     |                                           |
| Date:    | May 11, 2007 | * * |                                           | By:                 | */s/*Curtis  L. Hage |
|     |         |     | Curtis L. Hage,  Chairman, President           |
|     |         |     | And Chief  Executive Officer                   |
|     |         |     | (Principal  Executive Officer)                 |
|     |         |     |                                           |
| Date:    | May 11, 2007 | * * | By:                                            |                | */s/*Darrel L. Posegate |
|     |         |     | Darrel L.  Posegate, Executive Vice President, |
|     |         |     | Chief Financial  Officer and Treasurer         |
|     |         |     | (Principal  Financial and Accounting Officer)  |
|          |              |          |                                                |                     |  |  |  |

 

42

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**Indexto Exhibits**
| Exhibit Number | ** ** | ** **                                                                                                                                   |
|----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|
| ** **     | ** ** | ** **                                                                                                                                   |
| 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 |

 

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