**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C.  20549**

 

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**FORM 10-Q**

 

**ý****      QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE**

**SECURITIES EXCHANGE ACT OF 1934**

 

**For theQuarterly Period ended March 31, 2005**

** **

**CommissionFile Number: 0-19972**

 

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**HF FINANCIAL CORP.**

(Exact name of registrant as specified in its charter.)

 
| **Delaware**                                                     | ** ** | **46-0418532**                           |
|------------------------------------------------------------------|------------|------------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification Number) |
|                                                             |       |                                     |
| **225 South Main Avenue,  Sioux Falls, SD**                      | ** ** | **57104**                                |
| (Address of principal  executive office)                         |       | (ZIP Code)                               |
|                                                             |       |                                     |

 

**(605)333-7556**

(Registrant’s telephone number, including area code)

 

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

 

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

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

 

As of May 6, 2005there were 3,525,184 issued and outstanding shares of the Registrant’s CommonStock, with $.01 par value.

 

 

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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, 2005 and June 30, 2004    |   |
|                                          |                                                                                                 |   |
|                                          | Consolidated  Statements of Income for the  Three and Nine Months Ended March 31, 2005 and 2004 |   |
|                                          |                                                                                                 |   |
|                                          | Consolidated  Statements of Cash Flows for the  Nine Months Ended March 31, 2005 and 2004       |   |
|                                          |                                                                                                 |   |
|                                          | 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  2.                                      | Unregistered  Sales of Equity Securities and Use of Proceeds                                         |   |
|                                          |                                                                                                 |   |
| Item 3.                                       | Defaults upon  Senior Securities                                                                     |   |
|                                          |                                                                                                 |   |
| Item  4.                                      | Submission  of Matters to a Vote of Security Holders                                                 |   |
|                                          |                                                                                                 |   |
| Item 5.                                       | Other Information                                                                                    |   |
|                                          |                                                                                                 |   |
| Item 6.                                       | Exhibits                                                                                             |   |
|                                          |                                                                                                 |   |
| Form 10-Q                                | Signature Page                                                                                       |   |

 

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**PART I - FINANCIAL INFORMATION**

 

**Item1.****             FinancialStatements**

** **

**HFFINANCIAL CORP. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF FINANCIAL CONDITION**

**(Dollarsin Thousands)**

 
| ** **                                                                                                                                                      | ** ** | **March 31, 2005** | ** ** | **June 30, 2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                                                                                                                                      | ** ** | **(Unaudited)**         | ** ** | **(Audited)**          | ** ** |
| ** **                                                                                                                                                      |       |                    |       |                   |       |
| **ASSETS**                                                                                                                                                      |       |                    |       |                   |       |
| Cash  and cash equivalents                                                                                                                                      |       | $                       | 22,912     |                   | $          | 20,474 |   |
| Securities  available for sale                                                                                                                                  |       | 127,703                 |       | 122,715                |       |
| Federal  Home Loan Bank stock                                                                                                                                   |       | 5,629                   |       | 5,469                  |       |
| Loans  held for sale                                                                                                                                            |       | 7,773                   |       | 10,351                 |       |
|                                                                                                                                                            |       |                    |       |                   |       |
| Loans  and leases receivable                                                                                                                                    |       | 645,939                 |       | 644,551                |       |
| Allowance  for loan and lease losses                                                                                                                            |       | (3,339                  | )          | (3,605                 | )          |
| Net  loans and leases receivable                                                                                                                                |       | 642,600                 |       | 640,946                |       |
|                                                                                                                                                            |       |                    |       |                   |       |
| Accrued  interest receivable                                                                                                                                    |       | 4,439                   |       | 4,056                  |       |
| Office  properties and equipment, net of accumulated depreciation                                                                                               |       | 12,671                  |       | 12,555                 |       |
| Foreclosed real estate  and other properties                                                                                                                    |       | 1,570                   |       | 1,689                  |       |
| Cash  value of life insurance                                                                                                                                   |       | 12,412                  |       | 12,051                 |       |
| Servicing  rights                                                                                                                                               |       | 5,158                   |       | 4,620                  |       |
| Goodwill,  net                                                                                                                                                  |       | 4,951                   |       | 4,951                  |       |
| Other  assets                                                                                                                                                   |       | 6,192                   |       | 7,193                  |       |
| Total  assets                                                                                                                                                   |       | $                       | 854,010    |                   | $          | 847,070 |   |
|                                                                                                                                                            |       |                    |       |                   |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                   |       |                    |       |                   |       |
| **LIABILITIES**                                                                                                                                                 |       |                    |       |                   |       |
| Deposits                                                                                                                                                        |       | $                       | 650,728    |                   | $          | 658,719 |   |
| Advances  from Federal Home Loan Bank and other borrowings                                                                                                      |       | 104,210                 |       | 93,750                 |       |
| Subordinated  debentures payable to trusts                                                                                                                      |       | 27,837                  |       | 27,837                 |       |
| Advances  by borrowers for taxes and insurance                                                                                                                  |       | 8,558                   |       | 6,391                  |       |
| Accrued  expenses and other liabilities                                                                                                                         |       | 8,775                   |       | 8,724                  |       |
| Total  liabilities                                                                                                                                              |       | 800,108                 |       | 795,421                |       |
|                                                                                                                                                            |       |                    |       |                   |       |
| **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, 5,438,891 and 5,347,686  shares issued at March 31, 2005 and June 30, 2004, respectively |       | 54                      |       | 53                     |       |
| Common  stock subscribed for but not issued, 40,244 shares at June 30, 2004                                                                                |       | —                  |       | 698                    |       |
| Additional  paid-in capital                                                                                                                                     |       | 18,905                  |       | 17,680                 |       |
| Retained  earnings, substantially restricted                                                                                                                    |       | 64,942                  |       | 61,653                 |       |
| Deferred  compensation                                                                                                                                          |       | (938                    | )          | (1,147                 | )          |
| Accumulated  other comprehensive income (loss), net of related deferred tax effect                                                                              |       | (1,093                  | )          | (1,327                 | )          |
| Less  cost of treasury stock, 1,924,936 and 1,815,036 shares at March 31, 2005  and June 30, 2004, respectively                                       |       | (27,968                 | )          | (25,961                | )          |
| Total  stockholders’ equity                                                                                                                                |       | 53,902                  |       | 51,649                 |       |
| Total  liabilities and stockholders’ equity                                                                                                                |       | $                       | 854,010    |                   | $          | 847,070 |   |

 

*Seeaccompanying notes to unaudited consolidated financial statements.*

 

1

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**HFFINANCIAL CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OFINCOME**

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

 
| ** **                                                              | ** ** | **Three Months Ended  March 31,** | ** ** | **Nine Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|
| ** **                                                              | ** ** | **2005**                               | ** ** | **2004**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                    |       |                                   |       |                                  |       |   |   |   |   |
| Interest,  dividend and loan fee income:                                |       |                                   |       |                                  |       |   |   |   |   |
| Loans  and leases receivable                                            |       | $                                      | 9,882      |                                  | $          | 8,927 |   | $ | 29,820 |   | $ | 27,645 |   |
| Investment  securities and interest-earning deposits                    |       | 1,108                                  |       | 910                                   |       | 3,109 |   | 2,320 |   |
|                                                                    |       | 10,990                                 |       | 9,837                                 |       | 32,929 |   | 29,965 |   |
| Interest  expense:                                                      |       |                                   |       |                                  |       |   |   |   |   |
| Deposits                                                                |       | 3,259                                  |       | 2,503                                 |       | 8,971 |   | 7,576 |   |
| Advances  from Federal Home Loan Bank and other borrowings              |       | 1,449                                  |       | 1,163                                 |       | 4,332 |   | 3,729 |   |
|                                                                    |       | 4,708                                  |       | 3,666                                 |       | 13,303 |   | 11,305 |   |
| **Net interest income**                                                 |       | 6,282                                  |       | 6,171                                 |       | 19,626 |   | 18,660 |   |
| ** **                                                              |       |                                   |       |                                  |       |   |   |   |   |
| Provision  for losses on loans and leases                               |       | 129                                    |       | 607                                   |       | 504 |   | 1,678 |   |
| ** **                                                              |       |                                   |       |                                  |       |   |   |   |   |
| **Net interest income after provision for losses  on loans and leases** |       | 6,153                                  |       | 5,564                                 |       | 19,122 |   | 16,982 |   |
|                                                                    |       |                                   |       |                                  |       |   |   |   |   |
| Noninterest  income:                                                    |       |                                   |       |                                  |       |   |   |   |   |
| Fees  on deposits                                                       |       | 1,008                                  |       | 981                                   |       | 3,255 |   | 3,110 |   |
| Loan  servicing income                                                  |       | 351                                    |       | 383                                   |       | 1,132 |   | 1,221 |   |
| Gain  on sale of loans, net                                             |       | 164                                    |       | 245                                   |       | 500 |   | 1,079 |   |
| Trust  income                                                           |       | 179                                    |       | 150                                   |       | 510 |   | 409 |   |
| Gain  on sale of securities, net                                        |       | —                                 |       | —                                |       | 13 |   | 42 |   |
| Other                                                                   |       | 424                                    |       | 474                                   |       | 1,253 |   | 1,654 |   |
|                                                                    |       | 2,126                                  |       | 2,233                                 |       | 6,663 |   | 7,515 |   |
| Noninterest  expense:                                                   |       |                                   |       |                                  |       |   |   |   |   |
| Compensation  and employee benefits                                     |       | 3,924                                  |       | 4,029                                 |       | 12,051 |   | 11,880 |   |
| Occupancy  and equipment                                                |       | 766                                    |       | 795                                   |       | 2,315 |   | 2,431 |   |
| Other                                                                   |       | 1,613                                  |       | 1,476                                 |       | 4,707 |   | 4,639 |   |
|                                                                    |       | 6,303                                  |       | 6,300                                 |       | 19,073 |   | 18,950 |   |
| ** **                                                              |       |                                   |       |                                  |       |   |   |   |   |
| **Income before income taxes**                                          |       | 1,976                                  |       | 1,497                                 |       | 6,712 |   | 5,547 |   |
|                                                                    |       |                                   |       |                                  |       |   |   |   |   |
| Income  tax expense                                                     |       | 632                                    |       | 524                                   |       | 2,260 |   | 1,983 |   |
| ** **                                                              |       |                                   |       |                                  |       |   |   |   |   |
| **Net income**                                                          |       | $                                      | 1,344      |                                  | $          | 973 |   | $ | 4,452 |   | $ | 3,564 |   |
| **Comprehensive income**                                                |       | $                                      | 860        |                                  | $          | 1,193 |   | $ | 4,686 |   | $ | 3,571 |   |
| **Cash dividends paid per share**                                       |       | $                                      | 0.1100     |                                  | $          | 0.1075 |   | $ | 0.3275 |   | $ | 0.3211 |   |
|                                                                    |       |                                   |       |                                  |       |   |   |   |   |
| **Earnings per share:**                                                 |       |                                   |       |                                  |       |   |   |   |   |
| Basic                                                                   |       | $                                      | 0.38       |                                  | $          | 0.27 |   | $ | 1.26 |   | $ | 1.00 |   |
| Diluted                                                                 |       | $                                      | 0.37       |                                  | $          | 0.26 |   | $ | 1.22 |   | $ | 0.97 |   |

 

*Seeaccompanying notes to unaudited consolidated financial statements.*

 

2

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**HFFINANCIAL CORP. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Dollarsin Thousands)**

**(Unaudited)**

 
| ** **                                                                                     | ** ** | **Nine Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                     | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| **Cash flows from operating activities**                                                       |       |                                 |       |   |   |
| Net  income                                                                                    |       | $                                    | 4,452      |   | $ | 3,564 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities:             |       |                                 |       |   |   |
| Provision  for losses on loans and leases                                                      |       | 504                                  |       | 1,678 |   |
| Depreciation                                                                                   |       | 1,061                                |       | 1,166 |   |
| Amortization  of discounts and premiums on securities and other                                |       | 1,124                                |       | 1,173 |   |
| Stock  based compensation                                                                      |       | 281                                  |       | 208 |   |
| Deferred  income taxes                                                                         |       | 110                                  |       | — |   |
| Loans  originated for resale                                                                   |       | (57,825                              | )          | (101,377 | ) |
| Proceeds  from the sale of loans                                                               |       | 60,903                               |       | 110,330 |   |
| (Gain)  on sale of loans, net                                                                  |       | (500                                 | )          | (1,079 | ) |
| Realized  (gain) on sale of securities, net                                                    |       | (13                                  | )          | (42 | ) |
| Losses  and provision for losses on sales of foreclosed real estate and other  properties, net |       | 24                                   |       | 106 |   |
| Loss  on disposal of office properties and equipment, net                                      |       | 6                                    |       | 1 |   |
| Change  in other assets and liabilities                                                        |       | (322                                 | )          | (1,908 | ) |
| Net  cash provided by operating activities                                                     |       | 9,805                                |       | 13,820 |   |
| ** **                                                                                     |       |                                 |       |   |   |
| **Cash flows from investing activities**                                                       |       |                                 |       |   |   |
| Loans  and leases purchased                                                                    |       | (12,801                              | )          | (2,186 | ) |
| Loans  and leases originated and held                                                          |       | (153,955                             | )          | (169,592 | ) |
| Principal  collected on loans and leases                                                       |       | 164,282                              |       | 154,162 |   |
| Securities  available for sale:                                                                |       |                                 |       |   |   |
| Sales  and maturities and repayments                                                           |       | 40,123                               |       | 29,517 |   |
| Purchases                                                                                      |       | (45,397                              | )          | (75,624 | ) |
| Purchase  of Federal Home Loan Bank stock                                                      |       | (3,541                               | )          | (2,158 | ) |
| Redemption  of Federal Home Loan Bank stock                                                    |       | 3,381                                |       | 4,446 |   |
| Proceeds  from sale of office properties and equipment                                         |       | 2                                    |       | — |   |
| Purchase  of office properties and equipment                                                   |       | (1,185                               | )          | (748 | ) |
| Purchase  of servicing rights                                                                  |       | (766                                 | )          | (716 | ) |
| Proceeds  from sale of foreclosed real estate and other properties, net                        |       | 568                                  |       | 426 |   |
| Net  cash (used in) investing activities                                                       |       | (9,289                               | )          | (62,473 | ) |
|                                                                                                |            |                                      |            |  |  |  |  |

 

*Seeaccompanying notes to unaudited consolidated financial statements.*

 

3

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**HFFINANCIAL CORP. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS (CONTINUED)**

**(Dollarsin Thousands)**

**(Unaudited)**

 
| ** **                                                                | ** ** | **Nine Months Ended March 31,** | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                | ** ** | **2005**                             | ** ** | **2004** | ** ** |
|                                                                      |       |                                 |       |   |   |
| **Cash flows from financing activities**                                  |       |                                 |       |   |   |
| Net  increase (decrease) in deposit accounts                              |       | $                                    | (7,991     | ) | $ | 21,787 |   |
| Proceeds  of advances from Federal Home Loan Bank and other borrowings    |       | 402,383                              |       | 125,650 |   |
| Payments  on advances from Federal Home Loan Bank and other borrowings    |       | (391,923                             | )          | (130,931 | ) |
| Payment  of debt issue costs                                              |       | —                               |       | (158 | ) |
| Proceeds  from issuance of preferred securities                           |       | —                               |       | 7,217 |   |
| Increase  in advances by borrowers                                        |       | 2,167                                |       | 2 |   |
| Purchase  of treasury stock                                               |       | (2,007                               | )          | (1,862 | ) |
| Proceeds  from issuance of common stock                                   |       | 456                                  |       | 634 |   |
| Cash  dividends paid                                                      |       | (1,163                               | )          | (1,150 | ) |
| Net  cash provided by financing activities                                |       | 1,922                                |       | 21,189 |   |
|                                                                      |       |                                 |       |   |   |
| Increase  (decrease) in cash and cash equivalents                         |       | 2,438                                |       | (27,464 | ) |
|                                                                      |       |                                 |       |   |   |
| Cash  and cash equivalents                                                |       |                                 |       |   |   |
| Beginning                                                                 |       | 20,474                               |       | 44,214 |   |
| Ending                                                                    |       | $                                    | 22,912     |   | $ | 16,750 |   |
|                                                                      |       |                                 |       |   |   |
| Supplemental  Disclosures of Cash Flows Information                       |       |                                 |       |   |   |
| Cash  payments for interest                                               |       | $                                    | 13,109     |   | $ | 11,380 |   |
| Cash  payments for income and franchise taxes, net                        |       | 1,326                                |       | 401 |   |
|                                                                      |       |                                 |       |   |   |
| Supplemental  Schedule of Noncash Investing and Financing Activities |       |                                 |       |   |   |
| Loans  receivable reclassified as loans held for sale                     |       | $                                    | —     |   | $ | 1,917 |   |
| Other  investments reclassified as cash and cash equivalents              |       | —                               |       | 98 |   |
| Other  investments reclassified as other assets                           |       | —                               |       | 95 |   |

 

*Seeaccompanying notes to unaudited consolidated financial statements.*

 

4

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** **

**HFFINANCIAL CORP. AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

For The Three and NineMonths Ended March 31, 2005 and 2004

(Unaudited)

 

**NOTE1.****          SELECTED ACCOUNTING POLICIES**

 

*Basis of presentation:*

 

The consolidatedfinancial information of HF Financial Corp. (the “Company”) and itswholly-owned subsidiaries included in this Quarterly Report on Form 10-Qis unaudited.  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 Form 10-Kfor the fiscal year ended June 30, 2004 (“Fiscal 2004”), 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.

 

  During the second quarter of Fiscal 2004, theCompany completed a reclassification of its deferred loan origination fees andother loan fees and costs.  This processwas done upon a fuller interpretation of Statement No. 91 as issued by theFinancial Accounting Standards Board (“FASB”) and Regulation S-X (“Reg S-X”) asissued by the Securities and Exchange Commission.   All periods presented have been revised inpresentation to reflect this reclassification and there was no change to netincome or earnings per share as a result of this reclassification.

 

The interim consolidatedfinancial statements include the accounts of the Company, its wholly-ownedsubsidiaries, Home Federal Bank (the “Bank”), HF Financial Group, Inc. (“HFGroup”) and HomeFirst Mortgage Corp. (the “Mortgage Corp.”), and the Bank’swholly-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 financial statementsreflect the deconsolidation of the subsidiary trusts of the Company, HFFinancial Capital Trust I (“Trust I”), HF Financial CapitalTrust II (“Trust II”), HF Financial Capital Trust III (“Trust III”) and HFFinancial Capital Trust IV (“Trust IV”). All intercompany balances and transaction have been eliminated inconsolidation.

 

Health claimsaccrual:  The Companyhas a self-insured health plan for its employees.  The accrual estimate for pending and incurredbut not reported health claims is based upon a pending claims lag reportprovided by a third party provider. Although management believes that it uses the best information availableto determine the accrual, unforeseen health claims could result in adjustmentsand net earnings being significantly affected if circumstances differsubstantially from the assumptions used in estimating the accrual.

 

Stock-based compensation:  The Company accounts forstock-based compensation in accordance with Accounting Principles Board (“APB”)Opinion No. 25, “*Accounting for StockIssued to Employees”,*and related Interpretations.  Accordingly, no stock-based employeecompensation cost has been recognized for grants under the fixed stock optionplans, as all options granted under those plans had an exercise price equal tothe market value of the underlying common stock on the date of grant.  These stock-based compensation plans aredescribed more fully in the Company’s Annual Report on Form 10-K forFiscal 2004, under Note 17 of “Notes to Consolidated Financial Statements.”

 

5

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

 
| ** **                                                                                                                                        | ** ** | **Three Months Ended March 31,**                 | ** ** | **Nine Months Ended March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                                        | ** ** | **2005**                                              | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                                                        | ** ** | **(Dollars in Thousands, Except for Per Share Data)** | ** ** |
|                                                                                                                                              |       |                                                  |       |                                 |       |   |   |   |   |
| Net  income, as reported                                                                                                                          |       | $                                                     | 1,344      |                                 | $          | 973 |   | $ | 4,452 |   | $ | 3,564 |   |
| Add:  Total stock-based employee compensation expense included in reported net  income, net of related tax effects                                |       | 61                                                    |       | 40                                   |       | 158 |   | 113 |   |
| Deduct:  Total stock-based employee compensation expense determined under fair value  based method for all awards, net of related tax effects (1) |       | (125                                                  | )          | (73                                  | )          | (326 | ) | (216 | ) |
| Pro  forma net income                                                                                                                             |       | $                                                     | 1,280      |                                 | $          | 940 |   | $ | 4,284 |   | $ | 3,461 |   |
| Basic  earnings per share:                                                                                                                        |       |                                                  |       |                                 |       |   |   |   |   |
| As  reported                                                                                                                                      |       | $                                                     | 0.38       |                                 | $          | 0.27 |   | $ | 1.26 |   | $ | 1.00 |   |
| Pro  forma                                                                                                                                        |       | 0.36                                                  |       | 0.26                                 |       | 1.21 |   | 0.97 |   |
| Diluted  earnings per share:                                                                                                                      |       |                                                  |       |                                 |       |   |   |   |   |
| As  reported                                                                                                                                      |       | 0.37                                                  |       | 0.26                                 |       | 1.22 |   | 0.97 |   |
| Pro  forma                                                                                                                                        |       | 0.35                                                  |       | 0.26                                 |       | 1.18 |   | 0.94 |   |

 

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(1) Includesexpense related to restricted stock reported in net income.

 

**NOTE2.****          REGULATORY CAPITAL**

 

Thefollowing table sets forth the Bank’s compliance with its minimum capitalrequirements for a well capitalized institution at March 31, 2005:

 
| ** **                                         | ** ** | **Amount**                 | ** ** | **Percent** | ** ** |
|----------------------------------------------------|------------|----------------------------|------------|-------------|------------|
| ** **                                         | ** ** | **(Dollars in Thousands)** | ** ** |
| Tier  I (core) capital (to adjusted total assets): |       |                       |       |        |       |
| Required                                           |       | $                          | 42,414     |        | 5.00       | % |
| Actual                                             |       | 72,944                     |       | 8.60        |       |
| Excess  over required                              |       | 30,530                     |       | 3.60        |       |
|                                               |       |                       |       |        |       |
| Risk-based  capital (to risk-weighted assets):     |       |                       |       |        |       |
| Required                                           |       | $                          | 67,666     |        | 10.00      | % |
| Actual                                             |       | 74,590                     |       | 11.02       |       |
| Excess  over required                              |       | 6,924                      |       | 1.02        |       |

 

**NOTE3.****          EARNINGS PER SHARE**

 

Basic earnings per shareis computed by dividing income available to common stockholders (the numerator)by the weighted-average number of common shares outstanding (the denominator)during the period.  Shares issued duringthe period and shares reacquired during the period are weighted for the portionof the period that they were outstanding. The weighted average number of basic commonshares outstanding 

 

6

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for the three month periods endedMarch 31, 2005 and 2004 was 3,539,876 and 3,565,211, respectively.  The weighted average number of basic commonshares outstanding for the nine month periods ended March 31, 2005 and2004 was 3,542,377 and 3,568,128, respectively.

 

Dilutiveearnings per share is similar to the computation of basicearnings per share except that the denominator is increased to include thenumber of additional common shares that would have been outstanding if thedilutive options outstanding had been exercised. The weighted average number ofcommon and dilutive potential common shares outstanding for the three monthperiods ended March 31, 2005 and 2004 was 3,647,763 and 3,676,998,respectively.  The weighted averagenumber of common and dilutive potential common shares outstanding for the ninemonth periods ended March 31, 2005 and 2004 was 3,635,800 and 3,676,248,respectively.

 

 **NOTE 4.****         CONSUMER AUTOMOBILE LOAN SECURITIZATION**

 

On January 31, 2003,the Bank securitized and sold motor vehicle installment loans with principalbalances totaling $50.0 million through HFSC and Home Federal AutomobileSecuritization Trust 2003-A (“Automobile Securitization Trust”).  As part of the sales transaction, the Bankretains servicing responsibilities.  Inaddition, the Bank retains the rights to cash flows remaining after investorsin the Automobile Securitization Trust have received their contractual paymentsand has pledged a $1.5 million reserve fund to the Automobile SecuritizationTrust.  These retained interests aresubordinated to investors’ interests. The investors and Automobile Securitization Trust have no recourse tothe Bank’s other assets for failure of debtors to pay when due.  The pass through rate to investors is 2.65%.

 

The gain recognized onthe sale of these loans was determined by allocating the carrying amount of theloans between the loans sold and the interests retained.  The Bank determined that 50 basis points ofthe 100 basis points servicing contract represented was excess servicing andwas capitalized as part of the transaction utilizing a market discount rate of10.0%.  This asset is amortized inproportion to, and over the period of, estimated net servicing income.

 

The Company has the option to execute a cleanup callwhen the total outstanding balance is at 10% or less of the original poolbalance, or $5.0 million.  Based onmanagement’s estimates, this cleanup call could be executed in the first quarterof the fiscal year ended June 30, 2006.

 

Key economic assumptionsused and the sensitivity of fair value of the retained interest as of March 31,2005 are as follows:

 
| ** **                                  | ** ** | **Retained  Interest**     | ** ** | **Servicing  Rights** | ** ** |
|---------------------------------------------|------------|----------------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **(Dollars in Thousands)** | ** ** |
|                                        |       |                       |       |                  |       |
| Fair  Value                                 |       | $                          | 1,693      |                  | $          | 23 |   |
| Weighted  average life (in years)           |       | 2.05                       |       | 2.05                  |       |
| Prepayment  speed (ABS annual rate):        |       | 20.40                      | %          | 20.40                 | %          |
| Impact  on fair value of 10% adverse change |       | $                          | (7         | )                     | $          | (3 | ) |
| Impact  on fair value of 20% adverse change |       | (15                        | )          | (5                    | )          |
| Credit  losses (annual rate):               |       | 1.13                       | %          | 1.13                  | %          |
| Impact  on fair value of 10% adverse change |       | $                          | (6         | )                     | $          | — |   |
| Impact  on fair value of 20% adverse change |       | (12                        | )          | —                |       |
| Discount  rate:                             |       | 7.69                       | %          | 10.00                 | %          |
| Impact  on fair value of 10% adverse change |       | $                          | (8         | )                     | $          |  — |   |
| Impact  on fair value of 20% adverse change |       | (16                        | )          | —                |       |

 

7

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

 

**NOTE 5.****                              INVESTMENTSIN SECURITIES**

 

The amortized cost and fairvalues of investments in securities, all of which are classified as availablefor sale according to management’s intent, are as follows:

 
| ** **                  | ** ** | **March 31, 2005**    | ** ** |
|-----------------------------|------------|----------------------------|------------|
| ** **                  | ** ** | **Amortized  Cost**        | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  (Losses)** | ** ** | **Fair  Value** | ** ** |
| ** **                  | ** ** | **(Dollars in Thousands)** | ** ** |
|                        |       |                       |       |   |   |   |   |   |   |
| Debt  securities:           |       |                       |       |   |   |   |   |   |   |
| U.S.  government agencies   |       | $                          | 5,000      |   | $ | — |   | $ | (59 | ) | $ | 4,941 |   |
| Federal  Home Loan Bank     |       | 1,500                      |       | — |   | (18 | ) | 1,482 |   |
| Municipal  bonds            |       | 2,650                      |       | 1 |   | (18 | ) | 2,633 |   |
| Preferred  Term Securities  |       | 9,000                      |       | 57 |   | — |   | 9,057 |   |
| Mortgage-backed  securities |       | 111,289                    |       | 14 |   | (1,766 | ) | 109,537 |   |
|                        |       | 129,439                    |       | 72 |   | (1,861 | ) | 127,650 |   |
| Equity  securities:         |       |                       |       |   |   |   |   |   |   |
| FNMA                        |       | 8                          |       | 14 |   | — |   | 22 |   |
| Federal  Ag Mortgage        |       | 7                          |       | 1 |   | (2 | ) | 6 |   |
| Other  Investments          |       | 25                         |       | — |   | — |   | 25 |   |
|                        |       | 40                         |       | 15 |   | (2 | ) | 53 |   |
|                        |       | $                          | 129,479    |   | $ | 87 |   | $ | (1,863 | ) | $ | 127,703 |   |
|                             |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                  | ** ** | **March 31, 2004**    | ** ** |
|-----------------------------|------------|----------------------------|------------|
| ** **                  | ** ** | **Amortized  Cost**        | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  (Losses)** | ** ** | **Fair  Value** | ** ** |
| ** **                  | ** ** | **(Dollars in Thousands)** | ** ** |
|                        |       |                       |       |   |   |   |   |   |   |
| Debt  securities:           |       |                       |       |   |   |   |   |   |   |
| U.S.  government agencies   |       | $                          | 2,998      |   | $ | 46 |   | $ | — |   | $ | 3,044 |   |
| Federal  Home Loan Bank     |       | 1,000                      |       | 50 |   | — |   | 1,050 |   |
| Municipal  bonds            |       | 4,483                      |       | 49 |   | (1 | ) | 4,531 |   |
| Preferred  Term Securities  |       | 9,000                      |       | 34 |   | — |   | 9,034 |   |
| Mortgage-backed  securities |       | 116,314                    |       | 163 |   | (461 | ) | 116,016 |   |
|                        |       | 133,795                    |       | 342 |   | (462 | ) | 133,675 |   |
| Equity  securities:         |       |                       |       |   |   |   |   |   |   |
| FNMA                        |       | 8                          |       | — |   | (1 | ) | 7 |   |
| Federal  Ag Mortgage        |       | 7                          |       | 1 |   | — |   | 8 |   |
| Other  Investments          |       | —                     |       | — |   | — |   | — |   |
|                        |       | 15                         |       | 1 |   | (1 | ) | 15 |   |
|                        |       | $                          | 133,810    |   | $ | 343 |   | $ | (463 | ) | $ | 133,690 |   |

 

8

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The following table presents the fair value and age of gross unrealizedlosses by investment category at March 31, 2005 in accordance withEmerging Issues Task Force Issue No. 03-1, “*The Meaning of Other-Than-Temporary Impairment and Its Application toCertain Investments.”*

 
| ** **                  | ** ** | **Less than 12 Months** | ** ** | **12 Months or More**           | ** ** | **Total**                  | ** ** |
|-----------------------------|------------|-------------------------|------------|---------------------------------|------------|----------------------------|------------|
| ** **                  | ** ** | **Fair  Value**         | ** ** | **Gross  Unrealized  (Losses)** | ** ** | **Fair  Value**            | ** ** | **Gross  Unrealized  (Losses)** | ** ** | **Fair  Value** | ** ** | **Gross  Unrealized  (Losses)** | ** ** |
| ** **                  | ** ** | ** **              | ** ** | ** **                      | ** ** | **(Dollars in Thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Debt  securities:           |       |                    |       |                            |       |                       |       |   |   |   |   |   |   |
| U.S.  government agencies   |       | $                       | 4,941      |                            | $          | (59                        | )          | $ | — |   | $ | — |   | $ | 4,941 |   | $ | (59 | ) |
| Federal  Home Loan Bank     |       | 1,482                   |       | (18                             | )          | —                     |       | — |   | 1,482 |   | (18 | ) |
| Municipal  bonds            |       | 2,297                   |       | (18                             | )          | —                     |       | — |   | 2,297 |   | (18 | ) |
| Equity  securities          |       | 7                       |       | (2                              | )          | —                     |       | — |   | 7 |   | (2 | ) |
| Mortgage-backed  securities |       | 76,476                  |       | (1,174                          | )          | 32,057                     |       | (592 | ) | 108,533 |   | (1,766 | ) |
|                        |       | $                       | 85,203     |                            | $          | (1,271                     | )          | $ | 32,057 |   | $ | (592 | ) | $ | 117,260 |   | $ | (1,863 | ) |

 

Management does not believe any individual unrealized losses as of March 31,2005 represent an other-than-temporaryimpairment.  The unrealized lossesreported for mortgage-backed securities relate to securities issued by theFederal National Mortgage Association (“FNMA”), the Government NationalMortgage Association and the Federal Home Loan Mortgage Corporation (“FHLMC”).  These unrealized losses are primarilyattributable to changes in interest rates and as a group were less than 1.3% ofits respective amortized cost basis.  TheCompany has the ability to hold the securities to maturity or for a timenecessary to recover the amortized cost.

 

The Companyinvests in investment securities issued by FNMA and FHLMC.  FNMA and FHLMC are government-sponsoredenterprises (“GSEs”).  GSE, as defined inthe Omnibus Budget Reconciliation Act of 1990, refers to a private corporationthat operates under a charter granted by Congress.  The majority of the members of the board ofdirectors of a GSE must be elected by the private shareholders, though some portionmay be appointed by Congress or the President. The central function of a GSE is to serve as a financial intermediary,making loans or issuing loan guarantees to borrowers or sectors identified inthe enabling legislation.  A GSE mayraise funds in a variety of ways, but in no case are the liabilities of the GSEto be backed by the full faith and credit of the federal government.  The legislation specifically states that aGSE does not have the power to tax or regulate and cannot make financialcommitments in the name of the federal government and that members of its staffare not employees of the federal government. However, management believes that GSEs are generally perceived by thecredit markets to have an implicit federal government guarantee backing itsobligations.

 

Managementcannot predict the role of GSEs in the future or how Congress would respond toaccounting or credit issues that may affect GSEs.  Management presently expects to continue toinvest in investment securities issued by FNMA and FHLMC in the normal courseof business.  If Congress would evereliminate the implicit guarantee associated with securities issued by GSEs, theoutcome would most likely be adverse to the Company.

 

9

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**NOTE6.****          SEGMENT REPORTING**

 

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

 

The management approachis used as the conceptual basis for identifying reportable segments and isbased on the way that management organizes the segments within the enterprisefor making operating decisions, allocating resources and monitoringperformance, which is primarily based on products.

 
| **Three Months Ended  March 31, 2005**                   | ** ** | **Banking**                | ** ** | **Other** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------|------------|----------------------------|------------|-----------|------------|-----------|------------|
| ** **                                                    | ** ** | **(Dollars in Thousands)** | ** ** |
|                                                          |       |                       |       |      |       |      |       |
| Net  interest income                                          |       | $                          | 7,021      |      | $          | (739      | )          | $ | 6,282 |   |
| Intersegment  interest income                                 |       | (315                       | )          | 315       |       | —    |       |
| Provision  for losses on loans and leases                     |       | (129                       | )          | —    |       | (129      | )          |
| Noninterest  income                                           |       | 2,141                      |       | (15       | )          | 2,126     |       |
| Intersegment  noninterest income                              |       | (73                        | )          | 73        |       | —    |       |
| Noninterest  expense                                          |       | (6,117                     | )          | (186      | )          | (6,303    | )          |
| Intersegment  noninterest expense                             |       | 1                          |       | (1        | )          | —    |       |
| Income  (loss) from continuing operations before income taxes |       | $                          | 2,529      |      | $          | (553      | )          | $ | 1,976 |   |
|                                                          |       |                       |       |      |       |      |       |
| Total  assets at March 31, 2005                          |       | $                          | 850,394    |      | $          | 3,616     |       | $ | 854,010 |   |

 
| **Three Months Ended  March 31, 2004**                   | ** ** | **Banking**                | ** ** | **Other** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------|------------|----------------------------|------------|-----------|------------|-----------|------------|
| ** **                                                    | ** ** | **(Dollars in Thousands)** | ** ** |
|                                                          |       |                       |       |      |       |      |       |
| Net  interest income                                          |       | $                          | 6,720      |      | $          | (549      | )          | $ | 6,171 |   |
| Intersegment  interest income                                 |       | (217                       | )          | 217       |       | —    |       |
| Provision  for losses on loans and leases                     |       | (607                       | )          | —    |       | (607      | )          |
| Noninterest  income                                           |       | 2,264                      |       | (31       | )          | 2,233     |       |
| Intersegment  noninterest income                              |       | (87                        | )          | 87        |       | —    |       |
| Noninterest  expense                                          |       | (6,075                     | )          | (225      | )          | (6,300    | )          |
| Intersegment  noninterest expense                             |       | (1                         | )          | 1         |       | —    |       |
| Income  (loss) from continuing operations before income taxes |       | $                          | 1,997      |      | $          | (500      | )          | $ | 1,497 |   |
|                                                          |       |                       |       |      |       |      |       |
| Total  assets at March 31, 2004                          |       | $                          | 820,342    |      | $          | 2,866     |       | $ | 823,208 |   |

 

10

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| **Nine Months Ended  March 31, 2005**                    | ** ** | **Banking**                | ** ** | **Other** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------|------------|----------------------------|------------|-----------|------------|-----------|------------|
| ** **                                                    | ** ** | **(Dollars in Thousands)** | ** ** |
|                                                          |       |                       |       |      |       |      |       |
| Net  interest income                                          |       | $                          | 21,663     |      | $          | (2,037    | )          | $ | 19,626 |   |
| Intersegment  interest income                                 |       | (849                       | )          | 849       |       | —    |       |
| Provision  for losses on loans and leases                     |       | (504                       | )          | —    |       | (504      | )          |
| Noninterest  income                                           |       | 6,740                      |       | (77       | )          | 6,663     |       |
| Intersegment  noninterest income                              |       | (245                       | )          | 245       |       | —    |       |
| Noninterest  expense                                          |       | (18,337                    | )          | (736      | )          | (19,073   | )          |
| Intersegment  noninterest expense                             |       | 3                          |       | (3        | )          | —    |       |
| Income  (loss) from continuing operations before income taxes |       | $                          | 8,471      |      | $          | (1,759    | )          | $ | 6,712 |   |
|                                                          |       |                       |       |      |       |      |       |
| Total  assets at March 31, 2005                          |       | $                          | 850,394    |      | $          | 3,616     |       | $ | 854,010 |   |

 
| **Nine Months Ended  March 31, 2004**                    | ** ** | **Banking**                | ** ** | **Other** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------|------------|----------------------------|------------|-----------|------------|-----------|------------|
| ** **                                                    | ** ** | **(Dollars in Thousands)** | ** ** |
|                                                          |       |                       |       |      |       |      |       |
| Net  interest income                                          |       | $                          | 20,258     |      | $          | (1,598    | )          | $ | 18,660 |   |
| Intersegment  interest income                                 |       | (621                       | )          | 621       |       | —    |       |
| Provision  for losses on loans and leases                     |       | (1,678                     | )          | —    |       | (1,678    | )          |
| Noninterest  income                                           |       | 7,552                      |       | (37       | )          | 7,515     |       |
| Intersegment  noninterest income                              |       | (275                       | )          | 275       |       | —    |       |
| Noninterest  expense                                          |       | (18,221                    | )          | (729      | )          | (18,950   | )          |
| Intersegment  noninterest expense                             |       | 3                          |       | (3        | )          | —    |       |
| Income  (loss) from continuing operations before income taxes |       | $                          | 7,018      |      | $          | (1,471    | )          | $ | 5,547 |   |
|                                                          |       |                       |       |      |       |      |       |
| Total  assets at March 31, 2004                          |       | $                          | 820,342    |      | $          | 2,866     |       | $ | 823,208 |   |

 

11

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**NOTE7.****          DEFINED BENEFIT PLAN**

 

The Company has anoncontributory (cash balance) defined benefit pension plan covering allemployees of the Company and its wholly-owned subsidiaries who have attainedthe age of 21 and have completed 1,000 hours in a plan year.  The benefits are based on 6% of each eligibleparticipant’s annual compensation, plus income earned in the accounts at a ratedetermined annually based on 30-year treasury noterates.  The Company’s funding policy isto make the minimum annual required contribution plus such amounts as theCompany may determine to be appropriate from time to time.  One hundred percent vesting occurs after fiveyears with a normal retirement age of 65, with provisions for early retirementat age 62.  Information relative to thecomponents of net periodic benefit cost for the Company’s defined benefit planis presented below:

 
| ** **                         | ** ** | **Three Months Ended  March 31,** | ** ** | **Nine Months Ended  March 31,** | ** ** |
|------------------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|
| ** **                         | ** ** | **2005**                               | ** ** | **2004**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
|                               |       |                                   |       |                                  |       |   |   |   |   |
| Service  cost                      |       | $                                      | 113,535    |                                  | $          | 107,695 |   | $ | 340,606 |   | $ | 323,087 |   |
| Interest  cost                     |       | 91,585                                 |       | 81,077                                |       | 274,754 |   | 243,231 |   |
| Expected  return on plan assets    |       | (92,629                                | )          | (60,988                               | )          | (277,887 | ) | (182,964 | ) |
| Amortization  of prior losses      |       | 8,297                                  |       | 13,681                                |       | 24,891 |   | 41,043 |   |
| Accretion  of prior service cost   |       | —                                 |       | (10,882                               | )          | — |   | (32,647 | ) |
| Amortization  of transition asset  |       | 2,908                                  |       | 2,908                                 |       | 8,723 |   | 8,723 |   |
| Total  costs recognized in expense |       | $                                      | 123,696    |                                  | $          | 133,491 |   | $ | 371,087 |   | $ | 400,473 |   |

 

The Company previouslydisclosed in its consolidated financial statements for Fiscal 2004, which areincluded in Part II, Item 8 of the Company’s Annual Report on Form 10-Kfor Fiscal 2004, that it contributed $670,000 to fund its qualified pensionplan.  During the quarter ended December 31,2004, the Company made contributions of $662,000 to fund its qualified pensionplan.  The Company anticipates noadditional contributions for this fiscal year ending June 30, 2005 (“Fiscal2005”).

 

12

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**Item 2****.****  Management’s Discussion and Analysis ofFinancial 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-lookingstatements” that deal with future results, expectations, plans andperformance.  In addition, the Company’smanagement may make forward-looking statements orally to the media, securitiesanalysts, investors or others.  Theseforward-looking statements might include one or more of the following:

 

•                  Projections of income, loss,revenues, earnings or losses per share, dividends, capital expenditures,capital structure, tax benefit or other financial items.

 

•                  Descriptions of plans or objectivesof management for future operations, products or services, transactions,investments and use of subordinated debentures payable to trusts.

 

•                  Forecasts of future economicperformance.

 

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

 

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

 

Forward-lookingstatements about the Company’s expected financial results and other plans aresubject to certain risks, uncertainties and assumptions.  These include, but are not limited to 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 or continuing claims against the Company’s self-insured health plan;the Company’s use of trust preferred securities; the ability or inability ofthe Company to successfully enter into a definitive agreement for and closeanticipated transactions; technological, computer-related or operationaldifficulties; adverse changes in securities markets; results of litigation; orother significant uncertainties.

 

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

 

13

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**Executive Summary**

 

The Company’s net incomefor the third quarter of Fiscal 2005 was $1.3 million, or $0.37 per dilutedshare, compared to $1.0 million, or $0.26 per diluted share, for the thirdquarter of Fiscal 2004.  For the firstnine months of Fiscal 2005, net income was $4.5 million, or $1.22 per dilutedshare, compared to $3.6 million, or $0.97 per diluted share, for the first ninemonths of Fiscal 2004.  Return on averageequity was 11.12% at March 31, 2005, compared to 9.40% at March 31,2004.

 

Net interest income forthe first nine months of Fiscal 2005 was $19.6 million, an increase $966,000 or5.2% over the same period a year ago.  Netinterest income increased $111,000, or 1.8%, to $6.3 million for the threemonths ended March 31, 2005 over the same period in the prior fiscalyear.  The change in net interest incomefor the three and nine months ended March 31, 2005 as compared to the sameperiod a year ago was due in part to an 8.8% increase in averageinterest-earning assets through the first nine months of Fiscal 2005 from thesame period a year ago.  The national lowrate environment experienced over the past few years, coupled with a recentflattening of the treasury yield curve caused by increased short-term rates andlagging long-term rates affected the Company’s net interest margin ratio duringthe first nine months of Fiscal 2005. The net interest margin was 3.33%, compared to 3.43% for the same perioda year ago, a decline of 10 basis points. Net interest margin was 3.28% for the quarter ended March 31, 2005as compared to 3.39% at March 31, 2004, a decrease of 11 basispoints.  Variability of the net interestmargin ratio may be affected by many aspects, including Federal Reservepolicies for short-term interest rates, competitive and economic factors andcustomer preferences for various products and services.

 

Total deposits at March 31,2005 were at $650.7 million, an increase of $7.6 million, or 1.2%, from March 31,2004.  Interest expense on these depositswas $9.0 million for the first nine months of Fiscal 2005, which is an increaseof $1.4 million, or 18.4%, over the same period a year ago.  A primary factor affecting interest expensehas been money market accounts.  Thevolume of money market accounts increased by $287,000, or 0.1%, from March 31,2004 to March 31, 2005.  Interestexpense for these accounts has increased by $1.2 million, or 67.5%, compared tothe same period in the prior fiscal year. At March 31, 2005, approximately 65% of all money market accountswere indexed with a monthly reset, tied to the 91-day Treasury bill, comparedto approximately 34% at March 31, 2004. With the actions taken by the Federal Reserve in the last year toincrease short-term interest rates, the 91-day Treasury bill has risensignificantly from 0.94% to 2.77% over the same period a year ago, an increaseof 183 basis points.

 

In April 2005, theCompany announced the renewal of its annual stock buyback program for theperiod of May 2005 through April 2006.  During the third quarter ended March 31,2005, the Company acquired 58,100 shares under its current stock buybackprogram, which expired on April 30, 2005. Through the first nine months of Fiscal 2005, the Company acquired109,900 shares under its current stock buyback program.

 

The total risk basedcapital ratio of 11.02% at March 31, 2005 is above the 10.66% at March 31,2004, an increase of 36 basis points. This places the Bank in the “well capitalized” category within Office ofThrift Supervision (“OTS”) regulation at March 31, 2005 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.  During the second and third quarters ofFiscal 2005, the Company has experienced loan payoffs primarily in multi-familyand commercial real estate.  Thesepayoffs are due to competitive factors, both in price competition and newcompetitors entering the market.

 

Credit quality of theCompany has improved over the last two years as a result of a combination ofdisciplined underwriting standards, good economic health of the region andresolution of a few significant impaired loans. Nonperforming assets at March 31, 2005 were $2.7 million incomparison to $3.9 million a 

 

14

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year ago, a decrease of $1.2million or 31.0%.  This reduction wasprimarily due to a decrease in nonaccruing loans and leases.  The ratio of nonperforming assets to totalassets declined to 0.32% at March 31, 2005, compared to 0.48% at March 31,2004.  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 analysis gives the Company a consistentand systematic methodology to determine proper levels for the allowance at agiven time. These efforts supported a decrease in the allowance for loan andlease losses to $3.3 million at March 31, 2005 compared to $3.6 million atMarch 31, 2004.

 

  Noninterest expense was $6.3 million for thequarter ended March 31, 2005, which represents no change when compared to$6.3 million for the third quarter ended March 31, 2004.  For the first nine months of Fiscal 2005,noninterest expense was $19.1 million, compared to $19.0 million a year ago, anincrease of 0.6%.  Compensation andemployee benefits expense for the first nine months of Fiscal 2005 accountedfor an increase of $171,000 from the same period a year ago.  Net healthcare costs, inclusive ofself-funded health claims, administration fees and fully-insured dentalpremiums offset by stop loss insurance receivable and employee reimbursementsfor the first nine months of Fiscal 2005 were $974,000, compared to $1.5 millionfor the same period a year ago, a decrease of $571,000 or 37.0%.

 

Noninterest income was$2.1 million for the quarter ended March 31, 2005, compared to $2.2million at March 31, 2004, a decrease of 4.8%.  For the first nine months of Fiscal 2005,noninterest income was $6.7 million, compared to $7.5 million for the sameperiod a year ago, a decrease of 11.3%. This shortfall was driven primarily by the production volume decreaseresulting in fewer gains on sale of single-family mortgage and student loans.  This was due primarily to the decrease inrefinanced mortgage activity.  Gain onsale of loans was $500,000 for the first nine months of Fiscal 2005, comparedto $1.1 million for the same a period a year ago, a decline of $579,000 or53.7%.

 

The efficiency ratio forthe quarter ended March 31, 2005 was 74.96%, which represents no changewhen compared to 74.96% at March 31, 2004. The efficiency ratio for the nine months ended March 31, 2005 was72.55%, compared to 72.40% for the same time period a year ago, an increase of15 basis points.  In addition to theaforementioned discussion on net interest margin, interest expense on the $27.8million of variable priced trust preferred securities outstanding, hasincreased to $1.2 million for the first nine months of Fiscal 2005, compared to$901,000 for the same period a year ago, an increase of $307,000.  Excluding this interest expense, theefficiency ratio would have been 69.36% for the nine months ended March 31,2005, compared to 69.99% at March 31, 2004, a decrease of 63 basis points.

 

**General**

 

The Company is afinancial services provider and, as such, has inherent risks that must bemanaged in order to achieve net income. Primary risks that affect net income include credit risk, liquidityrisk, operational risk, regulatory compliance risk and reputation risk.  The Company’s net income is derived bymanaging net interest margin, the ability to collect fees from servicesprovided, by controlling the costs of delivering services and the management ofloan and lease losses.  The primarysource of revenues comes from the net interest margin, which represents thedifference between income on interest-earning assets (i.e. loans and investmentsecurities) and expense on interest-bearing liabilities (i.e. deposits andborrowed funding).  The net interestmargin is affected by regulatory, economic and competitive factors thatinfluence interest rates, loan demand and deposit flows.  Fees earned include charges for depositservices, trust services and loan services. Personnel costs are the primary expenses required to deliver theservices to customers.  Other costsinclude occupancy and equipment and general and administrative expenses.

 

15

----

 

**Financial Condition Data**

 

At March 31, 2005,the Company had total assets of $854.0 million, an increase of $6.9 millionfrom the level at June 30, 2004. The increase in assets was due primarily to increases in securitiesavailable for sale of $5.0 million, cash and cash equivalents of $2.4 millionand net loans and leases receivable of $1.7 million offset by decreases inloans held for sale of $2.6 million and other assets of $1.0 million.  The increase in liabilities of $4.7 millionfrom June 30, 2004 to March 31, 2005 was primarily due to an increasein advances from the FHLB and other borrowings of $10.5 million offset by adecrease in deposits of $8.0 million.  Inaddition, stockholders’ equity increased $2.3 million to $53.9 million at March 31,2005 from $51.6 million at June 30, 2004 primarily due to net income of$4.5 million.

 

The increase insecurities available for sale of $5.0 million was primarily the result ofpurchases of $45.4 million exceeding sales, maturities and repayments of $40.1million.  Included in the $40.1 millionof sales, maturities and repayments was approximately $15.0 million of sales ofvariable-rate, mortgage backed securities and $22.1 million of mortgage-backedsecurities principal repayments.  The purchases of $45.4 million included variable-rate, mortgage-backedsecurities of $43.7 million.

 

The increase in cash andcash equivalents of $2.4 million was primarily due to the timing of items inclearing.

 

The increase in net loansand leases receivable of $1.7 million was due primarily to an increase in purchasesand originations over sales, amortization and repayments of principal**. **In addition, deferred fees and discounts increased by $159,000,primarily due to an increase of $109,000 in indirect automobile loans thatinclude prepaid dealer reserves.  Also, there were increases of$21,000 and $18,000 for deferred fees and discounts on commercial real estateloans and multi-family loans, respectively, reflecting early loan payoffs.

 

The decrease in loansheld for sale of $2.6 million was primarily due to mortgage loans held for saledecreasing from $10.0 million at June 30, 2004 to $5.8 million at March 31,2005.  Student loans held for saleincreased from $324,000 at June 30, 2004 to $2.0 million at March 31,2005.  During the second quarter ofFiscal 2004, the Company began classifying its student loan portfolio as heldfor sale.

 

Advances from the FHLBand other borrowings increased $10.5 million, which was primarily due to anincrease in FHLB borrowings.  Theincrease in FHLB borrowings was primarily the result of an $8.0 milliondecrease in deposits and a $1.7 million increase in net loans and leasesreceivable.

 

The $8.0 milliondecrease in deposits was due to decreases in savings accounts of $18.0 million,out-of-market certificates of deposit of $6.8 million offset by increases ininterest bearing checking accounts of $7.7 million, in-market certificates ofdeposit of $6.5 million, noninterest bearing checking accounts of $2.3 millionand money market accounts of $373,000. Public fund deposits decreased $29.4 million at March 31, 2005 fromthe levels at June 30, 2004 primarily due to decreases in in-marketsavings accounts of $18.7 million, out-of-market demand accounts of $16.3million and in-market certificates of deposit of $6.3 million offset by increasesin in-market demand accounts of $9.8 million and out-of-market certificates ofdeposit of $2.1 million.

 

16

----

 

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

 
| ** **                             | ** ** | **At March 31, 2005** | ** ** | **At June 30, 2004**               | ** ** |
|----------------------------------------|------------|----------------------------|------------|-----------------------------------------|------------|
| ** **                             | ** ** | **Amount**                 | ** ** | **Percent of  Loans in  Each Category** | ** ** | **Amount** | ** ** | **Percent of  Loans in  Each Category** | ** ** |
| ** **                             | ** ** | **(Dollars in Thousands)** | ** ** |
|                                   |       |                       |       |                                    |       |   |   |   |   |
| One-to  four-family (1)                |       | $                          | 95,429     |                                    | 14.77      | % | $ | 93,721 |   | 14.54 | % |
| Commercial real  estate                |       | 95,739                     |       | 14.82                                   | %          | 89,356 |   | 13.86 | % |
| Multi-family  real estate              |       | 29,731                     |       | 4.60                                    | %          | 42,572 |   | 6.61 | % |
| Commercial  business (2)               |       | 116,189                    |       | 17.99                                   | %          | 124,033 |   | 19.24 | % |
| Equipment  finance leases              |       | 29,190                     |       | 4.52                                    | %          | 27,019 |   | 4.19 | % |
| Consumer Direct  (3) (4)          |       | 110,881                    |       | 17.17                                   | %          | 108,755 |   | 16.87 | % |
| Consumer  Indirect                     |       | 92,955                     |       | 14.39                                   | %          | 87,839 |   | 13.63 | % |
| Agricultural                           |       | 66,248                     |       | 10.26                                   | %          | 63,370 |   | 9.83 | % |
| Construction and  development          |       | 9,577                      |       | 1.48                                    | %          | 7,886 |   | 1.23 | % |
| Total Loans and  Leases Receivable (5) |       | $                          | 645,939    |                                    | 100.00     | % | $ | 644,551 |   | 100.00 | % |

 

----

(1) Excludes$5,775 and $10,027 loans held for sale at March 31, 2005 and June 30,2004, respectively.

(2) Includes$3,652 tax exempt leases at March 31, 2005.

(3) Includesmobile home loans.

(4) Excludes$1,998 and $324 student loans held for sale at March 31, 2005 andJune 30, 2004, respectively.During the second quarter of Fiscal 2004, the Company began classifying itsstudent loan portfolio as held for sale.

(5) Includesdeferred loan fees and discounts and undisbursed portion of loans in process.

 
| ** **                             | ** ** | **At March 31, 2005** | ** ** | **At June 30, 2004**                  | ** ** |
|----------------------------------------|------------|----------------------------|------------|--------------------------------------------|------------|
| ** **                             | ** ** | **Amount**                 | ** ** | **Percent of  Deposits in  Each Category** | ** ** | **Amount** | ** ** | **Percent of  Deposits in  Each Category** | ** ** |
| ** **                             | ** ** | **(Dollars in Thousands)** | ** ** |
|                                   |       |                       |       |                                       |       |   |   |   |   |
| Noninterest  bearing checking accounts |       | $                          | 77,568     |                                       | 11.92      | % | $ | 75,251 |   | 11.42 | % |
| Interest bearing  accounts             |       | 53,400                     |       | 8.20                                       | %          | 45,738 |   | 6.94 | % |
| Money market  accounts                 |       | 212,301                    |       | 32.63                                      | %          | 211,928 |   | 32.17 | % |
| Savings accounts                       |       | 45,628                     |       | 7.01                                       | %          | 63,670 |   | 9.67 | % |
| Certificates of  deposit               |       | 261,831                    |       | 40.24                                      | %          | 262,132 |   | 39.80 | % |
| Total Deposits                         |       | $                          | 650,728    |                                       | 100.00     | % | $ | 658,719 |   | 100.00 | % |

 

**Analysis of Net Interest Income**

 

Net interest incomerepresents the difference between income on interest-earning assets and expenseon interest-bearing liabilities.  Netinterest income depends upon the volume of interest-earning assets andinterest-bearing liabilities and the interest rates earned or paid on them.

 

17

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*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 averagebalance for the Bank with simple average balances for all other companies.  The average balances include nonaccruing loansand leases.  The yields on loans andleases include origination fees, net of costs, which are considered adjustmentsto yield.

 

**Rate/Volume Analysis of NetInterest Income**

 
| ** **                                     | ** ** | **THREE MONTHS ENDED MARCH 31,** | ** ** |
|------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                     | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| ** **                                     | ** ** | **Average  Outstanding  Balance**     | ** ** | **Interest  Earned/  Paid** | ** ** | **Yield/  Rate** | ** ** | **Average  Outstanding  Balance** | ** ** | **Interest  Earned/  Paid** | ** ** | **Yield/  Rate** | ** ** |
| ** **                                     |       |                                  |       |   |   | **(Dollars  in Thousands)** |   |   |   |   |   |
| Interest-earning  assets:                      |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Loans and leases  receivable (1) (3)      |       | $                                     | 652,245    |   | $ | 9,882 |   | 6.14 | % | $ | 614,358 |   | $ | 8,927 |   | 5.83 | % |
| Investment  securities (2) (3)            |       | 118,375                               |       | 1,059 |   | 3.63 | % | 110,411 |   | 892 |   | 3.24 | % |
| FHLB stock                                     |       | 5,633                                 |       | 49 |   | 3.53 | % | 4,367 |   | 18 |   | 1.65 | % |
|                                           |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Total  interest-earning assets                 |       | 776,253                               |       | $ | 10,990 |   | 5.74 | % | 729,136 |   | $ | 9,837 |   | 5.41 | % |
| Noninterest-earning  assets                    |       | 63,507                                |       |   |   |   |   | 60,875 |   |   |   |   |   |
| Total assets                                   |       | $                                     | 839,760    |   |   |   |   |   | $ | 790,011 |   |   |   |   |   |
|                                           |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                 |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                      |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Checking and  money market                     |       | $                                     | 263,712    |   | $ | 1,330 |   | 2.05 | % | $ | 241,156 |   | $ | 673 |   | 1.12 | % |
| Savings                                        |       | 51,321                                |       | 173 |   | 1.37 | % | 56,718 |   | 86 |   | 0.61 | % |
| Certificates of  deposit                       |       | 254,828                               |       | 1,756 |   | 2.79 | % | 258,307 |   | 1,744 |   | 2.71 | % |
| Total  interest-bearing deposits               |       | 569,861                               |       | 3,259 |   | 2.32 | % | 556,181 |   | 2,503 |   | 1.81 | % |
| FHLB advances  and other borrowings            |       | 97,509                                |       | 1,016 |   | 4.23 | % | 70,372 |   | 839 |   | 4.78 | % |
| Subordinated  debentures payable to trusts     |       | 27,837                                |       | 433 |   | 6.31 | % | 27,837 |   | 324 |   | 4.67 | % |
|                                           |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities            |       | 695,207                               |       | 4,708 |   | 2.75 | % | 654,390 |   | 3,666 |   | 2.25 | % |
| Noninterest-bearing  deposits                  |       | 72,900                                |       |   |   |   |   | 65,316 |   |   |   |   |   |
| Other  liabilities                             |       | 17,438                                |       |   |   |   |   | 19,054 |   |   |   |   |   |
| Total  liabilities                             |       | 785,545                               |       |   |   |   |   | 738,760 |   |   |   |   |   |
| Equity                                         |       | 54,215                                |       |   |   |   |   | 51,251 |   |   |   |   |   |
| Total  liabilities and equity                  |       | $                                     | 839,760    |   |   |   |   |   | $ | 790,011 |   |   |   |   |   |
|                                           |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest  income; interest rate spread (4) |       |                                  |       | $ | 6,282 |   | 2.99 | % |   |   | $ | 6,171 |   | 3.16 | % |
|                                           |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Net interest  margin (4) (5)              |       |                                  |       |   |   | 3.28 | % |   |   |   |   | 3.39 | % |

 

----

(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 and municipal securities.

(4) Percentagesfor the three months ended March 31, 2005 and March 31, 2004 havebeen annualized.

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

 

18

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| ** **                                     | ** ** | **NINE MONTHS ENDED MARCH 31,** | ** ** |
|------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                     | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| ** **                                     | ** ** | **Average  Outstanding  Balance**    | ** ** | **Interest  Earned/  Paid** | ** ** | **Yield/  Rate** | ** ** | **Average  Outstanding  Balance** | ** ** | **Interest  Earned/  Paid** | ** ** | **Yield/  Rate** | ** ** |
| ** **                                     | ** ** | **(Dollars in Thousands)**           | ** ** |
| Interest-earning assets:                       |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Loans and leases receivable (1) (3)       |       | $                                    | 662,446    |   | $ | 29,820 |   | 6.00 | % | $ | 616,528 |   | $ | 27,645 |   | 5.95 | % |
| Investment securities (2) (3)             |       | 116,137                              |       | 2,976 |   | 3.41 | % | 100,406 |   | 2,237 |   | 2.96 | % |
| FHLB stock                                     |       | 6,029                                |       | 133 |   | 2.94 | % | 4,529 |   | 83 |   | 2.43 | % |
|                                           |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Total interest-earning assets                  |       | 784,612                              |       | $ | 32,929 |   | 5.59 | % | 721,463 |   | $ | 29,965 |   | 5.51 | % |
| Noninterest-earning assets                     |       | 64,808                               |       |   |   |   |   | 61,337 |   |   |   |   |   |
| Total assets                                   |       | $                                    | 849,420    |   |   |   |   |   | $ | 782,800 |   |   |   |   |   |
|                                           |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                  |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                      |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Checking and money market                      |       | $                                    | 262,884    |   | $ | 3,302 |   | 1.67 | % | $ | 232,182 |   | $ | 1,935 |   | 1.11 | % |
| Savings                                        |       | 49,095                               |       | 390 |   | 1.06 | % | 50,333 |   | 223 |   | 0.59 | % |
| Certificates of deposit                        |       | 259,397                              |       | 5,279 |   | 2.71 | % | 260,018 |   | 5,418 |   | 2.77 | % |
| Total interest-bearing deposits                |       | 571,376                              |       | 8,971 |   | 2.09 | % | 542,533 |   | 7,576 |   | 1.85 | % |
| FHLB advances and other borrowings             |       | 106,422                              |       | 3,124 |   | 3.91 | % | 77,956 |   | 2,828 |   | 4.81 | % |
| Subordinated debentures payable to trusts      |       | 27,837                               |       | 1,208 |   | 5.78 | % | 25,672 |   | 901 |   | 4.66 | % |
| Total interest-bearing liabilities             |       | 705,635                              |       | 13,303 |   | 2.51 | % | 646,161 |   | 11,305 |   | 2.32 | % |
| Noninterest-bearing deposits                   |       | 73,145                               |       |   |   |   |   | 66,192 |   |   |   |   |   |
| Other liabilities                              |       | 17,272                               |       |   |   |   |   | 19,886 |   |   |   |   |   |
| Total liabilities                              |       | 796,052                              |       |   |   |   |   | 732,239 |   |   |   |   |   |
| Equity                                         |       | 53,368                               |       |   |   |   |   | 50,561 |   |   |   |   |   |
| Total liabilities and equity                   |       | $                                    | 849,420    |   |   |   |   |   | $ | 782,800 |   |   |   |   |   |
|                                           |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Net interest income; interest rate spread  (4) |       |                                 |       | $ | 19,626 |   | 3.08 | % |   |   | $ | 18,660 |   | 3.19 | % |
|                                           |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Net interest margin (4) (5)               |       |                                 |       |   |   | 3.33 | % |   |   |   |   | 3.43 | % |

 

----

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

(2) Includes federal funds sold.

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

(4) Percentages for the nine months ended March 31, 2005 andMarch 31, 2004 have been annualized.

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

 

19

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Thefollowing schedule presents the dollar amount of changes in interestincome and interest 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., changesin volume multiplied by old rate) and (ii) changes in rate (i.e., changesin rate multiplied by old volume).  Forpurposes of this table, changes attributable to both rate and volume, whichcannot be segregated, have been allocated proportionately to the change due tovolume and the change due to rate.

 

 
| ** **                                | ** ** | **Three Months Ended March 31,**    | ** ** | **Nine Months Ended March 31,**   | ** ** |
|-------------------------------------------|------------|------------------------------------------|------------|----------------------------------------|------------|
| ** **                                | ** ** | **2005 vs 2004**                         | ** ** | **2005 vs 2004**                       | ** ** |
| ** **                                | ** ** | **Increase  (Decrease)  Due to  Volume** | ** ** | **Increase  (Decrease)  Due to  Rate** | ** ** | **Total  Increase** | ** ** | **Increase  Due to  Volume** | ** ** | **Increase  (Decrease)  Due to  Rate** | ** ** | **Total  Increase  (Decrease)** | ** ** |
| ** **                                | ** ** | **(Dollars in Thousands)**               | ** ** |
| Interest-earning assets:                  |       |                                     |       |                                   |       |   |   |   |   |   |   |   |   |
| Loans and leases receivable (1)           |       | $                                        | 495        |                                   | $          | 460 |   | $ | 955 |   | $ | 2,001 |   | $ | 174 |   | $ | 2,175 |   |
| Investment securities (2)                 |       | 59                                       |       | 108                                    |       | 167 |   | 345 |   | 394 |   | 739 |   |
| FHLB stock                                |       | 8                                        |       | 23                                     |       | 31 |   | 27 |   | 23 |   | 50 |   |
|                                      |       |                                     |       |                                   |       |   |   |   |   |   |   |   |   |
| Total interest-earning assets             |       | $                                        | 562        |                                   | $          | 591 |   | $ | 1,153 |   | $ | 2,373 |   | $ | 591 |   | $ | 2,964 |   |
|                                      |       |                                     |       |                                   |       |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:             |       |                                     |       |                                   |       |   |   |   |   |   |   |   |   |
| Deposits:                                 |       |                                     |       |                                   |       |   |   |   |   |   |   |   |   |
| Checking and money market                 |       | $                                        | 59         |                                   | $          | 598 |   | $ | 657 |   | $ | 252 |   | $ | 1,115 |   | $ | 1,367 |   |
| Savings                                   |       | (9                                       | )          | 96                                     |       | 87 |   | (6 | ) | 173 |   | 167 |   |
| Certificates of deposit                   |       | (33                                      | )          | 45                                     |       | 12 |   | (23 | ) | (116 | ) | (139 | ) |
| Total interest-bearing deposits           |       | 17                                       |       | 739                                    |       | 756 |   | 223 |   | 1,172 |   | 1,395 |   |
| FHLB advances and other borrowings        |       | 316                                      |       | (139                                   | )          | 177 |   | 1,024 |   | (728 | ) | 296 |   |
| Subordinated debentures payable to trusts |       | (2                                       | )          | 111                                    |       | 109 |   | 74 |   | 233 |   | 307 |   |
|                                      |       |                                     |       |                                   |       |   |   |   |   |   |   |   |   |
| Total interest-bearing liabilities        |       | $                                        | 331        |                                   | $          | 711 |   | $ | 1,042 |   | $ | 1,321 |   | $ | 677 |   | $ | 1,998 |   |
|                                      |       |                                     |       |                                   |       |   |   |   |   |   |   |   |   |
| Net interest income increase              |       |                                     |       |                                   |       | $ | 111 |   |   |   |   |   | $ | 966 |   |

 

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

(2) Includes federal funds sold.

 

20

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**Application of Critical Accounting Policies**

 

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

 

*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.

 

The allowanceis compiled by utilizing the Company’s loan and lease risk rating system, whichis structured to identify weaknesses in the loan and lease portfolio.  The risk rating system has evolved to aprocess whereby management believes the system will properly identify thecredit 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.

 

At eachbalance sheet date, the MSRs are analyzed for impairment, which occurs when thefair value of the MSRs is lower than the amortized book value. The Company’sMSRs are primarily servicing rights acquired on South Dakota HousingDevelopment Authority first time home buyers 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.

 

Due to thesubstantial decline in interest rates over the last several fiscal years, 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, 2005.

 

21

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*Retained Interest from Securitization* – TheCompany recorded an asset as a result of the automobile securitization.  See Note 4 of the “Notes to ConsolidatedFinancial Statements.”  This asset isrecorded based on present value concepts of future expected cash flows.  The assumptions used to calculate the initialretained interest value and subsequent assumptions are based on the bestinformation available.  The value of theretained interest may change significantly if actual cash flows differ fromexpected cash flows.

 

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

 

Nonperformingassets (nonaccrual loans and leases, accruing loans and leases delinquent morethan 90 days and foreclosed assets) increased to $2.7 million at March 31,2005 from $2.3 million at June 30, 2004, an increase of $428,000, or18.8%.  Accruing loans and leasesdelinquent more than 90 days increased $493,000 from the levels at June 30,2004.  In addition, the ratio ofnonperforming assets to total assets, which is one indicator of credit riskexposure, increased to 0.32% at March 31, 2005 from 0.27% at June 30,2004.

 

Nonaccruingloans and leases decreased 8.0% or $125,000 to $1.4 million at March 31,2005 compared to $1.6 million at June 30, 2004.  Included in nonaccruing loans and leases atMarch 31, 2005 were three loans totaling $129,000 secured by one- tofour-family real estate, one loan totaling $70,000 secured by commercial real estate,11 commercial business loans totaling $702,000, 34 consumer loans totaling$446,000 and three leases totaling $89,000.

 

The Company’snonperforming loans and leases, which represent nonaccrual and past due 90 daysand still accruing, have increased $368,000 to $2.4 million at March 31,2005 compared to $2.1 million at June 30, 2004.  The risk rating system in place is designedto identify and manage the nonperforming loans and leases.  Commercial and agricultural loans andequipment finance leases will have specific reserve allocations based on collateralvalues or based on the present value of expected cash flows if the loans andleases are deemed impaired.  Loans andleases that are not performing do not necessarily result in a loss.

 

As ofMarch 31, 2005, the Company had $272,000 of foreclosed assets.  The balance of foreclosed assets atMarch 31, 2005 consisted of $147,000 of single-family collateral owned and$125,000 of consumer collateral owned.

 

AtMarch 31, 2005, the Company had designated $11.6 million of its assets asspecial mention and classified $2.8 million of its assets that management hasdetermined need to be closely monitored because of possible credit problems ofthe borrowers or the cash flows of the secured properties.  At March 31, 2005 the Company had $28.5million in multi-family, commercial business, commercial real estate andagricultural participation loans purchased, none of which were classified as ofMarch 31, 2005.  These loans andleases were considered in determining the adequacy of the allowance for loanand lease losses.  The allowance for loanand lease losses is established based on management’s evaluation of the risksprobable in the loan and lease portfolio and changes in the nature and volumeof loan and lease activity.  Suchevaluation, which includes a review of all loans and leases for which fullcollectibility may not be reasonably assured, considers the estimated fairmarket value of the underlying collateral, present value of expected principaland interest payments, economic conditions, historical loss experience andother factors that warrant recognition in providing for an adequate loan andlease loss allowance.

 

Althoughthe Company’s management believes that the March 31, 2005 recordedallowance for loan and lease losses was adequate to provide for probable losseson the related loans and leases, there can be no assurance that the allowanceexisting at March 31, 2005 will be adequate in the future.

 

22

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Inaccordance with the Company’s internal classification of assets policy,management evaluates the loan and lease portfolio on a monthly basis toidentify loss potential and determines the adequacy of the allowance for loanand lease losses quarterly.  Loans andleases are placed on nonaccrual status when the collection of principal and/orinterest become doubtful.  Foreclosedassets include assets acquired in settlement of loans.  The following table sets forth the amountsand categories of the Company’s nonperforming assets for the periods indicated.

 
| ** **                                                                      | ** ** | **Nonperforming Assets As Of** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                      | ** ** | **March 31,  2005**       | ** ** | **June 30,  2004** | ** ** |
| ** **                                                                      | ** ** | **(Dollars in Thousands)**     | ** ** |
| Nonaccruing loans and leases:                                                   |       |                           |       |   |   |
| One- to four-family                                                             |       | $                              | 129        |   | $ | 86 |   |
| Commercial real estate                                                          |       | 70                             |       | 75 |   |
| Commercial business                                                             |       | 702                            |       | 795 |   |
| Equipment finance leases                                                        |       | 89                             |       | 21 |   |
| Consumer (1)                                                                    |       | 446                            |       | 564 |   |
| Agricultural                                                                    |       | —                         |       | 20 |   |
| Total                                                                           |       | 1,436                          |       | 1,561 |   |
|                                                                            |       |                           |       |   |   |
| Accruing loans and leases delinquent more  than 90 days:                        |       |                           |       |   |   |
| One- to four-family                                                             |       | 14                             |       | — |   |
| Commercial real estate                                                          |       | 82                             |       | — |   |
| Commercial business                                                             |       | 260                            |       | 221 |   |
| Equipment finance leases                                                        |       | 125                            |       | 281 |   |
| Consumer (1)                                                                    |       | 11                             |       | — |   |
| Agricultural                                                                    |       | 503                            |       | — |   |
| Total                                                                           |       | 995                            |       | 502 |   |
|                                                                            |       |                           |       |   |   |
| Foreclosed assets: (2)                                                          |       |                           |       |   |   |
| One- to four-family                                                             |       | 147                            |       | 100 |   |
| Consumer (1)                                                                    |       | 125                            |       | 112 |   |
| Total                                                                           |       | 272                            |       | 212 |   |
|                                                                            |       |                           |       |   |   |
| Total nonperforming assets                                                      |       | $                              | 2,703      |   | $ | 2,275 |   |
|                                                                            |       |                           |       |   |   |
| Ratio of nonperforming assets to total  assets                                  |       | 0.32                           | %          | 0.27 | % |
|                                                                            |       |                           |       |   |   |
| Ratio of nonperforming loans and leases to  total loans and leases (3) (4) |       | 0.37                           | %          | 0.32 | % |

 

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(1) Includes mobile home loans.

(2) Total foreclosed assets do not include land or other realestate owned held for sale.

(3) Nonperforming loans and leases include both nonaccruing andaccruing loans and leases delinquent more than 90 days.

(4) Total loans and leases include loans held for sale.

 

23

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The followingtable sets forth information with respect to activity in the Company’sallowance for loan and lease losses during the periods indicated.

 
| ** **                                                                                              | ** ** | **Nine Months Ended March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                              | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| ** **                                                                                              | ** ** | **(Dollars in Thousands)**           | ** ** |
| Balance at beginning of period                                                                          |       | $                                    | 3,605      |   | $ | 3,842 |   |
| Charge-offs:                                                                                            |       |                                 |       |   |   |
| One- to four-family                                                                                     |       | —                               |       | (6 | ) |
| Commercial real estate                                                                                  |       | (31                                  | )          | (16 | ) |
| Commercial business                                                                                     |       | (179                                 | )          | (394 | ) |
| Equipment finance leases                                                                                |       | (11                                  | )          | (23 | ) |
| Consumer (1)                                                                                            |       | (822                                 | )          | (891 | ) |
| Agriculture                                                                                             |       | (14                                  | )          | (836 | ) |
| Total charge-offs                                                                                       |       | (1,057                               | )          | (2,166 | ) |
|                                                                                                    |       |                                 |       |   |   |
| Recoveries:                                                                                             |       |                                 |       |   |   |
| One- to four-family                                                                                     |       | 8                                    |       | 4 |   |
| Commercial business                                                                                     |       | 30                                   |       | 2 |   |
| Equipment finance leases                                                                                |       | 1                                    |       | 63 |   |
| Consumer (1)                                                                                            |       | 170                                  |       | 182 |   |
| Agriculture                                                                                             |       | 78                                   |       | 3 |   |
| Total recoveries                                                                                        |       | 287                                  |       | 254 |   |
|                                                                                                    |       |                                 |       |   |   |
| Net (charge-offs)                                                                                       |       | (770                                 | )          | (1,912 | ) |
|                                                                                                    |       |                                 |       |   |   |
| Additions charged to operations                                                                         |       | 504                                  |       | 1,678 |   |
|                                                                                                    |       |                                 |       |   |   |
| Balance at end of period                                                                                |       | $                                    | 3,339      |   | $ | 3,608 |   |
|                                                                                                    |       |                                 |       |   |   |
| Ratio of net (charge-offs) during the  period to average loans and leases outstanding during the period |       | (0.12                                | )%         | (0.31 | )% |
|                                                                                                    |       |                                 |       |   |   |
| Ratio of allowance for loan and lease  losses to total loans and leases at end of period (2)            |       | 0.51                                 | %          | 0.58 | % |
|                                                                                                    |       |                                 |       |   |   |
| Ratio of allowance for loan and lease  losses to nonperforming loans and leases at end of period (3)    |       | 137.35                               | %          | 96.39 | % |

 

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(1) Includes mobile home loans.

(2) Total loans and leases include loans held for sale.

(3) Nonperforming loans and leases include both nonaccruing andaccruing loans and leases delinquent more than 90 days.

 

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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 byCreditors for Impairment of a Loan” are summarized in the followingtables.  The combination of FASB 5 andFASB 114 calculations comprise the Company’s allowance for loan and leaselosses.

 
| ** **               | ** ** | **FASB 5  Allowance  for Loan and  Lease Losses** | ** ** | **FASB 114  Impaired Loan  Valuation  Allowance** | ** ** | **FASB 5  Allowance  for Loan and  Lease Losses** | ** ** | **FASB 114  Impaired Loan  Valuation  Allowance** | ** ** |
|--------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|
| **Loan Type**            | ** ** | **At March 31, 2005**                        | ** ** | **At June 30, 2004**                         | ** ** |
| ** **               | ** ** | **(Dollars in Thousands)**                        | ** ** |
| One- to four-family      |       | $                                                 | 189        |                                              | $          | —                                            |       | $                                                 | 15         |   | $ | — |   |
| Commercial real estate   |       | 207                                               |       | —                                            |       | 135                                               |       | —                                            |       |
| Multi-family real estate |       | 73                                                |       | —                                            |       | 85                                                |       | —                                            |       |
| Commercial business      |       | 816                                               |       | —                                            |       | 970                                               |       | —                                            |       |
| Equipment finance leases |       | 319                                               |       | 5                                                 |       | 296                                               |       | 4                                                 |       |
| Consumer (1)             |       | 1,332                                             |       | —                                            |       | 1,736                                             |       | —                                            |       |
| Agricultural             |       | 398                                               |       | —                                            |       | 364                                               |       | —                                            |       |
| Total                    |       | $                                                 | 3,334      |                                              | 5          |                                              | $          | 3,601                                             |       | $ | 4 |   |
|                          |            |                                                   |            |                                                   |            |                                                   |            |                                                   |            |  |  |  |  |

 

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(1)  Includes mobile home loans.

 

FASB 114 Impaired Loan Summary

 
| ** **               | ** ** | **Number  of Loan  Customers** | ** ** | **Loan  Balance** | ** ** | **Impaired Loan  Valuation  Allowance** | ** ** |
|--------------------------|------------|--------------------------------|------------|-------------------|------------|-----------------------------------------|------------|
| **Loan Type**            | ** ** | **At March 31, 2005**     | ** ** |
| ** **               | ** ** | **(Dollars in Thousands)**     | ** ** |
| Equipment finance leases |       | 1                              |       | 72                |       | 5                                       |       |
| Commercial real estate   |       | 1                              |       | 62                |       | —                                  |       |
| Commercial business      |       | 3                              |       | 88                |       | —                                  |       |
| Total                    |       | 5                              |       | $                 | 222        |                                    | 5          |   |
|                          |            |                                |            |                   |            |                                         |            |  |

 

25

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FASB 114 Impaired Loan Summary

 
| ** **                | ** ** | **Number  of Loan  Customers** | ** ** | **Loan  Balance** | ** ** | **Impaired Loan  Valuation  Allowance** | ** ** |
|---------------------------|------------|--------------------------------|------------|-------------------|------------|-----------------------------------------|------------|
| **Loan Type**             | ** ** | **At June 30, 2004**      | ** ** |
| ** **                | ** ** | **(Dollars in Thousands)**     | ** ** |
| Equipment finance leases0 |       | 1                              |       | $                 | 4          |                                    | $          | 4 |   |
| Commercial real estate    |       | 1                              |       | 73                |       | —                                  |       |
| Commercial business       |       | 5                              |       | 175               |       | —                                  |       |
| Total                     |       | 7                              |       | $                 | 252        |                                    | $          | 4 |   |

 

The allowancefor loan and lease losses was $3.3 million at March 31, 2005 as comparedto $3.6 million at March 31, 2004. The ratio of the allowance for loan and lease losses to total loans andleases was 0.51% at March 31, 2005 compared to 0.58% at March 31,2004, a decrease of 12.1%.  The Company’smanagement has considered nonperforming loans and leases and potential problemloans and leases in establishing the allowance for loan and lease losses.  The Company continues to monitor itsallowance for probable loan and lease losses and make future additions or reductionsin light of the level of loans and leases in its portfolio and as economicconditions 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.  A periodic credit review is performed on alltypes of loans and leases to establish the necessary reserve based on theestimated risk within the portfolio. This assessment of risk takes into accountthe composition of the loan and lease portfolio, historical loss experience foreach loan and lease category, previous loan and lease experience,concentrations of credit, current economic conditions and other factors that inmanagement’s judgment deserve recognition.

 

Realestate properties acquired through foreclosure are recorded at thelower of cost or fair value (less a deduction for disposition costs).  Valuations are periodically updated bymanagement and a specific provision for losses on such properties isestablished by a charge to operations if the carrying values of the properties exceedtheir estimated net realizable values.

 

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

 

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**Comparison of the Three Months EndedMarch 31, 2005 and March 31, 2004**

 

*General*.  The Company’s net income was $1.3 million, or$0.38 and $0.37 for basic and diluted earnings per share, respectively, for thethree months ended March 31, 2005, a $371,000 increase in earningscompared to $1.0 million, or $0.27 and $0.26 for basic and diluted earnings pershare, respectively, for the same period in the prior fiscal year.  For the three months ended March 31,2005, the return on average equity was 9.92%, a 30.7% increase compared to7.59% for the same period in the prior fiscal year.  For the three months ended March 31,2005, the return on average assets was 0.64%, a 30.6% increase compared to0.49% for the same period in the prior fiscal year.  As discussed in more detail below, theincreases were due to a variety of key factors, including an increase in netinterest income of $111,000 and a decrease in provision for losses on loans andleases of $478,000 offset by a decrease in noninterest income of $107,000 andincreases in noninterest expense of $3,000 and income tax expense of $108,000.

 

*Interest, Dividend and Loan FeeIncome.*  Interest, dividendand loan fee income was $11.0 million for the three months ended March 31,2005 as compared to $9.8 million for the same period in the prior fiscal year,an increase of $1.2 million or 11.7%.  A$495,000 increase in interest, dividend and loan fee income was the result of a6.2% increase in the average volume of loans and leases receivable and a$460,000 increase in interest, dividend and loan fee income due to an increasein the average yield on loans and leases receivable from 5.83% for the threemonths ended March 31, 2004 to 6.14% for the three months endedMarch 31, 2005. The average yield on total interest-earning assets was5.74% for the three months ended March 31, 2005 as compared to 5.41% forthe same period in the prior fiscal year.

 

*Interest Expense.*  Interest expense was $4.7 million for thethree months ended March 31, 2005 as compared to $3.7 million for the sameperiod in the prior fiscal year, an increase of $1.0 million or 28.4%.  A $739,000 increase in interest expense wasthe result of an increase in average yield on interest-bearing deposits from1.81% for the three months ended March 31, 2004 to 2.32% for the threemonths ended March 31, 2005.  A$316,000 increase in interest expense was the result of a 38.6% increase in theaverage balance of FHLB advances and other borrowings offset by a decrease of$139,000 as a result of the average yield on FHLB advances and other borrowingsdecreasing from 4.78% for the three months ended March 31, 2004 to 4.23%for the three months ended March 31, 2005. Average interest-bearing deposits increased $13.7 million while FHLBadvances and other borrowings increased $27.1 million.  An increase of $711,000 in interest expensewas the result of a 22.2% increase in the average yield on interest bearingliabilities from 2.25% for the three months ended March 31, 2004 to 2.75% forthe three months ended March 31, 2005.

 

*Net Interest Income.*The Company’s net interest income for the three months ended March 31,2005 increased $111,000, or 1.8%, to $6.3 million compared to $6.2 million forthe same period in the prior fiscal year. The increase in net interest income was due primarily to an increase inthe average yield on interest earning assets for the three months endedMarch 31, 2005 compared to the same period in the prior fiscal year.  Gradually increasing rates over the priorquarter and the prime rate increasing from 4.00% at June 30, 2004 to 5.75%at March 31, 2005 contributed to an increase in net interest income.  The Company’s net interest margin was 3.28%for the third quarter of Fiscal 2005 as compared to 3.39% for the same periodin 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, and current economic conditionsthat may affect the borrower’s ability to pay. The allowance for loan and lease losses is established through aprovision for losses on loans and leases charged to expense.

 

27

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During the three months ended March 31, 2005, the Company recordeda provision for losses on loans and leases of $129,000 compared to $607,000 forthe three months ended March 31, 2004, a decrease of $478,000.  See “Asset Quality” for further discussion.

 

*Noninterest Income.*  Noninterest income was $2.1 million for thethree months ended March 31, 2005 as compared to $2.2 million for the sameperiod in the prior fiscal year, a decrease of $107,000 or 4.8%.  The decrease in noninterest income was dueprimarily to decreases in net gain on sale of loans of $81,000 and othernoninterest income of $50,000 offset by an increase in fees on deposits of$27,000.

 

Net gain on sale of loans was $164,000 for the three months endedMarch 31, 2005 as compared to $245,000 for the same period in the priorfiscal year, a decrease of $81,000 or 33.1%. The decrease was primarily due to a decrease in the amount ofresidential mortgage loans sold into the secondary market during the thirdquarter of Fiscal 2005 as compared to the same period in the prior fiscalyear.  Residential mortgage loanproduction decreased 15.2% in dollar volume for the three months endedMarch 31, 2005 as compared to the same period in the prior fiscal year.

 

Other noninterest income decreased 10.5% to $424,000 for the threemonths ended March 31, 2005 as compared to $474,000 for the same period inthe prior fiscal year primarily due to a decrease in securitization income of$25,000 as a result of a decrease in the principal balance of securitizedloans. The remaining $25,000 decrease in other noninterest income is comprisedof miscellaneous and various other noninterest income.

 

Fees on depositsincreased $70,000 primarily due to an increase in fees collected on automaticteller machine (“ATM”) transactions from outside customers of $39,000.  The remaining increase in fees on deposits iscomprised of various other deposit fee income.

 

*Noninterest Expense.*  Noninterest expense was $6.3 million for thethree months ended March 31, 2005 as compared to $6.3 million for thethree months ended March 31, 2004. Although total noninterest expense remained constant from the sameperiod in the prior fiscal year, compensation and employee benefits decreased$105,000 and occupancy and equipment decreased 29,000 offset by an increase inother noninterest expense of  $137,000.

 

Compensationand employee benefits decreased $105,000, or 2.6%, to $3.9 million for thethree months ended March 31, 2005 as compared to $4.0 million for thethree months ended March 31, 2004. The decrease was primarily due to a decrease of $298,000 or 44.0% in nethealthcare costs, inclusive of self-funded health claims, administration feesand fully insured dental premiums offset by stop loss insurance receivable andemployee reimbursements.  This decreasewas offset by increases of $44,000 for variable incentive pay for mortgageoriginations and a short-term compensation program, $43,000 for employeerecruitment expenses and $17,000 due to deferred loan and lease originationcosts.

 

Occupancy and equipment decreased $29,000 for the three months endedMarch 31, 2005 compared to the same period in the prior fiscal yearprimarily due to a decrease in depreciation expense on fixed assets of $16,000.

 

Other noninterest expense increased $137,000 for the three months endedMarch 31, 2005 compared to the same period in the prior fiscal yearprimarily due to an increase in advertising of $128,000.

 

*Income tax expense.*  The Company’s income tax expense for thethree months ended March 31, 2005 increased $108,000 or 20.6% to $632,000compared to $524,000 for the same period in the prior fiscal year.  The effective tax rate was 32.0% and 35.0%for the three months ended March 31, 2005 and March 31,

 

28

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2004, respectively.  The decreasein the effective tax rate for the quarter was the result of a decrease in theexpected effective tax rate for Fiscal 2005 due to permanent tax differences.

 

**Comparison of the Nine Months Ended March 31,2005 and March 31, 2004**

 

*General*.  The Company’s net income was $4.5 million, or$1.26 and $1.22 for basic and diluted earnings per share, respectively, for thenine months ended March 31, 2005, a $888,000 increase in earnings comparedto $3.6 million, or $1.00 and $0.97 for basic and diluted earnings per share,respectively, for the same period in the prior fiscal year.  For the nine months ended March 31,2005, the return on average equity was 11.12%, an 18.3% increase compared to9.40% for the same period in the prior fiscal year.  For the nine months ended March 31,2005, the return on average assets was 0.70%, a 14.8% increase compared to0.61% for the same period in the prior fiscal year.  As discussed in more detail below, theincreases were due to a variety of key factors, including an increase in netinterest income of $966,000 and a decrease in provision for losses on loans andleases of $1.2 million offset by a decrease in noninterest income of $852,000and increases in noninterest expense of $123,000 and income tax expense of$277,000.

 

*Interest, Dividend and Loan Fee Income.* Interest, dividend and loan fee income was $32.9 million for the ninemonths ended March 31, 2005 as compared to $30.0 million for the sameperiod in the prior fiscal year, an increase of $3.0 million or 9.9%.  A $2.0 million increase in interest, dividendand loan fee income was the result of a 7.4% increase in the average volume ofloans and leases receivable and an increase of $591,000 in interest, dividendand loan fee income due to an increase in the average yield on loans and leasesreceivable from 5.95% for the nine months ended March 31, 2004 to 6.00%for the nine months ended March 31, 2005. The average yield on totalinterest-earning assets was 5.59% for the nine months ended March 31, 2005as compared to 5.51% for the same period in the prior fiscal year.

 

*Interest Expense.*  Interest expense was $13.3 million for thenine months ended March 31, 2005 as compared to $11.3 million for the sameperiod in the prior fiscal year, an increase of $2.0 million or 17.7%.  A $1.2 million increase in interest expensewas the result of an increase in average yield on interest-bearing depositsfrom 1.85% for the nine months ended March 31, 2004 to 2.09% for the ninemonths ended March 31, 2005.  A $1.0million increase in interest expense was the result of a 36.5% increase in theaverage balance of FHLB advances and other borrowings offset by a decrease of$728,000 as a result of the average yield on FHLB advances and other borrowingsdecreasing from 4.81% for the nine months ended March 31, 2004 to 3.91%for the nine months ended March 31, 2005. Average interest-bearing deposits increased $28.8 million while FHLBadvances and other borrowings increased $28.5 million.  An increase of $1.3 million in interestexpense was the result of a 9.2% increase in the average balance of totalinterest bearing liabilities from $646.2 million for the nine months endedMarch 31, 2004 to $705.6 million for the nine months ended March 31,2005.  An increase of $677,000 ininterest expense was the result of the average yield on total interest bearingliabilities increasing from 2.32% for the nine months ended March 31, 2004to 2.51% for the nine months ended March 31, 2005.

 

*Net Interest Income.*The Company’s net interest income for the nine months ended March 31, 2005increased $966,000, or 5.2%, to $19.6 million compared to $18.7 million for thesame period in the prior fiscal year. The increase in net interest income was primarily due to an increase inthe average balance of interest earning assets for the nine months endedMarch 31, 2005 compared to the same period 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

 

29

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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 aprovision for losses on loans and leases charged to expense.

 

During the nine months ended March 31, 2005, the Company recordeda provision for losses on loans and leases of $504,000 compared to $1.7 millionfor the nine months ended March 31, 2004, a decrease of $1.2 million.  See “Asset Quality” for further discussion.

 

*Noninterest Income.*  Noninterest income was $6.7 million for thenine months ended March 31, 2005 as compared to $7.5 million for the sameperiod in the prior fiscal year, a decrease of $852,000 or 11.3%.  The decrease in noninterest income was dueprimarily to decreases in net gain on sale of loans of $579,000 and other noninterestincome of $401,000 offset by an increase in fees on deposits of $145,000.

 

Net gain on sale of loans was $500,000 for the nine months endedMarch 31, 2005 as compared to $1.1 million for the same period in theprior fiscal year, a decrease of $579,000 or 53.7%.  The decrease was primarily due to a decreasein the amount of residential mortgage loans sold into the secondary marketduring the nine months ended March 31, 2005 as compared to the same periodin the prior fiscal year.  Residentialmortgage loan production decreased 39.0% in dollar volume for the nine monthsended March 31, 2005 as compared to the same period in the prior fiscalyear.

 

Other noninterest income decreased 24.2% to $1.3 million for the ninemonths ended March 31, 2005 as compared to $1.7 million for the sameperiod in the prior fiscal year primarily due to the sale of the property andcasualty book of business during the first quarter of the prior fiscal year of$116,000, a decrease in securitization income of $148,000 primarily due to adecrease in the principal balance of securitized loans and a decrease incommission and insurance income in the amount of $69,000 primarily due to thesale of the Company’s property and casualty book of business.  The remaining $68,000 decrease in othernoninterest income is comprised of miscellaneous and various other noninterestincome.

 

Fees on depositsincreased $145,000 primarily due to an increase in fees collected on ATMtransactions from outside customers of $125,000.   The remaining increase in fees on depositsis comprised of various other deposit fee income.

 

*Noninterest Expense.*  Noninterest expense was $19.1 million for thenine months ended March 31, 2005 as compared to $19.0 million for the ninemonths ended March 31, 2004, an increase of $123,000 or 0.7%.  The increase in noninterest expense was dueprimarily to an increase in compensation and employee benefits of $171,000offset by a decrease in occupancy and equipment of $116,000.

 

Compensationand employee benefits increased $171,000, or 1.4%, to $12.1 million for thenine months ended March 31, 2005 as compared to $11.9 million for the ninemonths ended March 31, 2004 primarily due to increases in deferred loanand lease origination costs of $406,000 reflecting primarily lower mortgageoriginations and the short-term compensation program of $422,000 offset bydecreases in variable incentive pay for mortgage originations of $147,000 and adecrease of $571,000 or 37.0% in net healthcare costs, inclusive of self-fundedhealth claims, administration fees and fully-insured dental premiums offset bystop loss insurance receivable and employee reimbursements.

 

Occupancy and equipment decreased $116,000 for the nine months endedMarch 31, 2005 compared to the same period in the prior fiscal yearprimarily due to a decrease in depreciation expense on fixed assets of$105,000.

 

*Income tax expense.*  The Company’s income tax expense for the ninemonths ended March 31, 2005 increased $277,000 or 14.0% to $2.3 millioncompared to $2.0 million for the same period in the prior fiscal

 

30

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year.  The effective tax rate was 33.7% and 35.7%for the nine months ended March 31, 2005 and March 31, 2004,respectively.  The decrease in effectivetax rate was the result of a decrease in the expected effective tax rate forthe year ending June 30, 2005 due to permanent tax differences.

 

**Liquidity and Capital Resources**

 

The Bank’s primary sources of funds are earnings, in-market deposits,FHLB advances and other borrowings, repayments of loan principal,mortgage-backed securities and callable agency securities and, to a lesserextent, sales of mortgage loans, sales and maturities of securities,mortgage-backed securities, out-of-market deposits and short-term investments.  While scheduled loan payments and maturingsecurities are relatively predictable, deposit flows and loan prepayments aremore influenced by interest rates, general economic conditions and competition.The Bank attempts to price its deposits to meet its asset/liability objectivesconsistent with local market conditions. Excess balances are invested in overnight funds.

 

Liquidity management is both a daily and long-term responsibility ofmanagement.  The Bank adjusts itsinvestments in liquid assets 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.

 

The Bank anticipates that it will have sufficient funds available tomeet current loan commitments.  AtMarch 31, 2005, the Bank had outstanding commitments to originateresidential mortgage loans of $26.2 million, commercial and agricultural realestate loans of $5.2 million, commercial business loans of $2.1 million andmulti-family loans of $1.4 million.  Inaddition, the Bank had outstanding commitments to sell residential mortgageloans of $13.5 million and consumer student loans of $2.0 million.  Commitments by the Bank to originate loansare not necessarily executed by the customer. The Bank monitors the ratio of commitments to fundings for use inliquidity management.  At March 31,2005, the Bank had commitments to purchase securities available for sale of$4.1 million and no commitments to sell securities available for sale.

 

Although in-marketdeposits are the Bank’s primary source of funds, the Bank’s policy has been toutilize borrowings where the funds can be invested in either loans orsecurities at a positive rate of return or to use the funds for short-termliquidity purposes.  The Bank currentlyhas two $10.0 million unsecured lines of federal funds with correspondentbanks.  There were no funds drawn oneither line of credit at March 31, 2005. Additionally, as of March 31, 2005, the Bank had $16.3 million inout-of-market certificates of deposit and $2.1 million in out-of-market moneymarket accounts.  The Bank may also seekother sources of contingent liquidity including additional federal fundspurchased lines with correspondent banks and lines of credit with the FederalReserve Bank.

 

The Company uses itscapital resources to pay dividends to its stockholders, to repurchase Companystock pursuant to Board of Directors approved plans, to support organic growth,to make acquisitions, to service its debt obligations and to provide fundingfor investment into the Bank of Tier 1 (core) capital.

 

The Company currentlyhas in effect a stock buyback program in which up to 10% of the common stock ofthe Company outstanding on May 1, 2004 may be acquired throughApril 30, 2005.  As ofMarch 31, 2005, a total of 109,900 shares of common stock have beenpurchased pursuant to the current program, of which 58,100 shares werepurchased during the three months ended March 31, 2005.  In addition, the Company approved a new stockbuyback program in which up to 10% of the common stock of the Companyoutstanding on May 1, 2005 may be acquired through April 30,2006.  See Part II, Item 2 “Unregistered Sales of Equity Securitiesand Use of Proceeds.”

 

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Savings institutionsinsured by the Federal Deposit Insurance Corporation are required by theFinancial Institutions Reform, Recovery and Enforcement Act of 1989 to meetthree 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.  Under thesecapital requirements, at March 31, 2005, the Bank met all current capitalrequirements.

 

The minimum OTS Tier 1 (core) capital requirement for well-capitalizedinstitutions is 5.00% of total adjusted assets for thrifts.  The Bank had Tier 1 (core) capital of 8.60%at March 31, 2005.  The minimum OTStotal risk-based capital requirement for well-capitalized institutions is10.00% of risk-weighted assets.  The Bankhad total risk-based capital of 11.02% at March 31, 2005.

 

**Off-Balance Sheet Financing Arrangements**

 

During the fiscal year ended June 30, 2003, the Bank securitizedand sold consumer automobile loans in the amount of $50.0 million through HFSCand Automobile Securitization Trust.  Theoutstanding balance of the securitized automobile loans was $8.6 million atMarch 31, 2005.  As part of thesales transaction, the Bank retains servicing responsibilities and a retainedinterest in the receivables, which is subordinated to third party investors’interests.  The receivables were soldwithout legal recourse.  The saleprovided the Bank with an additional source of liquidity at interest rates morefavorable than it could receive through other forms of financing.  It also assisted in reducing capitalrequirements and credit risk to the Bank, in addition to giving the Bank accessto the national capital markets.  SeeNote 4 of the “Notes to Consolidated Financial Statements” for further detail.

 

**Impact of Inflation and Changing Prices**

 

The unauditedconsolidated financial statements and notes thereto presented in this QuarterlyReport 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’s performancethan 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**

 

InDecember 2004, FASB issued Statement of Financial Accounting Standards (“SFAS”)No. 123R, *“Share-Based Payment”,*whichrequires all companies to measure compensation cost for all share-basedpayments (including stock options) at fair value.  This would be effective for the Company forthe interim reporting period ending September 30, 2005.

 

The Companyaccounts for stock-based compensation in accordance with Accounting PrinciplesBoard (“APB”) Opinion No. 25, “*Accountingfor Stock Issued to Employees”*, and related interpretations. Nostock-based employee compensation cost has been recognized for grants under theCompany’s fixed stock option plans, as all options granted under those planshad an exercise price equal to the market value of the underlying common stockon the date of grant.

 

32

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**Item 3.  Quantitative andQualitative Disclosures About Market Risk**

 

Interest rate risk is the most significant market risk affecting theCompany.  Other types of market risk,such as foreign currency exchange rate risk and commodity price risk, do notarise in the normal course of the Company’s business activities.  The Bank, like other financial institutions,is subject to interest rate risk to the extent that its interest-bearingliabilities with short- and medium-term maturities mature or reprice morerapidly than its interest-earning assets. The Company does not currently engage in trading activities or usederivative instruments to control interest rate risk although it may in thefuture, if necessary, to manage interest rate risk.

 

The composition of theBank’s balance sheet results in maturity mismatches between interest-earningassets and interest-bearing liabilities. The scheduled maturities of the Bank’s fixed rate interest-earningassets are longer than the scheduled maturities of its fixed rateinterest-bearing liabilities.  Thismismatch exposes the Bank to interest rate risk.  In a rising rate scenario, as measured by theOTS interest rate risk exposure simulation model, the estimated market orportfolio value (“PV”) of the Bank’s assets would decline in value to a greaterdegree than the change in the PV of the Bank’s liabilities, thereby reducingnet portfolio value (“NPV”), the estimated market value of its shareholders’equity.

 

As set forth below, depending upon thevolatility of the rate change, the change in asset or liability mix of theCompany or other factors may produce a decrease in net interest margin in anupward moving rate environment even as the NPV estimate indicates an increasein net value.  The converse situation canalso 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, atDecember 31, 2004 (the most recent report available) and March 31,2004, an analysis of the Company’s interest rate risk as measured by theestimated changes in NPV resulting from instantaneous and sustained parallelshifts in the yield curve (+ 300 or –100 basis points, measured in 100 basispoint increments).  Due to the abnormallylow prevailing interest rate environment, -200 and –300 NPV were not estimatedby the OTS.  Management does not believethat the Company has experienced any material changes in its market riskposition from that disclosed in the Company’s Annual Report on Form 10-Kfor the fiscal year ended June 30, 2004 or that the Company’s primarymarket risk exposures and how those exposures were managed during the ninemonths ended March 31, 2005 changed significantly when compared toJune 30, 2004.

 

The data in thefollowing tables is based on assumptions utilized by the OTS in assessing interestrate risk of thrift institutions and published in “Selected Asset and LiabilityPrice Tables as of December 31, 2004” and “Selected Asset and LiabilityPrice Tables as of March 31, 2004”. Even if interest rates change in the designated amounts, there can be noassurance that the Company’s assets and liabilities would perform as set forthbelow.

 
| **December 31,  2004**   | ** ** |
|-------------------------------|------------|
| **Change in  Interest Rates** | ** ** | **Estimated  NPV  Amount** | ** ** | **Estimated  Increase  (Decrease) in NPV** | ** ** |
| **Amount**                    | ** ** | **Percent** |
|                          |       | **(Dollars  in thousands)** |   |   |   |
| **Basis Points**              | ** ** | ** ** | ** ** | ** ** | ** ** |
|                          |       |   |   |   |   |   |   |
| +300                          |       | $ | 93,913 |   | $ | (5,498 | ) | (6 | )% |
| +200                          |       | 97,324 |   | (2,087 | ) | (2 | ) |
| +100                          |       | 99,508 |   | 97 |   | — |   |
| —                        |       | 99,411 |   | — |   | — |   |
| -100                          |       | 95,778 |   | (3,632 | ) | (4 | ) |
|                               |            |  |  |  |  |  |  |  |  |

 

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| **March 31,  2004**      | ** ** |
|-------------------------------|------------|
| **Change in  Interest Rates** | ** ** | **Estimated  NPV  Amount** | ** ** | **Estimated  Increase  (Decrease) in NPV** | ** ** |
| **Amount**                    | ** ** | **Percent** |
|                          |       | **(Dollars  in thousands)** |   |   |   |
| **Basis Points**              | ** ** | ** ** | ** ** | ** ** | ** ** |
|                          |       |   |   |   |   |   |   |
| +300                          |       | $ | 91,693 |   | $ | 1,943 |   | 2 | % |
| +200                          |       | 93,681 |   | 3,931 |   | 4 |   |
| +100                          |       | 93,472 |   | 3,723 |   | 4 |   |
| —                        |       | 89,750 |   | — |   | — |   |
| -100                          |       | 84,148 |   | (5,601 | ) | (6 | ) |
|                               |            |  |  |  |  |  |  |  |  |

 

In managing market risk and the asset/liability mix, the Bank hasplaced its emphasis on developing a portfolio in which, to the extentpracticable, assets and liabilities reprice within similar periods. The effect ofthis policy will generally be to reduce the Bank’s sensitivity to interest ratechanges.  The goal of this policy is toprovide a relatively consistent level of net interest income in varyinginterest rate cycles and to minimize the potential for significant fluctuationsfrom period to period.

 

**Item4.  Controls and Procedures**

 

The Company’s management has evaluated, under the supervision and withthe participation of the Company’s Chairman, President and Chief ExecutiveOfficer and the Company’s Executive Vice President, Chief Financial Officer andTreasurer, the effectiveness of the design and operation of the Company’sdisclosure controls and procedures, as defined in Rule 13a-15(e), and haveconcluded that, as of the end of the period covered by this Quarterly Report,the Company’s disclosure controls and procedures are effective for gathering,analyzing and disclosing information the Company is required to disclose in itsperiodic reports filed under the Exchange Act. There were no significant changes in the Company’s internal control overfinancial reporting identified in the above referenced evaluation thatmaterially affected, or are reasonably likely to materially affect, the Company’sinternal control over financial reporting.

 

34

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**PART II- OTHER INFORMATION**

 

**Item 1.    LegalProceedings**

 

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

 

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

 

The following table sets forth the purchasesby the Company of its common stock during the quarterly period endedMarch 31, 2005.

 
| **Period**            | ** ** | **Total  Number  of Shares  Purchased** | ** ** | **Average  Price Paid  per Share** | ** ** | **Total Number  of Shares Purchased  as Part of Publicly  Announced Programs** | ** ** | **Maximum Number of  Shares that May Yet  Be Purchased Under  the Current Program** | ** ** |
|-----------------------|------------|-----------------------------------------|------------|------------------------------------|------------|--------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| January 1 -31, 2005   |       | —                                  |       | —                             |       | —                                                                         |       | 301,181                                                                             |       |
| February 1 - 28, 2005 |       | 54,200                                  |       | $                                  | 20.05      |                                                                           | 54,200     |                                                                                | 246,981    |   |
| March 1 - 31, 2005    |       | 3,900                                   |       | $                                  | 20.59      |                                                                           | 3,900      |                                                                                | 243,081    |   |
|                  |       |                                    |       |                               |       |                                                                           |       |                                                                                |       |
| 3rd Quarter Total     |       | 58,100                                  |       | $                                  | 20.15      |                                                                           | 58,100     |                                                                                |       |   |

 

All of the purchases were made under the Company’s stock buybackprogram, which was publicly announced on April 26, 2004 and pursuant towhich up to 10% of the common stock of the Company that was outstanding onMay 1, 2004, which equals 352,981 shares, may be acquired throughApril 30, 2005.  As ofMarch 31, 2005, a total of 109,900 shares of common stock have been purchasedpursuant to the current program, 58,100 of which were purchased in the openmarket during the three months ended March 31, 2005.

 

The Company approved a new stock buyback program effective as ofMay 1, 2005, which was publicly announced on April 25, 2005, in whichup to 10% of the common stock of the Company outstanding on May 1, 2005,which equals 350,914 shares, may be acquired through April 30, 2006.

 

**Item 3.    Defaultsupon Senior Securities**

 

None

 

**Item 4.    Submissionof Matters to a Vote of Security Holders**

 

None

 

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**Item 5.    OtherInformation**

 

None

 

**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 |

 

36

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**HF FINANCIAL CORP.**

 

**FORM 10-QSIGNATURES**

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.

 

 
|   |              | HF Financial Corp.                            |   |
|--------|-------------------|-----------------------------------------------|--------|
|   |              |                                          |   |   |
|   |              | (Registrant)                                  |   |
|   |              |                                          |   |
| Date:  | May 10, 2005 |                                          |   | By: | /s/ Curtis L. Hage |   |
|   |              | Curtis L. Hage, Chairman, President           |   |
|   |              | And Chief Executive Officer                   |   |
|   |              | (Principal Executive Officer)                 |   |
|   |              |                                          |   |
| Date:  | May 10, 2005 |                                          |   | By: | /s/ Darrel L. Posegate |   |
|   |              | Darrel L. Posegate, Executive Vice President, |   |
|   |              | Chief Financial Officer and Treasurer         |   |
|   |              | (Principal Financial and Accounting Officer)  |   |
|        |                   |                                               |        |  |  |  |  |  |

 

37

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**Index to 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 |

 

- Index -

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