Table ofContents

 

 

** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

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**FORM 10-Q**

** **

| **x** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|--------------------------------------------------------------------------------------------------------|

 

**For the Quarterly Period Ended March 31,2009**

** **

**OR**

 

| **o** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|---------------------------------------------------------------------------------------------------------|

 

**For thetransition period from             to**

 

**Commission file number 0-19972**

 

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**HF FINANCIAL CORP.**

(Exact name of registrant asspecified in its charter)

 

| **Delaware**                                                    | ** ** | **46-0418532**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) | ** ** | (I.R.S. Employer  Identification No.) |
| * *                                                        | ** ** | * *                              |
| **225 South Main Avenue,  Sioux Falls, SD**                     | ** ** | **57104**                             |
| (Address of principal executive offices)                        | ** ** | (ZIP Code)                            |

 

(**605) 333-7556**

(Registrant’s telephone number, including area code)

 

Indicateby check mark whether the Registrant (1) has filed all reports required tobe filed by Section 13 or Section 15(d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.    Yes  x    No  o

 

Indicateby check mark whether the Registrant (1) has submitted electronically andposted on its corporate Web site, if any, every Interactive Data File requiredto be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405of this chapter) during the preceding 12 months (or for such shorter periodthat the Registrant was required to submit and post such files).    Yes  o    No  o

 

Indicateby check mark whether the Registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

| Large accelerated filer o |   | Accelerated filer o         |
|---------------------------|--------|-----------------------------|
|                      |   |                        |
| Non-accelerated filer o   |   | Smaller reporting company x |

 

Indicateby check mark whether the Registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).    Yes  o     No x

 

As of May 8,2009, there were 4,025,982 shares of the Registrant’s common stock outstanding.

 

 

 

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Table ofContents

 

**QuarterlyReport on Form 10-Q**

**Table of Contents**

 
| ** **     | ** **                                                                                          | **Page Number** |
|----------------|-----------------------------------------------------------------------------------------------------|----------------------|
|           |                                                                                                |                 |
|           | **PART I  — FINANCIAL INFORMATION**                                                       |                 |
|           |                                                                                                |                 |
| Item 1.        | Financial Statements  (Unaudited):                                                                  |                 |
|           |                                                                                                |                 |
|           | Consolidated Statements of Financial Condition At  March 31, 2009 and June 30, 2008       | 1                    |
|           |                                                                                                |                 |
|           | Consolidated Statements of Income for the Three and  Nine Months Ended March 31, 2009 and 2008 | 2                    |
|           |                                                                                                |                 |
|           | Consolidated Statements of Cash Flows for the Nine  Months Ended March 31, 2009 and 2008       | 3                    |
|           |                                                                                                |                 |
|           | Notes to Consolidated Financial Statements                                                          | 4                    |
|           |                                                                                                |                 |
| Item 2.        | Management’s  Discussion and Analysis of Financial Condition and Results of Operations         | 16                   |
|           |                                                                                                |                 |
| Item 3.        | Quantitative  and Qualitative Disclosures about Market Risk                                         | 37                   |
|           |                                                                                                |                 |
| Item 4.        | Controls and  Procedures                                                                            | 38                   |
|           |                                                                                                |                 |
|           |                                                                                                |                 |
|           | **PART II  — OTHER INFORMATION**                                                          |                 |
|           |                                                                                                |                 |
| Item 1.        | Legal Proceedings                                                                                   | 39                   |
|           |                                                                                                |                 |
| Item 1A.       | Risk Factors                                                                                        | 39                   |
|           |                                                                                                |                 |
| Item 2.        | Unregistered  Sales of Equity Securities and Use of Proceeds                                        | 39                   |
|           |                                                                                                |                 |
| Item 6.        | Exhibits                                                                                            | 40                   |
|           |                                                                                                |                 |
| Form 10-Q | Signature Page                                                                                      | 41                   |

 

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Table of Contents

 

**PART I - FINANCIAL INFORMATION**

 

**Item 1.         Financial Statements**

 

**HF FINANCIAL CORP.**

**CONSOLIDATED STATEMENTS OF FINANCIALCONDITION**

**(Dollars in Thousands)**

 

 
| ** **                                                                                                                                                      | ** ** | **March 31, 2009** | ** ** | **June 30, 2008** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                                                                                                                                      | ** ** | **(Unaudited)**         | ** ** | **(Audited)**          | ** ** |
| **ASSETS**                                                                                                                                                      | ** ** | ** **              | ** ** | ** **             | ** ** |
| Cash and cash  equivalents                                                                                                                                      |       | $                       | 13,732     |                   | $          | 21,170 |   |
| Securities  available for sale                                                                                                                                  |       | 250,045                 |       | 225,004                |       |
| Federal Home  Loan Bank stock                                                                                                                                   |       | 12,476                  |       | 11,245                 |       |
| Loans held for  sale                                                                                                                                            |       | 21,193                  |       | 8,796                  |       |
|                                                                                                                                                            |       |                    |       |                   |       |
| Loans and leases  receivable                                                                                                                                    |       | 819,530                 |       | 783,710                |       |
| Allowance for  loan and lease losses                                                                                                                            |       | (8,140                  | )          | (5,933                 | )          |
| Net loans and  leases receivable                                                                                                                                |       | 811,390                 |       | 777,777                |       |
|                                                                                                                                                            |       |                    |       |                   |       |
| Accrued interest  receivable                                                                                                                                    |       | 7,764                   |       | 7,540                  |       |
| Office  properties and equipment, net of accumulated depreciation                                                                                               |       | 15,522                  |       | 14,849                 |       |
| Foreclosed real  estate and other properties                                                                                                                    |       | 695                     |       | 643                    |       |
| Cash value of  life insurance                                                                                                                                   |       | 14,457                  |       | 14,050                 |       |
| Servicing rights                                                                                                                                                |       | 11,374                  |       | 11,189                 |       |
| Goodwill, net                                                                                                                                                   |       | 4,951                   |       | 4,951                  |       |
| Other assets                                                                                                                                                    |       | 8,392                   |       | 6,280                  |       |
| Total assets                                                                                                                                                    |       | $                       | 1,171,991  |                   | $          | 1,103,494 |   |
|                                                                                                                                                            |       |                    |       |                   |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                  |       |                    |       |                   |       |
|                                                                                                                                                            |       |                    |       |                   |       |
| **LIABILITIES**                                                                                                                                                 |       |                    |       |                   |       |
| Deposits                                                                                                                                                        |       | $                       | 804,208    |                   | $          | 784,237 |   |
| Advances from  Federal Home Loan Bank and other borrowings                                                                                                      |       | 210,335                 |       | 198,454                |       |
| Subordinated  debentures payable to trusts                                                                                                                      |       | 27,837                  |       | 27,837                 |       |
| Advances by  borrowers for taxes and insurance                                                                                                                  |       | 18,147                  |       | 10,795                 |       |
| Accrued expenses  and other liabilities                                                                                                                         |       | 17,370                  |       | 17,968                 |       |
| Total  liabilities                                                                                                                                              |       | 1,077,897               |       | 1,039,291              |       |
|                                                                                                                                                            |       |                    |       |                   |       |
| **STOCKHOLDERS’  EQUITY**                                                                                                                                  |       |                    |       |                   |       |
| Preferred stock,  $.01 par value, 500,000 shares authorized, 25,000 shares issued at  March 31, 2009                                                       |       | —                  |       | —                 |       |
| 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, 6,109,437 and 6,035,447 shares  issued at March 31, 2009 and June 30, 2008, respectively |       | 61                      |       | 60                     |       |
| Common stock  subscribed for but not issued                                                                                                                     |       | —                  |       | 95                     |       |
| Additional  paid-in capital                                                                                                                                     |       | 48,028                  |       | 21,905                 |       |
| Retained  earnings, substantially restricted                                                                                                                    |       | 80,341                  |       | 76,041                 |       |
| Accumulated  other comprehensive (loss), net of related deferred tax effect                                                                                     |       | (3,439                  | )          | (3,001                 | )          |
| Less cost of  treasury stock, 2,083,455 and 2,083,455 shares at March 31, 2009 and  June 30, 2008, respectively                                       |       | (30,897                 | )          | (30,897                | )          |
| Total  stockholders’ equity                                                                                                                                |       | 94,094                  |       | 64,203                 |       |
| Total  liabilities and stockholders’ equity                                                                                                                |       | $                       | 1,171,991  |                   | $          | 1,103,494 |   |

 

*Seeaccompanying notes to unaudited consolidated financial statements.*

 

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**HF FINANCIAL CORP.**

**CONSOLIDATED STATEMENTS OF INCOME**

**(Dollars in Thousands, except sharedata)**

**(Unaudited)**

 
| ** **                                                               | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                               | ** ** | **March 31,**     | ** ** | **March 31,**    | ** ** |
| ** **                                                               | ** ** | **2009**               | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
| Interest,  dividend and loan fee income:                                 |       |                   |       |                  |       |   |   |   |   |
| Loans and leases  receivable                                             |       | $                      | 12,045     |                  | $          | 13,188 |   | $ | 37,709 |   | $ | 41,187 |   |
| Investment  securities and interest-earning deposits                     |       | 2,963                  |       | 2,354                 |       | 8,696 |   | 6,425 |   |
|                                                                     |       | 15,008                 |       | 15,542                |       | 46,405 |   | 47,612 |   |
| Interest  expense:                                                       |       |                   |       |                  |       |   |   |   |   |
| Deposits                                                                 |       | 3,515                  |       | 5,693                 |       | 12,224 |   | 20,104 |   |
| Advances from  Federal Home Loan Bank and other borrowings               |       | 2,343                  |       | 2,154                 |       | 7,335 |   | 6,149 |   |
|                                                                     |       | 5,858                  |       | 7,847                 |       | 19,559 |   | 26,253 |   |
| **Net  interest income**                                                 |       | 9,150                  |       | 7,695                 |       | 26,846 |   | 21,359 |   |
|                                                                     |       |                   |       |                  |       |   |   |   |   |
| Provision for  losses on loans and leases                                |       | 414                    |       | 551                   |       | 801 |   | 1,171 |   |
|                                                                     |       |                   |       |                  |       |   |   |   |   |
| **Net  interest income after provision for losses on loans and leases**  |       | 8,736                  |       | 7,144                 |       | 26,045 |   | 20,188 |   |
|                                                                     |       |                   |       |                  |       |   |   |   |   |
| Non-interest  income:                                                    |       |                   |       |                  |       |   |   |   |   |
| Fees on deposits                                                         |       | 1,304                  |       | 1,290                 |       | 4,373 |   | 4,058 |   |
| Loan servicing  income                                                   |       | 617                    |       | 589                   |       | 1,708 |   | 1,636 |   |
| Gain on sale of  loans, net                                              |       | 543                    |       | 257                   |       | 1,079 |   | 955 |   |
| Trust income                                                             |       | 158                    |       | 229                   |       | 533 |   | 727 |   |
| Gain on sale of  securities, net                                         |       | 387                    |       | —                |       | 512 |   | — |   |
|                                                                     |       |                   |       |                  |       |   |   |   |   |
| Total  other-than-temporary impairment losses                            |       | (3,158                 | )          | —                |       | (3,158 | ) | — |   |
| Portion of loss  recognized in other comprehensive income (before taxes) |       | 2,797                  |       | —                |       | 2,797 |   | — |   |
| Net impairment  losses recognized in earnings                            |       | (361                   | )          | —                |       | (361 | ) | — |   |
|                                                                     |       |                   |       |                  |       |   |   |   |   |
| Other                                                                    |       | 356                    |       | 442                   |       | 1,138 |   | 1,212 |   |
|                                                                     |       | 3,004                  |       | 2,807                 |       | 8,982 |   | 8,588 |   |
| Non-interest  expense:                                                   |       |                   |       |                  |       |   |   |   |   |
| Compensation and  employee benefits                                      |       | 5,232                  |       | 4,987                 |       | 16,181 |   | 14,218 |   |
| Occupancy and  equipment                                                 |       | 1,034                  |       | 941                   |       | 3,023 |   | 2,859 |   |
| FDIC insurance                                                           |       | 272                    |       | 23                    |       | 535 |   | 70 |   |
| Check and data  processing expense                                       |       | 671                    |       | 594                   |       | 1,945 |   | 1,815 |   |
| Marketing                                                                |       | 225                    |       | 221                   |       | 892 |   | 783 |   |
| Foreclosed real  estate and other properties, net                        |       | 6                      |       | 33                    |       | 219 |   | 113 |   |
| Other                                                                    |       | 968                    |       | 755                   |       | 3,192 |   | 2,548 |   |
|                                                                     |       | 8,408                  |       | 7,554                 |       | 25,987 |   | 22,406 |   |
|                                                                     |       |                   |       |                  |       |   |   |   |   |
| **Income  before income taxes**                                          |       | 3,332                  |       | 2,397                 |       | 9,040 |   | 6,370 |   |
|                                                                     |       |                   |       |                  |       |   |   |   |   |
| Income tax  expense                                                      |       | 1,161                  |       | 774                   |       | 3,048 |   | 2,149 |   |
| **Net  income**                                                          |       | 2,171                  |       | 1,623                 |       | 5,992 |   | 4,221 |   |
|                                                                     |       |                   |       |                  |       |   |   |   |   |
| Preferred stock  dividends and accretion                                 |       | 340                    |       | —                |       | 340 |   | — |   |
|                                                                     |       |                   |       |                  |       |   |   |   |   |
| **Net  income available for common shareholders**                        |       | $                      | 1,831      |                  | $          | 1,623 |   | $ | 5,652 |   | $ | 4,221 |   |
|                                                                     |       |                   |       |                  |       |   |   |   |   |
| **Comprehensive  income**                                                |       | $                      | 2,640      |                  | $          | 1,681 |   | $ | 5,214 |   | $ | 5,284 |   |
|                                                                     |       |                   |       |                  |       |   |   |   |   |
| **Cash  dividends declared per share**                                   |       | $                      | 0.1125     |                  | $          | 0.1075 |   | $ | 0.3375 |   | $ | 0.3225 |   |
|                                                                     |       |                   |       |                  |       |   |   |   |   |
| **Earnings  per common share:**                                          |       |                   |       |                  |       |   |   |   |   |
| Basic                                                                    |       | $                      | 0.45       |                  | $          | 0.41 |   | $ | 1.41 |   | $ | 1.06 |   |
| Diluted                                                                  |       | $                      | 0.45       |                  | $          | 0.40 |   | $ | 1.40 |   | $ | 1.05 |   |

 

*See accompanying notes to unaudited consolidated financialstatements.*

 

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**HF FINANCIAL CORP.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Dollars in Thousands)**

**(Unaudited)**

 
| ** **                                                                                     | ** ** | **Nine Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                     | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| **Cash  flows from operating activities**                                                      |       |                                 |       |   |   |
| Net income                                                                                     |       | $                                    | 5,992      |   | $ | 4,221 |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities:   |       |                                 |       |   |   |
| Provision for  losses on loans and leases                                                      |       | 801                                  |       | 1,171 |   |
| Depreciation                                                                                   |       | 1,292                                |       | 1,241 |   |
| Amortization of  discounts and premiums on securities and other                                |       | 1,255                                |       | 1,177 |   |
| Stock based  compensation                                                                      |       | 303                                  |       | 483 |   |
| Net change in  loans held for resale                                                           |       | (11,318                              | )          | (196 | ) |
| (Gain) on sale  of loans, net                                                                  |       | (1,079                               | )          | (955 | ) |
| Realized (gain)  on sale of securities, net                                                    |       | (512                                 | )          | (219 | ) |
| Other-than-temporary  impairments recognized in non-interest income                            |       | 361                                  |       | — |   |
| Losses and  provision for losses on sales of foreclosed real estate and other properties,  net |       | 19                                   |       | 31 |   |
| Change in other  assets and liabilities                                                        |       | (4,562                               | )          | (1,504 | ) |
| Net cash  provided by (used in) operating activities:                                          |       | (7,448                               | )          | 5,450 |   |
|                                                                                           |       |                                 |       |   |   |
| **Cash  flows from investing activities**                                                      |       |                                 |       |   |   |
| Loan  participations purchased                                                                 |       | (969                                 | )          | (5,477 | ) |
| Net change in  loans outstanding                                                               |       | (34,385                              | )          | 10,832 |   |
| Securities  available for sale:                                                                |       |                                 |       |   |   |
| Sales and  maturities and repayments                                                           |       | 74,921                               |       | 52,206 |   |
| Purchases                                                                                      |       | (99,288                              | )          | (123,419 | ) |
| Purchase of  Federal Home Loan Bank stock                                                      |       | (5,565                               | )          | (7,365 | ) |
| Redemption of  Federal Home Loan Bank stock                                                    |       | 4,334                                |       | 1,871 |   |
| Proceeds from  sale of office properties and equipment                                         |       | —                               |       | 1,274 |   |
| Purchase of  office properties and equipment                                                   |       | (1,965                               | )          | (1,020 | ) |
| Purchase of  servicing rights                                                                  |       | (857                                 | )          | (1,170 | ) |
| Proceeds from  sale of foreclosed real estate and other properties, net                        |       | 451                                  |       | 449 |   |
| Net cash (used  in) investing activities:                                                      |       | (63,323                              | )          | (71,819 | ) |
|                                                                                           |       |                                 |       |   |   |
| **Cash  flows from financing activities**                                                      |       |                                 |       |   |   |
| Net increase  (decrease) in deposit accounts                                                   |       | 19,971                               |       | (71,645 | ) |
| Proceeds of  advances from Federal Home Loan Bank and other borrowings                         |       | 4,054,528                            |       | 1,311,434 |   |
| Payments on  advances from Federal Home Loan Bank and other borrowings                         |       | (4,042,647                           | )          | (1,179,779 | ) |
| Proceeds from  issuance of subordinated debentures                                             |       | —                               |       | 5,000 |   |
| Redemption of  subordinated debentures                                                         |       | —                               |       | (5,000 | ) |
| Increase in  advances by borrowers                                                             |       | 7,352                                |       | 5,087 |   |
| Purchase of  treasury stock                                                                    |       | —                               |       | (1,618 | ) |
| Proceeds from  issuance of preferred stock                                                     |       | 25,000                               |       | — |   |
| Proceeds from  issuance of common stock                                                        |       | 821                                  |       | 470 |   |
| Cash dividends  paid                                                                           |       | (1,692                               | )          | (1,275 | ) |
| Net cash  provided by financing activities:                                                    |       | 63,333                               |       | 62,674 |   |
| (Decrease) in  cash and cash equivalents                                                       |       | (7,438                               | )          | (3,695 | ) |
| Cash and cash  equivalents                                                                     |       |                                 |       |   |   |
| Beginning                                                                                      |       | 21,170                               |       | 22,476 |   |
| Ending                                                                                         |       | $                                    | 13,732     |   | $ | 18,781 |   |
|                                                                                           |       |                                 |       |   |   |
| Supplemental  Disclosures of Cash Flows Information                                            |       |                                 |       |   |   |
| Cash payments  for interest                                                                    |       | $                                    | 21,054     |   | $ | 25,999 |   |
| Cash payments  for income and franchise taxes, net                                             |       | 2,795                                |       | 2,638 |   |

 

*See accompanying notes to unaudited consolidated financialstatements.*

 

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**HFFINANCIAL CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

ForThe Nine Months Ended March 31, 2009 and 2008

(Unaudited)

 

**NOTE 1.                SELECTEDACCOUNTING POLICIES**

 

*Basis ofpresentation:*

 

The consolidated financial information of HF Financial Corp. (the “Company”)and its wholly-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, 2008 (“Fiscal 2008”), 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.

 

The interim consolidated financial statements include the accounts ofthe Company, its wholly-owned subsidiaries, Home Federal Bank (the “Bank”), HFFinancial Group, Inc. (“HF Group”) and HomeFirst Mortgage Corp. (the “MortgageCorp.”), and the Bank’s wholly-owned subsidiaries, Mid America Capital Services, Inc.(“Mid America Capital”), Hometown Investment Services, Inc. (“Hometown”),Home Federal Securitization Corp. (“HFSC”), Mid-America Service Corporation andPMD, Inc.  The interim consolidatedfinancial statements reflect the deconsolidation of the wholly-owned subsidiarytrusts of the Company: HF Financial Capital Trust III (“Trust III”), HFFinancial Capital Trust IV (“Trust IV”), HF Financial Capital Trust V (“Trust V”)and HF Financial Capital Trust VI (“Trust VI”). See Note 10 of “Notes toConsolidated Financial Statements.”  Allintercompany balances and transactions have been eliminated in consolidation.

 

**NOTE 2.                REGULATORY CAPITAL**

 

The following table setsforth the Bank’s compliance with its minimum capital requirements for awell-capitalized institution at March 31, 2009:

 
| ** **                                           | ** ** | **Amount**                 | ** ** | **Percent** | ** ** |
|------------------------------------------------------|------------|----------------------------|------------|-------------|------------|
| ** **                                           | ** ** | **(Dollars in Thousands)** | ** ** |
| Tier I (core)  capital (to adjusted total assets):   |       |                       |       |        |       |
| Required                                             |       | $                          | 58,420     |        | 5.00       | % |
| Actual                                               |       | 96,371                     |       | 8.25        |       |
| Excess over  required                                |       | 37,951                     |       | 3.25        |       |
|                                                 |       |                       |       |        |       |
| Total Risk-based  capital (to risk-weighted assets): |       |                       |       |        |       |
| Required                                             |       | $                          | 94,645     |        | 10.00      | % |
| Actual                                               |       | 104,255                    |       | 11.02       |       |
| Excess over  required                                |       | 9,610                      |       | 1.02        |       |

 

**NOTE3.                EARNINGS PER COMMONSHARE**

 

Basic earnings per common share is computed by dividing incomeavailable to common stockholders (the numerator) by the weighted-average numberof common shares outstanding (the denominator) during the period.  Shares issued during the period and sharesreacquired during the period are weighted for the portion of the period theywere outstanding. The weighted average number of basic common sharesoutstanding for the three months ended March 31, 2009 and 2008 was4,024,335 and 3,960,315, respectively.  The weighted average number of basic common shares outstanding for thenine months ended March 31, 2009 and 2008 was 4,000,456 and 3,976,414,respectively.

 

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Dilutive earnings per common share is similar to the computation ofbasic earnings per common share except the denominator is increased to includethe number 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 monthsended March 31, 2009 and 2008 was 4,034,659 and 4,014,770,respectively.  The weighted averagenumber of common and dilutive potential common shares outstanding for the ninemonths ended March 31, 2009 and 2008 was 4,025,426 and 4,035,416,respectively.

 

**NOTE 4.                INVESTMENTS IN SECURITIES**

 

The amortized cost and fair values ofinvestments in securities, all of which are classified as available for saleaccording to management’s intent, are as follows

 
| ** **                              | ** **             | **March 31,  2009**    | ** **             | **June 30,  2008**                             | ** **             |
|-----------------------------------------|------------------------|-----------------------------|------------------------|-----------------------------------------------------|------------------------|
| ** **                              | ** **             | ** **                  | ** **             | **Gross**                                           | ** **             | ** ** | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                              | ** **             | **Amortized**               | ** **             | **Unrealized**                                      | ** **             | **Fair** | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| ** **                              | **   ** | **Cost**                    | **   ** | **   Gains    ** | **   ** | **(Losses)** | **   ** | **Value** | **   ** | **Cost** | **   ** | **   Gains   ** | **   ** | **(Losses)** | **   ** | **Value** | **  ** |
| ** **                              | ** **             | **(Dollars  in Thousands)** | ** **             |
|                                    |                   |                        |                   |                                                |                   |   |   |   |   |   |   |   |   |   |   |   |   |
| Debt securities:                        |                   |                        |                   |                                                |                   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S. government  agencies               |                   | $                           | 1,117                  |                                                | $                      | 46 |   | $ | — |   | $ | 1,163 |   | $ | 8,490 |   | $ | 173 |   | $ | — |   | $ | 8,663 |   |
| Federal Home  Loan Bank                 |                   | 1,500                       |                   | 8                                                   |                   | — |   | 1,508 |   | 3,944 |   | 87 |   | — |   | 4,031 |   |
| Municipal bonds                         |                   | 14,419                      |                   | 389                                                 |                   | (136 | ) | 14,672 |   | 12,319 |   | 51 |   | (189 | ) | 12,181 |   |
| Trust preferred  securities             |                   | 11,934                      |                   | —                                              |                   | (5,647 | ) | 6,287 |   | 12,372 |   | — |   | (2,080 | ) | 10,292 |   |
|                                    |                   | 28,970                      |                   | 443                                                 |                   | (5,783 | ) | 23,630 |   | 37,125 |   | 311 |   | (2,269 | ) | 35,167 |   |
|                                    |                   |                        |                   |                                                |                   |   |   |   |   |   |   |   |   |   |   |   |   |
| Equity  securities:                     |                   |                        |                   |                                                |                   |   |   |   |   |   |   |   |   |   |   |   |   |
| FNMA-common                             |                   | 8                           |                   | —                                              |                   | (8 | ) | — |   | 8 |   | — |   | — |   | 8 |   |
| Farmer  Mac-common                      |                   | 7                           |                   | —                                              |                   | (7 | ) | — |   | 7 |   | 2 |   | — |   | 9 |   |
| Other  investments                      |                   | 253                         |                   | —                                              |                   | — |   | 253 |   | 253 |   | — |   | — |   | 253 |   |
|                                    |                   | 268                         |                   | —                                              |                   | (15 | ) | 253 |   | 268 |   | 2 |   | — |   | 270 |   |
|                                    |                   |                        |                   |                                                |                   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential  mortgage-backed securities |                   | 223,771                     |                   | 3,625                                               |                   | (1,234 | ) | 226,162 |   | 190,947 |   | 558 |   | (1,938 | ) | 189,567 |   |
|                                    |                   | $                           | 253,009                |                                                | $                      | 4,068 |   | $ | (7,032 | ) | $ | 250,045 |   | $ | 228,340 |   | $ | 871 |   | $ | (4,207 | ) | $ | 225,004 |   |

 

During the third quarter of Fiscal 2009, theCompany early adopted FASB Staff Position(“FSP”) No. FAS 115-2, *The Recognition and Presentation ofOther-Than-Temporary Impairments*, which changes the recognition andpresentation of other-than-temporary impairments.  Management has implemented a process toidentify securities that could potentially have a credit impairment that isother than temporary.  This processinvolves evaluation of the length of time and extent to which the fair valuehas been less than the amortized cost basis, review of available informationregarding the financial position of the issuer, monitoring the rating of thesecurity, cash flow projections, and the Company’s intent to sell a security orwhether it is more likely than not we will be required to sell the securitybefore the recovery of its amortized cost which, in some cases, may extend tomaturity.  To the extent we determinethat a security is deemed to be other-than-temporarily impaired, an impairmentloss is recognized.

 

For all securities that are consideredtemporarily impaired, the Company does not intend to sell these securities (hasnot made a decision to sell) and it is not more likely than not that theCompany will be required to sell the security before recovery of its amortizedcost, which may occur at maturity.  TheCompany believes that it will collect all principal and interest due on allinvestments that have amortized cost in excess of fair value that areconsidered only temporarily impaired.

 

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The following table presents the fair valueand age of gross unrealized losses by investment category at March 31,2009, in accordance with FSP FAS 115-2*:*

 
| ** **                               | ** ** | **Less than 12 Months**    | ** ** | **12 Months or More** | ** ** | **Total**  | ** ** |
|------------------------------------------|------------|----------------------------|------------|-----------------------|------------|------------|------------|
| ** **                               | ** ** | ** **                 | ** ** | **Gross**             | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Gross** | ** ** |
| ** **                               | ** ** | **Fair**                   | ** ** | **Unrealized**        | ** ** | **Fair**   | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| ** **                               | ** ** | **Value**                  | ** ** | **(Losses)**          | ** ** | **Value**  | ** ** | **(Losses)** | ** ** | **Value** | ** ** | **(Losses)** | ** ** |
| ** **                               | ** ** | **(Dollars in Thousands)** | ** ** |
| Debt securities:                         |       |                       |       |                  |       |       |       |   |   |   |   |   |   |
| Municipal bonds                          |       | $                          | 1,969      |                  | $          | (66        | )          | $ | 1,199 |   | $ | (70 | ) | $ | 3,168 |   | $ | (136 | ) |
| Trust preferred  securities              |       | —                     |       | —                |       | 6,287      |       | (5,647 | ) | 6,287 |   | (5,647 | ) |
|                                     |       | 1,969                      |       | (66                   | )          | 7,486      |       | (5,717 | ) | 9,455 |   | (5,783 | ) |
| Equity  securities:                      |       |                       |       |                  |       |       |       |   |   |   |   |   |   |
| FNMA-common                              |       | —                     |       | (8                    | )          | —     |       | — |   | — |   | (8 | ) |
| Farmer  Mac-common                       |       | —                     |       | (7                    | )          | —     |       | — |   | — |   | (7 | ) |
|                                     |       | —                     |       | (15                   | )          | —     |       | — |   | — |   | (15 | ) |
| Residential  mortgage- backed securities |       | 52,993                     |       | (356                  | )          | 25,083     |       | (878 | ) | 78,076 |   | (1,234 | ) |
|                                     |       | $                          | 54,962     |                  | $          | (437       | )          | $ | 32,569 |   | $ | (6,595 | ) | $ | 87,531 |   | $ | (7,032 | ) |

 

The unrealized lossesreported for municipal bonds relate to 21 municipal general obligation orrevenue bonds.  The unrealized losses areprimarily attributed to changes in credit spreads or market interest rateincreases since the securities were originally acquired, rather than due tocredit or other causes.  Management does not believe any individualunrealized losses as of March 31, 2009, represent an other-than-temporaryimpairment for these investments.  TheCompany does not have the intent to sell these securities (has not made adecision to sell) and has assessed that it is not more likely than not that theCompany will be required to sell these securities before anticipated recoveryof fair value.

 

Theunrealized losses reported for residential mortgage-backed securities relate to68 securities issued by the Federal National Mortgage Association (“FNMA”), theGovernment National Mortgage Association (“GNMA”), or the Federal Home LoanMortgage Corporation (“FHLMC”).  Theseunrealized losses are primarily attributable to changes in interest rates andthe contractual cash flows of those investments which are guaranteed by anagency of the U.S. government. Residential mortgage-backed securities also include one “private-label”collateralized mortgage obligation with an amortized amount of $2.1 million,which has maintained its AAA rating as of March 31, 2009.  Management does not believe any of theseunrealized losses as of March 31, 2009, represent an other-than-temporaryimpairment for those investments.  TheCompany does not have the intent to sell these securities (has not made adecision to sell) and has assessed that it is not more likely than not that theCompany will be required to sell these securities before anticipated recoveryof fair value.

 

Theunrealized losses reported for trust preferred securities are attributable tosix rated pooled securities.  Ratingdowngrades regarding these investments have occurred during the current fiscalyear placing each in a below investment grade rating.  The securities have an amortized cost of $3.7million rated B3, $2.5 million rated Caa1, and $5.7 million rated Ca.  The market for these securities is currentlyinactive.  The Company performedassessments of available information for each security during the third quarterended March 31, 2009, and also considered factors such as overall dealstructure and its position within the structure, quality of underlying issuerswithin each pool, defaults and recoveries, loss severities andprepayments.  Based upon scenariosdeveloped in regard to this information, management compared the present valueof best estimates of cash flows expected to be collected from each security atthe security’s effective interest rate to the amortized cost basis of eachsecurity.  Management determined thatthree securities exhibited an other-than-temporary impairment.  The difference between the present value ofcash flows and the amortized cost basis for each of the three securities wasrecorded as credit loss impairment and recognized in earnings in the amount of$361,000.  The amortized cost basis ofthe three securities was reduced by the amount of credit loss.  The remaining impairment amount related toother factors of $2.8 million was recognized in other comprehensive income, netof applicable taxes.  The unrealizedlosses on these trust preferred securities can primarily be attributed to changesin credit spreads since the securities were acquired.  See Note 6 “Fair Value Measurement” foradditional information related to the determination of fair value.  The Company does not have the intent to sellthese six securities (has not made a decision to sell) and has assessed that itis not more likely than not that the Company will be required to sell thesesecurities before anticipated recovery of fair value.  Within this segment, five securities withamortized cost of $9.9 million are quarterly variable-rate securities tied to3-month LIBOR.

 

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The following table presents the amountsrecognized in the Consolidated Statements of Income for other-than-temporaryimpairments related to credit losses:

 
| ** **                                                                                                                                                                          | ** ** | **Three Months Ended**     | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                                                          | ** ** | **March 31, 2009**    | ** ** |
| ** **                                                                                                                                                                          | ** ** | **(Dollars in Thousands)** | ** ** |
| ** **                                                                                                                                                                          | ** ** | ** **                 | ** ** |
| Beginning  balance of credit losses on securities held as of January 1 for which a  portion of other-than-temporary impairment was recognized in other  comprehensive income   |       | $                          | —     |   |
|                                                                                                                                                                                |       |                       |       |
| Credit losses  for which an other-than-temporary impairment was not previously recognized                                                                                           |       | 361                        |       |
|                                                                                                                                                                                |       |                       |       |
| Ending balance  of credit losses on securities held as of March 31 for which a portion  of other-than-temporary impairment was recognized in other comprehensive  income  |       | $                          | 361   |   |

 

**NOTE 5.                SEGMENTREPORTING**

 

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

 

The management approach is used as the conceptual basis for identifyingreportable segments and is based on the way that management organizes thesegments within the enterprise for making operating decisions, allocatingresources and monitoring performance, which is primarily based on products.

 
| ** **                                | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------|------------|---------------------------------------|------------|
| ** **                                | ** ** | **2009**                              | ** ** | **2008** | ** ** |
| ** **                                | ** ** | **Banking**                           | ** ** | **Other** | ** ** | **Total** | ** ** | **Banking** | ** ** | **Other** | ** ** | **Total** | ** ** |
| ** **                                | ** ** | **(Dollars in Thousands)**            | ** ** |
|                                      |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Net interest  income                      |       | $                                     | 9,574      |   | $ | (424 | ) | $ | 9,150 |   | $ | 8,165 |   | $ | (470 | ) | $ | 7,695 |   |
| Provision for  losses on loans and leases |       | (414                                  | )          | — |   | (414 | ) | (551 | ) | — |   | (551 | ) |
| Non-interest  income                      |       | 2,968                                 |       | 36 |   | 3,004 |   | 2,717 |   | 90 |   | 2,807 |   |
| Intersegment  non-interest income         |       | (21                                   | )          | (40 | ) | (61 | ) | (28 | ) | (16 | ) | (44 | ) |
| Non-interest  expense                     |       | (8,105                                | )          | (303 | ) | (8,408 | ) | (7,394 | ) | (160 | ) | (7,554 | ) |
| Intersegment  non-interest expense        |       | —                                |       | 61 |   | 61 |   | — |   | 44 |   | 44 |   |
| Income (loss)  before income taxes        |       | $                                     | 4,002      |   | $ | (670 | ) | $ | 3,332 |   | $ | 2,909 |   | $ | (512 | ) | $ | 2,397 |   |
|                                      |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Total assets at  March 31            |       | $                                     | 1,146,675  |   | $ | 25,316 |   | $ | 1,171,991 |   | $ | 1,064,393 |   | $ | 3,496 |   | $ | 1,067,889 |   |

** **

 

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| ** **                                | ** ** | **Nine Months Ended March 31,** | ** ** |
|-------------------------------------------|------------|--------------------------------------|------------|
| ** **                                | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| ** **                                | ** ** | **Banking**                          | ** ** | **Other** | ** ** | **Total** | ** ** | **Banking** | ** ** | **Other** | ** ** | **Total** | ** ** |
| ** **                                | ** ** | **(Dollars in Thousands)**           | ** ** |
|                                      |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Net interest  income                      |       | $                                    | 28,152     |   | $ | (1,306 | ) | $ | 26,846 |   | $ | 22,962 |   | $ | (1,603 | ) | $ | 21,359 |   |
| Provision for  losses on loans and leases |       | (801                                 | )          | — |   | (801 | ) | (1,171 | ) | — |   | (1,171 | ) |
| Non-interest  income                      |       | 8,746                                |       | 236 |   | 8,982 |   | 8,409 |   | 179 |   | 8,588 |   |
| Intersegment  non-interest income         |       | (85                                  | )          | (97 | ) | (182 | ) | (82 | ) | (50 | ) | (132 | ) |
| Non-interest  expense                     |       | (24,878                              | )          | (1,109 | ) | (25,987 | ) | (21,707 | ) | (699 | ) | (22,406 | ) |
| Intersegment  non-interest expense        |       | —                               |       | 182 |   | 182 |   | — |   | 132 |   | 132 |   |
| Income (loss)  before income taxes        |       | $                                    | 11,134     |   | $ | (2,094 | ) | $ | 9,040 |   | $ | 8,411 |   | $ | (2,041 | ) | $ | 6,370 |   |
|                                      |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Total assets at  March 31            |       | $                                    | 1,146,675  |   | $ | 25,316 |   | $ | 1,171,991 |   | $ | 1,064,393 |   | $ | 3,496 |   | $ | 1,067,889 |   |

 

**NOTE 6.                FAIRVALUE MEASUREMENT**

 

Effective July 1, 2008, the Company adoptedStatement of Financial Accounting Standards (SFAS) No. 157, *Fair Value Measurements*. In accordance with the FASB StaffPosition 157-2, *Effective Date of SFAS No. 157*,the Company has not applied the provisions of this statement to non-financialassets and liabilities.  The Company early adopted FASB Staff Position 157-4,dated April 9, 2009, *Determining Fair ValueWhen the Volume and Level of Activity for the Asset or Liability HaveSignificantly Decreased and Identifying Transactions That Are Not Orderly*,during the third quarter of Fiscal 2009 which amended FASB Staff Postion 157-3,dated October 10, 2008, *Determining the Fair Valueof a Financial Asset When the Market for That Asset Is Not Active*.  SFAS 157 defines fair value and establishes aconsistent framework for measuring fair value under GAAP and expands disclosurerequirements for fair value measurements.  Fair values represent theestimated price that would be received from selling an asset or paid totransfer a liability in an orderly transaction between market participants atthe measurement date under current market conditions.  The standard describes three levels of inputsthat may be used to measure fair value:

 

Level 1: Quoted prices (unadjusted) for identicalassets or liabilities in active markets that the entity has the ability toaccess as of the measurement date.

 

Level 2: Significant other observable inputs otherthan Level 1 prices such as quoted prices for similar assets or liabilities;quoted prices in markets that are not active; or other inputs that areobservable or can be corroborated by observable market data.

 

Level 3: Significant unobservable inputs that reflecta company’s own assumptions about the assumptions that market participantswould use in pricing an asset or liability.  Level 3 assets and liabilities include financialinstruments whose value is determined using pricing models, discounted cashflow methodologies, or similar techniques, as well as instruments for which thedetermination of fair value requires significant management judgment orestimation.

 

The table below presents the Company’s balances offinancial instruments measured at fair value on a recurring basis by levelwithin the hierarchy at March 31, 2009:

 
| ** **                     | ** ** | **Quoted Prices**          | ** ** | **Significant Other** | ** ** | **Significant**  | ** ** | ** ** | ** ** |
|--------------------------------|------------|----------------------------|------------|-----------------------|------------|------------------|------------|------------|------------|
| ** **                     | ** ** | **In Active**              | ** ** | **Observable**        | ** ** | **Unobservable** | ** ** | ** ** | ** ** |
| ** **                     | ** ** | **Markets**                | ** ** | **Inputs**            | ** ** | **Inputs**       | ** ** | ** ** | ** ** |
| ** **                     | ** ** | **(Level 1)**              | ** ** | **(Level 2)**         | ** ** | **(Level 3)**    | ** ** | **Total**  | ** ** |
| ** **                     | ** ** | **(Dollars in Thousands)** | ** ** |
|                           |       |                       |       |                  |       |             |       |       |       |
| Securities  available for sale |       | $                          | —     |                  | $          | 243,758          |       | $          | 6,287      |   | $ | 250,045 |   |
| Interest rate  swap contracts  |       | —                     |       | (1,134                | )          | —           |       | (1,134     | )          |
|                                |            |                            |            |                       |            |                  |            |            |            |  |  |  |  |

 

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The Company used the following methods and significantassumptions to estimate the fair value of items:

 

Securities available for sale: The fair values ofsecurities available for sale are determined by obtaining quoted prices onnationally recognized securities exchanges (Level 1 inputs), or matrix pricing,which is a mathematical technique widely used in the industry to value debtsecurities without relying exclusively on quoted prices for the specificsecurities, but rather by relying on the securities’ relationship to otherbenchmark quoted securities (Level 2 inputs). The Company outsources this valuation primarily to a third partyprovider which utilizes several sources for valuing fixed-incomesecurities.  Sources utilized by thethird party provider include pricing models that vary based by asset class andinclude available trade, bid, and other market information.  This methodology includes broker quotes,proprietary models, descriptive terms and conditions databases, as well asextensive quality control programs.  Asfurther valuation sources, the third party provider uses a proprietaryvaluation model and capital markets trading staff.  This proprietary valuation model is used forvaluing municipal securities. This model includes a separate curve structurefor Bank-Qualified municipal securities. The grouping of municipal securitiesis further broken down according to insurer, credit support, state of issuance,and rating to incorporate additional spreads and municipal curves.

 

The securities shown in Level 3 relate to trustpreferred securities which are currently part of an inactive market.  The inactivity was evidenced first by asignificant widening of the bid-ask spread in the brokered markets in whichthese securities trade, and then by a significant decrease in the volume oftrades relative to historical levels. The new issue market for pooled trust preferred securities have beenissued since 2007.  Given conditions inthe debt markets and the absence of observable orderly transactions in thesecondary and new issue markets, management determined that an income valuationapproach technique (present value technique) that maximizes the use of relevantobservable inputs and minimizes the use of unobservable inputs will be equallyor more representative of fair value than the market approach valuationtechnique.

 

During the third quarter of Fiscal 2009, the Companymodified the valuation technique used to measure fair value of trust preferredsecurities.  In addition to the previousvaluation approach utilizing trust preferred security valuations prepared by anindependent third party, management derived valuations under various cash flowscenarios.  The results of the thirdparty valuation and the valuation derived by management were weighted each at50% and used to measure fair value for each security.  If the Company had not modified the valuationtechnique, other comprehensive income would have decreased by an additional$1.3 million, net of taxes.  Theapproaches to determining fair value included the following factors:

 

1.               The credit quality of the collateral estimated usingaverage probability of default values.

 

2.               The loss given default was assumed to be 95% (i.e. a5% recovery) for third party valuations. Management utilized a range of loss given default based upon a review ofthe financial condition of underlying issuers in each pool.

 

3.               The cash flows were forecasted for the underlying collateraland applied to each tranche to determine the resulting distribution among thesecurities.

 

4.               The best estimates of expected cash flows werediscounted to calculate the present value of the security.  Management considered a range of discountrates based upon three factors:  (1) arisk-free rate based on the rate of return on government debt securities, (2) thecredit spread for AA or A Bank Corporate Debt Indices, and (3) a liquidityor “risk premium” of 200 basis points.

 

5.               The calculations were modeled in several thousandscenarios and the average price was used for the third party valuations.  Management utilized an average price derivedfrom various cash flow scenarios.

 

Interest Rate Swaps: The fair values of interest rate swaps relate to cash flow hedges oftrust preferred debt securities issued by the Company.  The fair value is estimated by a third partyusing inputs that are observable or that can be corroborated by observablemarket data and, therefore, are classified within Level 2 of the valuationhierarchy. These fair value estimations include primarily market observableinputs, such as yield curves, and include the value associated withcounterparty credit risk.

 

The following table reconciles the beginning and ending balances of theassets or liabilities of the Company that are measured at fair value on arecurring basis using significant unobservable inputs.

 

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| ** **                                    | ** ** | **Fair Value Measurements Using Significant**                     | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **Unobservable Inputs (Level 3) - Securities Available for Sale** | ** ** |
| ** **                                    | ** ** | **Three Months Ended**                                            | ** ** | **Nine Months Ended** | ** ** |
| ** **                                    | ** ** | **March 31, 2009**                                           | ** ** | **March 31, 2009** | ** ** |
| ** **                                    | ** ** | **(Dollars in Thousands)**                                        | ** ** |
|                                          |       |                                                              |       |   |   |
| Beginning  balance                            |       | $                                                                 | 6,974      |   | $ | — |   |
| Total  realized/unrealized gains (losses)     |       |                                                              |       |   |   |
| Included in  earnings                         |       | (361                                                              | )          | (361 | ) |
| Included in  other comprehensive loss         |       | (326                                                              | )          | (2,788 | ) |
| Purchases,  issuances, (paydowns) and (sales) |       | —                                                            |       | (62 | ) |
| Transfers into  or (out) of Level 3           |       | —                                                            |       | 9,498 |   |
| Ending balance                                |       | $                                                                 | 6,287      |   | $ | 6,287 |   |

 

The table below presents the Company’s balances offinancial instruments measured at fair value on a nonrecurring basis by levelwithin the hierarchy at March 31, 2009:

 
| ** **     | ** ** | **Quoted Prices**          | ** ** | **Significant Other** | ** ** | **Significant**  | ** ** | ** ** | ** ** |
|----------------|------------|----------------------------|------------|-----------------------|------------|------------------|------------|------------|------------|
| ** **     | ** ** | **In Active**              | ** ** | **Observable**        | ** ** | **Unobservable** | ** ** | ** ** | ** ** |
| ** **     | ** ** | **Markets**                | ** ** | **Inputs**            | ** ** | **Inputs**       | ** ** | ** ** | ** ** |
| ** **     | ** ** | **(Level 1)**              | ** ** | **(Level 2)**         | ** ** | **(Level 3)**    | ** ** | **Total**  | ** ** |
| ** **     | ** ** | **(Dollars in Thousands)** | ** ** |
|           |       |                       |       |                  |       |             |       |       |       |
| Impaired loans |       | $                          | —     |                  | $          | 628              |       | $          | —     |   | $ | 628 |   |
|                |            |                            |            |                       |            |                  |            |            |            |  |  |  |  |

 

Impaired loans are evaluated and valued at the timethe loan is identified as impaired, at the lower of cost or marketvalue. Market value is measured based on the value of the collateralsecuring these loans.  Collateral is primarily real estate and itsfair value is generally determined based on real estate appraisals or otherevaluations by qualified professionals. Impaired loans are reviewed andevaluated on at least a quarterly basis for additional impairment and adjustedaccordingly, based on the same factors identified above. Impaired loans thatare collateral dependent are written down to their fair value, less costs tosell, through the establishment of specific reserves or by recordingcharge-offs when the carrying value exceeds the fair value. Valuationtechniques consistent with the market approach, income approach, and/or costapproach were used to measure fair value and primarily included observableinputs such as recent sales of similar assets or observable market data foroperational or carrying costs.

 

**NOTE 7.                DEFINEDBENEFIT PLAN**

 

The Company has a noncontributory (cash balance) defined benefitpension plan covering all employees of the Company and its wholly-ownedsubsidiaries who have attained the age of 21 and have completed 1,000 hours ofservice in a plan year.  The benefits arebased on 6% of each eligible participant’s annual compensation, plus incomeearned in the accounts at a rate determined annually based on 30-year Treasurynote rates.  The Company’s funding policyis to make the minimum annual required contribution plus such amounts as theCompany may determine to be appropriate from time to time.  The Company has adopted all plan provisionsrequired by the Pension Protection Act of 2006. These provisions are effective with the plan year beginning July 1,2008.  Information relative to thecomponents of net periodic benefit cost for the Company’s defined benefit planis presented below:

 

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| ** **                         | ** ** | **Three Months Ended**     | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------|------------|----------------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **March 31,**         | ** ** | **March 31,**    | ** ** |
| ** **                         | ** ** | **2009**                   | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                         | ** ** | **(Dollars in Thousands)** | ** ** |
| ** **                         | ** ** | ** **                 | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                       |       | $                          | 119        |                  | $          | 112 |   | $ | 356 |   | $ | 335 |   |
| Interest cost                      |       | 120                        |       | 109                   |       | 360 |   | 328 |   |
| Amortization of  prior losses      |       | 16                         |       | —                |       | 46 |   | — |   |
| Expected return  on plan assets    |       | (115                       | )          | (122                  | )          | (368 | ) | (365 | ) |
| Total costs  recognized in expense |       | $                          | 140        |                  | $          | 99 |   | $ | 394 |   | $ | 298 |   |

 

The Company previously disclosed in its consolidated financialstatements for Fiscal 2008, which are included in Part II, Item 8 “FinancialStatements and Supplementary Data” of the Company’s Annual Report on Form 10-Kfor Fiscal 2008, that it contributed $532,000 to fund its qualified pensionplan.  During the second quarter of thefiscal year ending June 30, 2009 (“Fiscal 2009”), the Company madecontributions of $2.35 million to fund its qualified pension plan.  The Company anticipates no additionalcontributions for Fiscal 2009.

 

**NOTE 8.                SELF-INSURED HEALTHCARE PLAN**

 

The Company has had a self-insured health plan for itsemployees, subject to certain limits, since January 1994.  The Bank is named the plan administrator forthis plan and has retained the services of an independent third partyadministrator to process claims and handle other duties for this plan.  The third party administrator does not assumeliability for benefits payable under this plan.

 

The Company assumes the responsibility for funding the plan benefitsout of general assets; however, employees cover some of the costs of coveredbenefits through contributions, deductibles, co-pays and participationamounts.  An employee is eligible forcoverage upon completion of 30 calendar days of regular employment.  The plan, which is on a calendar year basis,is intended to comply with, and be governed by, the Employee Retirement IncomeSecurity Act of 1974, as amended.

 

The accrual estimate forpending and incurred but not reported health claims is based upon a pendingclaims lag report provided by a third party provider.  Although management believes that it uses thebest information available to determine the accrual, unforeseen health claimscould result in adjustments and net earnings being significantly affected ifcircumstances differ substantially from the assumptions used in estimating theaccrual.  Net healthcare costs areinclusive of health claims expenses and administration fees offset by stop lossand employee reimbursement.

 

Reported below is asummary of net healthcare costs by quarter during Fiscal 2009 and Fiscal 2008:

 
| ** **                       | ** ** | **Fiscal Years Ended June 30,** | ** ** |
|----------------------------------|------------|--------------------------------------|------------|
| ** **                       | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| ** **                       | ** ** | **(Dollars in Thousands)**           | ** ** |
|                             |       |                                 |       |   |   |
| Quarter ended  September 30 |       | $                                    | 358        |   | $ | 221 |   |
| Quarter ended  December 31  |       | 945                                  |       | 409 |   |
| Quarter ended  March 31     |       | 704                                  |       | 328 |   |
| Quarter ended  June 30      |       | —                               |       | 524 |   |
| Net healthcare  costs            |       | $                                    | 2,007      |   | $ | 1,482 |   |

 

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**NOTE 9.                STOCK-BASEDCOMPENSATION PLANS**

 

The fair value of eachincentive stock option and each stock appreciation right grant is estimated atthe grant date using the Black-Scholes option-pricing model.  The following assumptions were used forgrants in the nine months ended March 31, 2009 and 2008:

 
| ** **                | ** ** | **Nine Months Ended** | ** ** |
|---------------------------|------------|-----------------------|------------|
| ** **                | ** ** | **March 31,**    | ** ** |
| ** **                | ** ** | **2009**              | ** ** | **2008** | ** ** |
| ** **                | ** ** | ** **            | ** ** | ** ** | ** ** |
| Expected  volatility      |       | 19.00                 | %          | 22.00 | % |
| Expected  dividend yield  |       | 3.06                  |       | 2.61 |   |
| Risk-free  interest rate  |       | 2.87                  |       | 4.10 |   |
| Expected term  (in years) |       | 5                     |       | 4 |   |

 

Stock option activity for the nine months ended March 31, 2009 is asfollows:

 
| ** **                      | ** ** | **2009**   | ** ** |
|---------------------------------|------------|------------|------------|
| ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | ** ** | ** ** | **Weighted** | ** ** | **Average** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | ** ** | ** ** | **Average** | ** ** | **Remaining** | ** ** | **Aggregate** | ** ** |
| ** **                      | ** ** | ** ** | ** ** | **Exercise** | ** ** | **Contractual** | ** ** | **Intrinsic** | ** ** |
| ** **                      | ** ** | **Shares** | ** ** | **Price** | ** ** | **Term** | ** ** | **Value** | ** ** |
|                            |       |       |       |   |   |   |   |   |   |
| Beginning  balance, July 1 |       | 203,554    |       | $ | 12.48 |   |   |   |   |   |
| Granted                         |       | —     |       | — |   |   |   |   |   |
| Forfeited                       |       | (4,232     | )          | 16.86 |   |   |   |   |   |
| Exercised                       |       | (51,939    | )          | 10.37 |   |   |   |   |   |
|                            |       |       |       |   |   |   |   |   |   |
| Ending balance                  |       | 147,383    |       | $ | 13.05 |   | 4.35 |   | $ | 173 |   |
|                            |       |       |       |   |   |   |   |   |   |
| Vested and  exercisable         |       | 147,383    |       | $ | 13.05 |   | 4.35 |   | $ | 173 |   |

 

Stock appreciation rights activity for the nine months ended March 31,2009, are as follows:

 
| ** **                      | ** ** | **2009**   | ** ** |
|---------------------------------|------------|------------|------------|
| ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | ** ** | ** ** | **Weighted** | ** ** | **Average** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | ** ** | ** ** | **Average** | ** ** | **Remaining** | ** ** | **Aggregate** | ** ** |
| ** **                      | ** ** | ** ** | ** ** | **Exercise** | ** ** | **Contractual** | ** ** | **Intrinsic** | ** ** |
| ** **                      | ** ** | **SARs**   | ** ** | **Price** | ** ** | **Term** | ** ** | **Value** | ** ** |
|                            |       |       |       |   |   |   |   |   |   |
| Beginning  balance, July 1 |       | 44,622     |       | $ | 16.06 |   |   |   |   |   |
| Granted                         |       | 47,051     |       | 14.71 |   |   |   |   |   |
| Forfeited                       |       | (3,651     | )          | 15.73 |   |   |   |   |   |
| Exercised                       |       | —     |       | — |   |   |   |   |   |
|                            |       |       |       |   |   |   |   |   |   |
| Ending balance                  |       | 88,022     |       | $ | 15.35 |   | 8.79 |   | $ | — |   |
|                            |       |       |       |   |   |   |   |   |   |
| Vested and  exercisable         |       | 14,820     |       | $ | 16.04 |   | 7.89 |   | $ | — |   |

 

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The total intrinsic value of options exercised during the nine monthsended March 31, 2009 and 2008 was $188,000 and $148,000,respectively.  Cash received from theexercise of options for the nine months ended March 31, 2009, and 2008 was$546,000 and $397,000, respectively.  Thetax benefit realized for the tax deductions from cashless option exercisestotaled $700 and $5,500 for the nine months ended March 31, 2009, and 2008,respectively.  The weighted-average grantdate fair value of stock appreciation rights (SARs) granted during the ninemonths ended March 31, 2009, and 2008 was $2.06 and $2.89,respectively.  The total unrecognizedcompensation cost related to nonvested SARs awards at March 31, 2009 was$177,000.  The cost is expected to berecognized over a weighted average period of 31 months.

 

Nonvested share activity for the nine months ended March 31follows:

 
| ** **                    | ** ** | **2009**   | ** ** | **2008**       | ** ** |
|-------------------------------|------------|------------|------------|----------------|------------|
| ** **                    | ** ** | ** ** | ** ** | **Weighted**   | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                    | ** ** | ** ** | ** ** | **Average**    | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                    | ** ** | ** ** | ** ** | **Grant Date** | ** ** | ** ** | ** ** | **Grant Date** | ** ** |
| ** **                    | ** ** | **Shares** | ** ** | **Fair Value** | ** ** | **Shares** | ** ** | **Fair Value** | ** ** |
|                          |       |       |       |           |       |   |   |   |   |
| Nonvested  balance, beginning |       | 121,746    |       | $              | 16.57      |   | 144,711 |   | $ | 16.10 |   |
| Granted                       |       | 23,602     |       | 13.33          |       | 14,955 |   | 16.78 |   |
| Vested                        |       | (49,295    | )          | 16.43          |       | (31,236 | ) | 14.50 |   |
| Forfeited                     |       | (1,551     | )          | 16.70          |       | (10,894 | ) | 16.46 |   |
|                          |       |       |       |           |       |   |   |   |   |
| Nonvested  balance, ending    |       | 94,502     |       | $              | 15.83      |   | 117,536 |   | $ | 16.58 |   |

 

Pretax compensation expense recognized for nonvested shares for thenine months ended March 31, 2009, and 2008 was $276,000 and $314,000,respectively.  The tax benefit for thenine months ended March 31, 2009, and 2008 was $94,000 and $107,000,respectively.  As of March 31, 2009,there was $704,000 of total unrecognized compensation cost related to nonvestedshares granted under the Company’s 2002 Stock Option and Incentive Plan, asamended (“the Plan”).  The cost isexpected to be recognized over a weighted-average period of 17 months.  The total fair value of shares vested duringthe nine months ended March 31, 2009 and 2008 was $810,000 and $453,000,respectively.

 

In association with the 2002 Option Plan, awards of nonvested shares ofthe Company’s common stock are made to outside directors of the Company.  Each outside director is entitled to allvoting, dividend and distribution rights during the vesting period.  During the second quarter of Fiscal 2009,14,511 shares of nonvested stock were awarded. Nonvested shares vest on the first anniversary of the date of grant.  As of March 31, 2009, there was $121,000of total unrecognized compensation cost related to nonvested shares, which areexpected to be recognized over the remaining 8 months.  For the nine months ended March 31,2009, amortization expense was recorded in the amount of $116,000.

 

These stock option and incentive plans are described more fully in Part II,Item 8 “Financial Statements and Supplementary Data” of the Company’s AnnualReport on Form 10-K for Fiscal 2008, under Note 16 of “Notes toConsolidated Financial Statements.”

 

**NOTE 10.              SUBORDINATEDDEBENTURES PAYABLE TO TRUSTS**

 

On July 5, 2007, the Company issued 5,000 shares totaling $5.0million of Company Obligated Mandatorily Redeemable Preferred Securities ofTrust VI.  Trust VI was established andexists for the sole purpose of issuing trust preferred securities and investingthe proceeds in subordinated debentures of the Company.  These subordinated debentures constitute thesole asset of Trust VI.  The securitiesprovide for cumulative cash distributions calculated at a rate based onthree-month LIBOR plus 1.65%, adjusted quarterly.  Refer to Note 11 in regards to the interestrate swap agreement, which converted the variable-rate Trust Preferred VIsecurity into a fixed-rate security for a term of five years.  The Company may, at one or more times, deferinterest payments on the capital securities for up to 20 consecutive quarterlyperiods, but not beyond October 1, 2037. At the end of the deferral period, all accumulated and unpaiddistributions must be paid.  The capitalsecurities must be redeemed on October 1, 2037; however, the Company hasthe option to shorten the maturity date to a date not earlier than October 1,2012.  Holders of the capital securitieshave no voting rights, are unsecured, and rank junior in priority of thepayment to all of the Company’s indebtedness and senior to the Company’scapital stock.

 

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On July 7, 2007, the Company exercised its option to redeem $5.0million of Company Obligated Mandatorily Redeemable Preferred Securities ofTrust II.

 

**NOTE 11.              INTEREST RATE CONTRACTS**

 

Interest rate swap contracts are entered into primarily as anasset/liability management strategy of the Company to modify interest raterisk.  The primary risk associated withall swaps is the exposure to movements in interest rates and the ability of thecounterparties to meet the terms of the contract.  The Company is exposed to losses if thecounterparty fails to make its payments under a contract in which the Companyis in a receiving status. The Company minimizes its risk by monitoring thecredit standing of the counterparty.  TheCompany anticipates the counterparty will be able to fully satisfy itsobligations under the remaining agreements. These contracts are designated as cash flow hedges.

 

During the first quarter of Fiscal 2008, the Company entered into aninterest rate swap agreement with a $5.0 million notional amount to convert thevariable-rate Trust Preferred VI security into a fixed-rate instrument for aterm of five years at a fixed rate of 6.69%. The fair value of the derivative was a $603,000 unrealized loss at March 31,2009.

 

During the fourth quarter of Fiscal 2008, the Company entered into aninterest rate swap agreement with a $7.0 million notional amount to convert thevariable-rate Trust Preferred IV security into a fixed-rate instrument for aterm of three years at a fixed rate of 6.19%. The fair value of the derivative was a $248,000 unrealized loss at March 31,2009.

 

During the first quarter of Fiscal 2009, the Company entered into aninterest rate swap agreement with a $3.0 million notional amount to convert aportion of the variable-rate Trust Preferred III security into a fixed-rateinstrument for a term of three years at a fixed rate of 6.70%.  The Company also entered into an interestrate swap agreement with a $2.0 million notional amount to convert theremaining portion of variable rate Trust Preferred III security into a fixedrate instrument for a term of four years at a fixed rate of 6.91%.  The fair value of the $3.0 million notionalamount derivative was a $151,000 unrealized loss, while the fair value of the$2.0 million notional amount derivative was a $132,000 unrealized loss at March 31,2009.

 

No gain or loss was recognized in earnings for the nine months ended March 31,2009, and 2008 related to interest rate swaps. No deferred net losses on interest rate swaps in other comprehensiveloss as of March 31, 2009, are expected to be reclassified into earningsduring the current fiscal year.   SeeNote 12 “Other Comprehensive Income” for amounts reported as othercomprehensive income.

 

The Company posted $1.2 million in cash under collateral arrangementsas of March 31, 2009, to satisfy collateral requirements associated withour interest rate swap contracts.

 

The following table summarizes the derivative financial instrumentsutilized as of March 31, 2009:

 
| ** **                    | ** ** | **Balance**                           | ** ** | **Notional**               | ** ** | **Estimated Fair Value** | ** ** |
|-------------------------------|------------|---------------------------------------|------------|----------------------------|------------|--------------------------|------------|
| **Cash flow hedge**           | ** ** | **Sheet Location**                    | ** ** | **Amount**                 | ** ** | **Gain**                 | ** ** | **Loss** | ** ** |
| ** **                    | ** ** | ** **                            | ** ** | **(Dollars in Thousands)** | ** ** |
|                          |       |                                  |       |                       |       |                     |       |   |   |
| Interest rate  swap contracts |       | Accumulated  other comprehensive loss |       | $                          | 17,000     |                     | $          | — |   | $ | (1,134 | ) |
|                               |            |                                       |            |                            |            |                          |            |  |  |  |  |  |

 

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The following table details the derivative financial instruments, theaverage remaining maturities and the weighted-average interest rates being paidand received as of March 31, 2009:

 
| ** **                    | ** ** | ** **                 | ** ** | **Average**  | ** ** | ** ** | ** ** | ** **                | ** ** |
|-------------------------------|------------|----------------------------|------------|--------------|------------|------------|------------|---------------------------|------------|
| ** **                    | ** ** | **Notional**               | ** ** | **Maturity** | ** ** | **Fair**   | ** ** | **Weighted Average Rate** | ** ** |
| ** **                    | ** ** | **Amount**                 | ** ** | **(years)**  | ** ** | **Value**  | ** ** | **Receive**               | ** ** | **Pay** | ** ** |
| ** **                    | ** ** | **(Dollars in Thousands)** | ** ** |
|                          |       |                       |       |         |       |       |       |                      |       |   |   |
| Interest rate  swap contracts |       | $                          | 17,000     |         | 2.7        |       | $          | (1,134                    | )          | 4.17 | % | 6.51 | % |
|                               |            |                            |            |              |            |            |            |                           |            |  |  |  |  |

 

**NOTE 12.              OTHER COMPREHENSIVE INCOME**

 

Comprehensive income consists of two components, net income and othercomprehensive income.  Othercomprehensive income refers to revenues, expenses and gains and losses underaccounting principles generally accepted in the United States of America (“GAAP”)which are recorded as an element of shareholders’ equity but are excluded fromnet income.  The components of totalother comprehensive income follow:

 
| ** **                                                                                         | ** ** | **Three Months Ended**     | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|----------------------------|------------|-----------------------|------------|
| ** **                                                                                         | ** ** | **March 31,**         | ** ** | **March 31,**    | ** ** |
| ** **                                                                                         | ** ** | **2009**                   | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                                         | ** ** | **(Dollars in Thousands)** | ** ** |
|                                                                                               |       |                       |       |                  |       |   |   |   |   |
| Net income                                                                                         |       | $                          | 1,831      |                  | $          | 1,623 |   | $ | 5,652 |   | $ | 4,221 |   |
| Other  comprehensive income (loss), net of tax:                                                    |       |                       |       |                  |       |   |   |   |   |
| Securities  available for sale:                                                                    |       |                       |       |                  |       |   |   |   |   |
| Net unrealized  gains (losses) that are included in accumulated other comprehensive income  (loss) |       | 4,202                      |       | 476                   |       | 3,171 |   | 2,380 |   |
| Noncredit  component of impairment losses on other-than-temporary impaired securities,  net        |       | (2,797                     | )          | —                |       | (2,797 | ) | — |   |
| Income tax  benefit                                                                                |       | (534                       | )          | (181                  | )          | (143 | ) | (904 | ) |
|                                                                                               |       |                       |       |                  |       |   |   |   |   |
| Other  comprehensive income on securities available for sale                                       |       | 871                        |       | 295                   |       | 231 |   | 1,476 |   |
|                                                                                               |       |                       |       |                  |       |   |   |   |   |
| Defined benefit  plan:                                                                             |       |                       |       |                  |       |   |   |   |   |
| Net unrealized  (loss)                                                                             |       | —                     |       | —                |       | — |   | — |   |
| Income tax  benefit                                                                                |       | —                     |       | —                |       | — |   | — |   |
|                                                                                               |       |                       |       |                  |       |   |   |   |   |
| Other  comprehensive (loss) on defined benefit plan                                                |       | —                     |       | —                |       | — |   | — |   |
|                                                                                               |       |                       |       |                  |       |   |   |   |   |
| Cash flow  hedging activities-interest rate swap contracts:                                        |       |                       |       |                  |       |   |   |   |   |
| Net unrealized  (losses)                                                                           |       | (94                        | )          | (359                  | )          | (1,014 | ) | (625 | ) |
| Income tax  benefit                                                                                |       | 32                         |       | 122                   |       | 345 |   | 212 |   |
|                                                                                               |       |                       |       |                  |       |   |   |   |   |
| Other  comprehensive (loss) on cash flow hedging activities-interest rate swap  contracts          |       | (62                        | )          | (237                  | )          | (669 | ) | (413 | ) |
|                                                                                               |       |                       |       |                  |       |   |   |   |   |
| Total other  comprehensive income (loss)                                                           |       | 809                        |       | 58                    |       | (438 | ) | 1,063 |   |
|                                                                                               |       |                       |       |                  |       |   |   |   |   |
| Other  comprehensive income                                                                        |       | $                          | 2,640      |                  | $          | 1,681 |   | $ | 5,214 |   | $ | 5,284 |   |

 

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| ** **                                                                                                 | ** ** | **March 31,**         | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                                 | ** ** | **2009**                   | ** ** | **2008** | ** ** |
| ** **                                                                                                 | ** ** | **(Dollars in Thousands)** | ** ** |
| Accumulated  other comprehensive income (loss) balances were:                                              | ** ** | ** **                 | ** ** | ** ** | ** ** |
| ** **                                                                                                 | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Unrealized  income (loss) on securities available for sale, net of related tax effect of  $1,127 and ($44) |       | $                          | (1,837     | ) | $ | 72 |   |
| Unrealized  (loss) on defined benefit plan, net of related tax effect of $523 and $60                      |       | (853                       | )          | (98 | ) |
| Unrealized  (loss) on cash flow hedging activities, net of related tax effect of $385 and  $122            |       | (749                       | )          | (413 | ) |
|                                                                                                       |       |                       |       |   |   |
|                                                                                                       |       | $                          | (3,439     | ) | $ | (439 | ) |

 

**NOTE 13.              STOCKHOLDERS’ EQUITY**

 

As referenced in the 8-K filed November 21, 2008, the Companyentered into an agreement with the U.S. Department of the Treasury pursuant towhich the Company issued and sold to the Treasury Department (i) 25,000shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, parvalue $0.01 per share and having a liquidation preference of $1,000 per share,and (ii) a ten-year warrant to purchase up to 302,419 shares of theCompany’s common stock, par value $0.01 per share, at an initial exercise priceof $12.40 per share, for an aggregate purchase price of $25.0 million incash.  The securities were issued andsold in a private placement exempt from registration pursuant to Section 4(2) ofthe Securities Act of 1933, as amended. Cumulative dividends on the Preferred Stock will accrue on theliquidation preference at a rate of 5.00% per annum for the first five years,and at a rate of 9.00% per annum thereafter, but will be paid only if, as andwhen declared by the Company’s Board of Directors.  As the issuance of Preferred Stock includedwarrants for common stock, this transaction increased the weighted averagenumber of diluted common shares outstanding by a total of 5,586 for the ninemonth period ended March 31, 2009.

 

**Item 2.                    Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

**Forward-Looking Statements**

 

This QuarterlyReport on Form 10-Q and other reports issued by the Company, includingreports 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, capitalstructure, tax benefit or other financial items.

*                 Descriptions of plans or objectives ofmanagement for future operations, products or services, transactions,investments and use of subordinated debentures payable to trusts.

*      Forecastsof future economic performance.

*      Use anddescriptions of assumptions and estimates underlying or relating to suchmatters.

 

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

 

Forward-looking statementsabout the Company’s expected financial results and other plans are subject tocertain risks, uncertainties and assumptions. These include, but are not limited to, the risks discussed in Part I,Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K forFiscal 2008 and the following: possible legislative changes and adverseeconomic, business and competitive conditions and developments (such asshrinking interest margins and continued short-term rate environments); depositoutflows; reduced demand for financial services and loan products; changes inaccounting policies or guidelines, or in monetary and fiscal policies of thefederal government; changes in credit and other risks posed by the Company’sloan and lease portfolios; the ability or inability of the Company to manageinterest rate and other risks; unexpected, continuing or excessive claimsagainst the Company’s self-insured health plan; the Company’s use of trustpreferred securities; the ability or inability of the Company to successfullyenter into a definitive agreement for and close anticipated transactions;technological, computer-related or operational difficulties; adverse changes insecurities markets; results of litigation; or other significant uncertainties.

 

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Forward-looking statements speak only as of the datethey are made.  The Company does notundertake to update forward-looking statements to reflect circumstances orevents that occur after the date the forward-looking statements are made.  Although the Company believes itsexpectations are reasonable, it can give no assurance that such expectationswill prove to be correct.  Based uponchanging conditions, should any one or more of these risks or uncertaintiesmaterialize, or should any underlying assumptions prove incorrect, actualresults may vary materially from those described in any forward-lookingstatements.

 

**Executive Summary**

 

The Company’s net incomeavailable for common shareholders for the third quarter of Fiscal 2009 was $1.8million, or $0.45 in diluted earnings per common share, compared to $1.6million, or $0.40 in diluted earnings per common share, for the third quarterof Fiscal 2008.  The Company’s net incomeavailable for common shareholders for the nine months ended March 31, 2009was $5.7 million, or $1.40 in diluted earnings per common share, compared to$4.2 million, or $1.05 in diluted earnings per common share, for the first ninemonths of Fiscal 2008.  Return on averagetotal equity was 10.16% for the first nine months of Fiscal 2009 as compared to8.80% in the prior year comparable period. Return on common equity, based upon net income available to commonshareholders divided by equity excluding preferred equity, was 12.08% for thefirst nine months of Fiscal 2009 as compared to 8.80% in the prior yearcomparable period.

 

The net interest margin on a fully taxable equivalent basis for thenine months ended March 31, 2009 was 3.37%, compared to 3.08% for the sameperiod a year ago, an increase of 29 basis points.  The increase over the same period last yearis primarily attributable to lower costs on interest-bearing liabilities and ahigher volume of earning assets.

 

Net interest income for the first nine months of Fiscal 2009 was $26.8million, an increase of $5.5 million, or 25.7%, over the same period a yearago.  For the nine months ended March 31,2009, average interest-earning assets and average interest-bearing liabilitiesincreased 14.1% and 12.8%, respectively, compared to the same period a yearago.  Yields on earning assets decreasedto 5.76% in the first nine months of Fiscal 2009, compared to 6.74% a year ago,a decrease of 98 basis points.  For thesame period, interest-bearing cost of funds decreased to 2.75%, compared to4.16%, a decrease of 141 basis points.

 

Net interest margin ratio may vary due to many factors, includingFederal Reserve policies for short-term interest rates, competitive andeconomic factors and customer preferences for various products andservices.  In the second quarter ofFiscal 2009, the Federal Reserve decreased the Fed Funds Target Rate by a totalof 175 basis points on three separate increments, the first decrease inshort-term interest rates since April 30, 2008.  For Fiscal 2008, Fed Funds rates were cutseven times between September 2007 and April 2008 for a total of 325basis points.

 

The allowance for loan and lease losses increased to $8.1 million at March 31,2009, compared to $5.6 million at March 31, 2008, an increase of $2.6million or 46.1%.  The ratio of allowancefor loan and lease losses to total loans and leases was 0.97% as of March 31,2009 compared to 0.72% at March 31, 2008. Total nonperforming assets at March 31, 2009 were $5.2 million ascompared to $4.3 million a year ago, an increase of $913,000 or 21.2%.  The ratio of nonperforming assets to totalassets increased to 0.45% at March 31, 2009, compared to 0.40% at March 31,2008.  The allowance for loan and leaselosses is calculated based on loan and lease levels, loan and lease losshistory, credit quality of the loan and lease portfolio, and environmentalfactors such as economic health of the region and management experience.  This risk rating analysis is designed to givethe Company a consistent and systematic methodology to determine proper levelsfor the allowance at a given time.

 

As referenced in our Form 8-K filed October 27, 2008, theCompany was involved in a lawsuit as plaintiff which was settled for $2.8million inclusive of the remaining amount of receivables from certain loanparticipation interests in the amount of $223,000.  The settlement amount, less attorney fees of$292,000, was recorded as a recovery of loan and lease losses in the secondquarter of Fiscal 2009.

 

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Total deposits at March 31, 2009 were $804.2 million, an increaseof $20.0 million, or 2.5%, from June 30, 2008.  During the nine month period, public fundaccount balances increased $7.4 million which are categorized in multiplecategories of deposits.  In-market andout-of-market certificates of deposit increased a total of $67.4 million from$353.3 million to $420.6 million for the nine month period, due in part tocustomer preference for higher yielding term deposit products.  The primary factors affecting interestexpense was the decrease in the average rates paid on total deposits for thenine month period ended March 31, 2008 of 3.92% compared to 2.38% for thenine month period ended March 31, 2009.

 

During the second quarter of Fiscal 2009, an increase in equityoccurred with participation in the U.S. Treasury Department Capital PurchaseProgram (“CPP”).  As referenced in our Form 8-Kfiled November 21, 2008, the Company entered into an agreement with theU.S. Department of the Treasury pursuant to which the Company issued and soldto the Treasury Department (i) 25,000 shares of Fixed Rate CumulativePerpetual Preferred Stock, Series A, par value $0.01 per share and havinga liquidation preference of $1,000 per share, and (ii) a ten-year warrantto purchase up to 302,419 shares of the Company’s common stock, par value $0.01per share, at an initial exercise price of $12.40 per share, for an aggregatepurchase price of $25.0 million in cash. The securities were issued and sold in a private placement exempt fromregistration pursuant to Section 4(2) of the Securities Act of 1933,as amended.  Cumulative dividends on thePreferred Stock will accrue on the liquidation preference at a rate of 5.00%per annum for the first five years, and at a rate of 9.00% per annumthereafter, but will be paid only if, as and when declared by the Company’sBoard of Directors.  Since thetransaction closing date, the Bank has continued to lend money on a prudentbasis to businesses, farmers and individuals within its marketplace.  New volume and renewals of existing creditsince the closing of the CPP transaction totaled $190.8 million through March 31,2009.

 

In April 2009, the Company announced that it has filed notice withthe U.S. Treasury Department to repurchase all of the 25,000 outstanding sharesof its Fixed Rate Cumulative Perpetual Preferred Stock, Series A, parvalue $0.01 per share.  The repurchaseprice of the preferred stock is $25.0 million plus a final accrueddividend.  According to the AmericanRecovery and Reinvestment Act of 2009, the Treasury must consult with the Company’sprimary Federal Regulator before approving the repurchase of the preferredstock.  The Company believes it hassufficient cash funds to complete the repurchase. After the completion of thistransaction, the Company’s Total Risk-Based Capital Ratio will continue toexceed the standard for a “well-capitalized” financial institution.

 

In April 2009, the Company announced it will pay a quarterly cashdividend of 11.25 cents per common share for the third quarter of Fiscal2009.  The dividend will be paid on May 15,2009 to stockholders of record on May 8, 2009.

 

The Company also announced in April 2009, a quarterly cashdividend on its Fixed Rate Cumulative Perpetual Preferred Stock (Series A)issued to the U.S. Treasury Department under the CPP.  The dividend amount is equal to $12.50 perpreferred share.  This amount is based ona rate per annum of 5.00%, and is payable for the three month period of February 15,2009 through May 15, 2009, using 30-day months.

 

The total risk-based capital ratio of 11.02% at March 31,2009, increased by 19 basis points from 10.83% at June 30, 2008.  This continues to place the Bank in the “well-capitalized”category within OTS regulation at March 31, 2009 and is consistent withthe “well-capitalized” OTS category in which the Company plans to operate.  The Company historically has been able tomanage the size of its assets through secondary market loan sales ofsingle-family mortgages and student loans.

 

Non-interest income was $9.0 million for the nine months ended March 31,2009 as compared to $8.6 million for the same period in the prior fiscal year,an increase of $394,000, or 4.6%.  Feeson deposits increased $315,000, or 7.8% for the nine months ended March 31,2009 as compared to the same period in the prior fiscal year primarily due toincreased point-of-sale interchange revenue and fee schedule adjustments.  Gain on sale of loans increased $124,000, or13.0%, due to an increase in refinance activity in conjunction with historicallylow interest rates.  Loan servicing incomeincreased $72,000, or 4.4% primarily due to an increase of $31.0 million in thebalances of loans serviced by the Bank from $1.03 billion at March 31,2008 to $1.06 billion at March 31, 2009. Net gain on sale of securities increased $512,000 for the nine monthsended March 31, 2009 as compared to the same period in the prior fiscalyear primarily due to the sale of securities, which did not occur in the prioryear.

 

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Non-interest expense was $26.0 million for the nine months ended March 31,2009 as compared to $22.4 million for the nine months ended March 31,2008, an increase of $3.6 million, or 16.0%. Employee compensation increased $741,000, or 8.2%, variable pay relatingto employee incentives and commissions increased $242,000, or 15.1% and nethealthcare costs increased $1.0 million, or 109.4%.  Employee compensation increased due to annualraises awarded and sales-related personnel additions.  Variable pay relating to employee incentiveprograms increased due to higher production activity and increased financialperformance outcomes.  Healthcare costsincreased as a result of higher claim activity in the second and third quartersof Fiscal 2009.  The Company has had aself-insured health plan since January 1994.  Management continues to believe the currentstructure is a reasonable alternative to traditional healthcare plans over thelong term.  The level of healthcare costswhich the Company incurs may vary from year to year.  The increase in net healthcare costs does notnecessarily indicate a trend.  FDIC insurancepremiums increased $465,000 due to a combination of new deposit guaranteeprograms and assessment schedule changes initiated by the FDIC and theexpiration of credits previously used to lower costs.  Other non-interest expenses rose $644,000 largely dueto increases in legal and professional expenses of $434,000, and audit andregulatory examination fees of $95,000.

 

The Bank is a member of the Deposit Insurance Fund (the “DIF”), whichis administered by the Federal Deposit Insurance Corporation (“FDIC”).  Deposits are insured up to the applicablelimits by the FDIC and such insurance is backed by the full faith and credit ofthe United States Government.  Asinsurer, the FDIC imposes deposit insurance premiums and is authorized toconduct examinations of and to require reporting by FDIC-insured institutions.  Recent bank failures have decreased the DIFto levels below its required reserve ratio. In order to replenish the DIF, the FDIC has increased deposit insurancepremiums to a level designed to restore the DIF to required levels within sevenyears, and has proposed a one-time special assessment of 20 basis points to becollected on September 30, 2009, based upon deposits at June 30,2009.  The FDIC also instituted theTransaction Account Guarantee Program (“TAGP”). The TAGP extended the FDIC’s insurance to full coverage of non-interestbearing transaction accounts for participating institutions through the end of2009 at an annualized rate of 10 basis points on deposit balances in excess ofthe $250,000 insurance limit currently in place.  The Bank is a participant in the TAGP, butdoes not expect this program to have a material impact on the FDICassessment.  The Bank had previously paidassessments under the Savings Association Insurance Fund (“SAIF”) and waseligible for certain credit against deposit insurance assessments when SAIF wasmerged into the DIF in 2005.  This credithad offset the majority of the Bank’s FDIC premium expense in past fiscal yearsbut has been fully utilized during the second quarter of Fiscal 2009.  As a result of these factors, the Bank isanticipating an increase in deposit insurance premiums in Fiscal 2009 ascompared to Fiscal 2008.

 

**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 deposit services,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.

 

**FinancialCondition Data**

 

At March 31, 2009,the Company had total assets of $1.2 billion, an increase of $68.5 million fromthe level at June 30, 2008.  Theincrease in assets since June 30, 2008 was due primarily to increases insecurities available for sale of $25.0 million, net loans and leases receivableof $33.6 million, and loans held for sale of $12.4 million.  The increase in liabilities of $38.7 millionsince June 30, 2008 was primarily due to increases in deposits of $20.0million and advances from the FHLB and other borrowings of $11.9 million.  In addition, stockholders’ equity increased$30.0 million to $94.1 million at March 31, 2009 from $64.2 million at June 30,2008, primarily due to participation in the CPP resulting in a $25.0 millionincrease to capital.  Capital also increaseddue to the net income available for common shareholders for the nine monthsended March 31, 2009 of $5.7 million, but was partially offset by the netincrease in accumulated other comprehensive (loss), net of related deferred taxeffect, of $438,000.

 

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The increase innet loans and leases receivable of $33.6 million at March 31, 2009 ascompared to June 30, 2008, was primarily the result of increases inagricultural loans of $52.9 million to $213.1 million, increases in commercialbusiness and real estate of $9.8 million to $313.2 million, increases ofconsumer direct loans of $7.5 million to $113.2 million and an increase inconstruction and development loans of $4.5 million to $10.1 million.  These increases were partially offset bydecreases in one-to four-family loans of $20.2 million to $80.0 million anddecreases in consumer indirect loans of $18.3 million to $26.0 million at March 31,2009 as compared to June 30, 2008. Loans held for sale increased by $12.4 million at March 31, 2009,as compared to June 30, 2008, due primarily to seasonal fluctuation ofstudent loan activity and increased single family loan production activity.

 

Cash and cash equivalents decreased $7.4 million at March 31, 2009as compared to June 30, 2008.  Seethe Consolidated Statement of Cash Flows for an in-depth analysis in the changein cash and cash equivalents for the nine months ended March 31, 2009.

 

Deposits increased $20.0 million to $804.2 million, while advances fromthe FHLB and other borrowings increased $11.9 million to $210.3 million. Theoverall increase in FHLB borrowings was primarily the result of an increase insecurities available for sale, an increase in loans and leases receivable, theincrease in loans held for sale, the decrease of cash and cash equivalents, andwas partially offset by the increase in deposits.

 

The $20.0 million increase in deposits was due to increasesin public funds of $7.4 million which are categorized in multiple categories ofdeposits.  Public funds have increased,from $156.3 million at June 30, 2008 to $163.6 million at March 31,2009, as a result of seasonal fluctuations typical with these types ofmunicipal deposits.  For the same period,out-of-market deposits increased from $27.3 million to $29.8 million, or9.4%.  The in-market certificates ofdeposit increased since June 30, 2008 in the amount of $64.8 million.  This increase was offset by decreases innoninterest bearing and interest bearing checking accounts, money marketaccounts, and savings accounts of $11.4 million, $28.6 million, and $7.4million, respectively, when compared to the totals at June 30, 2008.

 

The following tables showthe composition of the Company’s loan and lease portfolio and deposit accounts:

 

**Loan and Lease Portfolio Composition**

 
| ** **                                        | ** ** | **March 31, 2009**    | ** ** | **June 30, 2008** | ** ** |
|---------------------------------------------------|------------|----------------------------|------------|------------------------|------------|
| ** **                                        | ** ** | **Amount**                 | ** ** | **Percent**            | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| ** **                                        | ** ** | **(Dollars in Thousands)** | ** ** |
|                                              |       |                       |       |                   |       |   |   |   |   |
| One-to  four-family (1)                           |       | $                          | 79,774     |                   | 9.73       | % | $ | 99,989 |   | 12.76 | % |
| Commercial  business and real estate (2) (3) |       | 313,198                    |       | 38.22                  |       | 303,415 |   | 38.72 |   |
| Multi-family  real estate                         |       | 46,876                     |       | 5.72                   |       | 45,093 |   | 5.75 |   |
| Equipment  finance leases                         |       | 17,240                     |       | 2.10                   |       | 19,288 |   | 2.46 |   |
| Consumer direct  (4)                              |       | 113,238                    |       | 13.82                  |       | 105,719 |   | 13.49 |   |
| Consumer  indirect (5)                            |       | 25,973                     |       | 3.17                   |       | 44,294 |   | 5.65 |   |
| Agricultural                                      |       | 213,130                    |       | 26.01                  |       | 160,267 |   | 20.45 |   |
| Construction and  development                     |       | 10,101                     |       | 1.23                   |       | 5,645 |   | 0.72 |   |
| Total loans and  leases receivable (6)            |       | $                          | 819,530    |                   | 100.00     | % | $ | 783,710 |   | 100.00 | % |

----

(1) Excludes$15,579 and $7,958 loans held for sale at March 31, 2009 and June 30,2008, respectively.

(2) Includes$2,912 and $3,012 tax exempt leases at March 31, 2009 and June 30,2008, respectively.

(3) Excludes$0 and $223 commercial loans held for sale at March 31, 2009 and June 30,2008, respectively.

(4) Excludes$5,614 and $614 student loans held for sale at March 31, 2009 and June 30,2008, respectively.

(5) TheCompany announced Consumer Indirect originations ceased during the firstquarter of Fiscal 2008.

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

 

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**DepositComposition**

 
| ** **                             | ** ** | **March 31, 2009**    | ** ** | **June 30, 2008** | ** ** |
|----------------------------------------|------------|----------------------------|------------|------------------------|------------|
| ** **                             | ** ** | **Amount**                 | ** ** | **Percent**            | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| ** **                             | ** ** | **(Dollars in Thousands)** | ** ** |
|                                   |       |                       |       |                   |       |   |   |   |   |
| Noninterest  bearing checking accounts |       | $                          | 81,178     |                   | 10.08      | % | $ | 90,598 |   | 11.55 | % |
| Interest bearing  checking accounts    |       | 88,191                     |       | 10.97                  |       | 90,125 |   | 11.49 |   |
| Money market  accounts                 |       | 143,057                    |       | 17.79                  |       | 171,689 |   | 21.89 |   |
| Savings accounts                       |       | 71,155                     |       | 8.85                   |       | 78,575 |   | 10.02 |   |
| In-market  certificates of deposit     |       | 390,815                    |       | 48.60                  |       | 325,995 |   | 41.57 |   |
| Out-of-market  certificates of deposit |       | 29,812                     |       | 3.71                   |       | 27,255 |   | 3.48 |   |
| Total deposits                         |       | $                          | 804,208    |                   | 100.00     | % | $ | 784,237 |   | 100.00 | % |

 

**Analysisof 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.

 

*Average Balances, Interest Rates and Yields.* The following table presents for the periods indicated, the total dollaramount of interest income from average interest-earning assets and theresulting yields, as well as the interest expense on average interest-bearingliabilities, expressed both in dollars and rates, and the net interestmargin.  The table does not reflect anyeffect of income taxes, except where noted. Average balances consist of daily average balances for the Bank withsimple average balances for all other subsidiaries of the Company.  The average balances include nonaccruingloans and leases.  The yields on loansand leases include origination fees, net of costs, which are consideredadjustments to yield.

 

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| ** **                                          | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                          | ** ** | **2009**                              | ** ** | **2008** | ** ** |
| ** **                                          | ** ** | **Average**                           | ** ** | **Interest** | ** ** | ** ** | ** ** | **Average** | ** ** | **Interest** | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | **Outstanding**                       | ** ** | **Earned/** | ** ** | **Yield/** | ** ** | **Outstanding** | ** ** | **Earned/** | ** ** | **Yield/** | ** ** |
| ** **                                          | ** ** | **Balance**                           | ** ** | **Paid** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Paid** | ** ** | **Rate** | ** ** |
| ** **                                          | ** ** | **(Dollars in Thousands)**            | ** ** |
| Interest-earning  assets:                           |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Loans and leases  receivable (1) (3)           |       | $                                     | 837,501    |   | $ | 12,045 |   | 5.83 | % | $ | 766,960 |   | $ | 13,188 |   | 6.92 | % |
| Investment  securities (2) (3)                 |       | 252,812                               |       | 2,937 |   | 4.71 | % | 173,835 |   | 2,253 |   | 5.21 | % |
| FHLB stock                                          |       | 12,476                                |       | 26 |   | 0.85 | % | 8,889 |   | 101 |   | 4.56 | % |
|                                                |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Total  interest-earning assets                      |       | 1,102,789                             |       | $ | 15,008 |   | 5.52 | % | 949,684 |   | $ | 15,542 |   | 6.58 | % |
| Noninterest-earning  assets                         |       | 66,679                                |       |   |   |   |   | 70,917 |   |   |   |   |   |
| Total assets                                        |       | $                                     | 1,169,468  |   |   |   |   |   | $ | 1,020,601 |   |   |   |   |   |
|                                                |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                      |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                           |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Checking and money  market                          |       | $                                     | 214,277    |   | $ | 310 |   | 0.59 | % | $ | 262,518 |   | $ | 1,495 |   | 2.29 | % |
| Savings                                             |       | 70,165                                |       | 74 |   | 0.43 | % | 54,391 |   | 256 |   | 1.89 | % |
| Certificates of  deposit                            |       | 397,126                               |       | 3,131 |   | 3.20 | % | 343,517 |   | 3,942 |   | 4.61 | % |
| Total  interest-bearing deposits                    |       | 681,568                               |       | 3,515 |   | 2.09 | % | 660,426 |   | 5,693 |   | 3.47 | % |
| FHLB advances  and other borrowings                 |       | 241,338                               |       | 1,896 |   | 3.19 | % | 159,773 |   | 1,660 |   | 4.18 | % |
| Subordinated  debentures payable to trusts (4) |       | 27,837                                |       | 447 |   | 6.51 | % | 27,837 |   | 494 |   | 7.14 | % |
|                                                |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities                 |       | 950,743                               |       | 5,858 |   | 2.50 | % | 848,036 |   | 7,847 |   | 3.72 | % |
| Noninterest-bearing  deposits                       |       | 79,969                                |       |   |   |   |   | 79,186 |   |   |   |   |   |
| Other  liabilities                                  |       | 45,995                                |       |   |   |   |   | 28,217 |   |   |   |   |   |
| Total  liabilities                                  |       | 1,076,707                             |       |   |   |   |   | 955,439 |   |   |   |   |   |
| Equity                                              |       | 92,761                                |       |   |   |   |   | 65,162 |   |   |   |   |   |
| Total  liabilities and equity                       |       | $                                     | 1,169,468  |   |   |   |   |   | $ | 1,020,601 |   |   |   |   |   |
|                                                |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Net interest  income; interest rate spread (5) |       |                                  |       | $ | 9,150 |   | 3.02 | % |   |   | $ | 7,695 |   | 2.86 | % |
|                                                |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Net interest  margin (5) (6)                   |       |                                  |       |   |   | 3.36 | % |   |   |   |   | 3.26 | % |
|                                                |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Net interest  margin, TE (7)                        |       |                                  |       |   |   | 3.55 | % |   |   |   |   | 3.32 | % |

----

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

(2) Includes federal funds sold.

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

(4) Includes $125 in July 2007 for unamortized debt issuance costs.

(5) Percentages for the three months ended March 31, 2009 and March 31,2008 have been annualized.

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

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

 

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| ** **                                          | ** ** | **Nine Months Ended March 31,** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                          | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| ** **                                          | ** ** | **Average**                          | ** ** | **Interest** | ** ** | ** ** | ** ** | **Average** | ** ** | **Interest** | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | **Outstanding**                      | ** ** | **Earned/** | ** ** | **Yield/** | ** ** | **Outstanding** | ** ** | **Earned/** | ** ** | **Yield/** | ** ** |
| ** **                                          | ** ** | **Balance**                          | ** ** | **Paid** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Paid** | ** ** | **Rate** | ** ** |
| ** **                                          | ** ** | **(Dollars in Thousands)**           | ** ** |
| Interest-earning  assets:                           |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Loans and leases  receivable (1) (3)           |       | $                                    | 820,766    |   | $ | 37,709 |   | 6.12 | % | $ | 772,732 |   | $ | 41,187 |   | 7.09 | % |
| Investment  securities (2) (3)                 |       | 240,551                              |       | 8,512 |   | 4.71 | % | 160,577 |   | 6,176 |   | 5.12 | % |
| FHLB stock                                          |       | 12,207                               |       | 184 |   | 2.01 | % | 7,403 |   | 249 |   | 4.47 | % |
|                                                |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Total  interest-earning assets                      |       | 1,073,524                            |       | $ | 46,405 |   | 5.76 | % | 940,712 |   | $ | 47,612 |   | 6.74 | % |
| Noninterest-earning  assets                         |       | 66,772                               |       |   |   |   |   | 70,653 |   |   |   |   |   |
| Total assets                                        |       | $                                    | 1,140,296  |   |   |   |   |   | $ | 1,011,365 |   |   |   |   |   |
|                                                |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                      |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                           |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Checking and  money market                          |       | $                                    | 233,156    |   | $ | 1,727 |   | 0.99 | % | $ | 271,388 |   | $ | 6,153 |   | 3.02 | % |
| Savings                                             |       | 68,298                               |       | 462 |   | 0.90 | % | 52,195 |   | 940 |   | 2.40 | % |
| Certificates of  deposit                            |       | 383,205                              |       | 10,035 |   | 3.49 | % | 359,620 |   | 13,011 |   | 4.82 | % |
| Total  interest-bearing deposits                    |       | 684,659                              |       | 12,224 |   | 2.38 | % | 683,203 |   | 20,104 |   | 3.92 | % |
| FHLB advances  and other borrowings                 |       | 235,778                              |       | 5,952 |   | 3.36 | % | 129,295 |   | 4,456 |   | 4.59 | % |
| Subordinated  debentures payable to trusts (4) |       | 27,837                               |       | 1,383 |   | 6.62 | % | 27,837 |   | 1,693 |   | 8.09 | % |
|                                                |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities                 |       | 948,274                              |       | 19,559 |   | 2.75 | % | 840,335 |   | 26,253 |   | 4.16 | % |
| Noninterest-bearing  deposits                       |       | 76,360                               |       |   |   |   |   | 79,544 |   |   |   |   |   |
| Other  liabilities                                  |       | 37,091                               |       |   |   |   |   | 27,650 |   |   |   |   |   |
| Total  liabilities                                  |       | 1,061,725                            |       |   |   |   |   | 947,529 |   |   |   |   |   |
| Equity                                              |       | 78,571                               |       |   |   |   |   | 63,836 |   |   |   |   |   |
| Total  liabilities and equity                       |       | $                                    | 1,140,296  |   |   |   |   |   | $ | 1,011,365 |   |   |   |   |   |
|                                                |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Net interest  income; interest rate spread (5) |       |                                 |       | $ | 26,846 |   | 3.01 | % |   |   | $ | 21,359 |   | 2.58 | % |
|                                                |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Net interest  margin (5) (6)                   |       |                                 |       |   |   | 3.33 | % |   |   |   |   | 3.02 | % |
|                                                |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Net interest  margin, TE (7)                        |       |                                 |       |   |   | 3.37 | % |   |   |   |   | 3.08 | % |

----

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

(2) Includes federal funds sold.

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

(4) Includes $125 in July 2007 for unamortized debt issuance costs.

(5) Percentages for the nine months ended March 31, 2009 and March 31,2008 have been annualized.

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

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

 

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

 

The following schedulepresents the dollar amount of changes in interest income and interest expensefor major components of interest-earning assets and interest-bearingliabilities.  It distinguishes betweenthe increases and decreases due to fluctuating outstanding balances due to thelevels and volatility of interest rates. For each category of interest-earning assets and interest-bearingliabilities, information is provided on changes attributable to (i) changesin volume (i.e., changes in volume multiplied by old rate) and (ii) changesin rate (i.e., changes in rate multiplied by old volume).  For purposes of this table, changesattributable to both rate and volume, which cannot be segregated, have beenallocated proportionately to the change due to volume and the change due torate.

 

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|                                       |   | **Three Months Ended March 31,** |   | **Nine Months Ended March 31,** |   |
|--------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                       |   | **2009 vs 2008**                      |   | **2009 vs 2008**                     |   |
|                                       |   | **Increase**                          |   | **Increase**                         |   |   |   | **Increase** |   | **Increase** |   |   |   |
|                                       |   | **(Decrease)**                        |   | **(Decrease)**                       |   | **Total** |   | **(Decrease)** |   | **(Decrease)** |   | **Total** |   |
|                                       |   | **Due to**                            |   | **Due to**                           |   | **Increase** |   | **Due to** |   | **Due to** |   | **Increase** |   |
|                                       |   | **Volume**                            |   | **Rate**                             |   | **(Decrease)** |   | **Volume** |   | **Rate** |   | **(Decrease)** |   |
|                                       |   | **(Dollars in Thousands)**            |   |
| Interest-earning  assets:                  |   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |
| Loans and leases  receivable (1)           |   | $                                     | 1,171  |                                 | $      | (2,314 | ) | $ | (1,143 | ) | $ | 2,540 |   | $ | (6,018 | ) | $ | (3,478 | ) |
| Investment  securities (2)                 |   | 1,000                                 |   | (316                                 | )      | 684 |   | 3,076 |   | (740 | ) | 2,336 |   |
| FHLB stock                                 |   | 40                                    |   | (115                                 | )      | (75 | ) | 161 |   | (226 | ) | (65 | ) |
|                                       |   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |
| Total  interest-earning assets             |   | $                                     | 2,211  |                                 | $      | (2,745 | ) | $ | (534 | ) | $ | 5,777 |   | $ | (6,984 | ) | $ | (1,207 | ) |
|                                       |   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:             |   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |
| Deposits:                                  |   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |
| Checking and  money market                 |   | $                                     | (275   | )                                    | $      | (910 | ) | $ | (1,185 | ) | $ | (868 | ) | $ | (3,558 | ) | $ | (4,426 | ) |
| Savings                                    |   | 73                                    |   | (255                                 | )      | (182 | ) | 290 |   | (768 | ) | (478 | ) |
| Certificates of  deposit                   |   | 597                                   |   | (1,408                               | )      | (811 | ) | 852 |   | (3,828 | ) | (2,976 | ) |
| Total  interest-bearing deposits           |   | 395                                   |   | (2,573                               | )      | (2,178 | ) | 274 |   | (8,154 | ) | (7,880 | ) |
| FHLB advances  and other borrowings        |   | 832                                   |   | (596                                 | )      | 236 |   | 3,672 |   | (2,176 | ) | 1,496 |   |
| Subordinated  debentures payable to trusts |   | —                                |   | (47                                  | )      | (47 | ) | — |   | (310 | ) | (310 | ) |
|                                       |   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities        |   | $                                     | 1,227  |                                 | $      | (3,216 | ) | $ | (1,989 | ) | $ | 3,946 |   | $ | (10,640 | ) | $ | (6,694 | ) |
|                                       |   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |
| Net interest  income increase              |   |                                  |   |                                 |   | $ | 1,455 |   |   |   |   |   | $ | 5,487 |   |

----

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

(2) Includes federal funds sold.

 

**Application of Critical Accounting Policies**

 

GAAP requires management to utilize estimates whenreporting financial results.  The Companyhas identified the policies discussed below as Critical Accounting Policiesbecause the accounting estimates require management to make certain assumptionsabout matters which may be uncertain at the time the estimate was made and adifferent method of estimating could have been reasonably made which could havea material impact on the presentation of the Company’s financial condition,changes in financial condition or results of operations.

 

*Allowancefor Loan and Lease Losses* — GAAP requires the Company to set aside reserves ormaintain an allowance against probable loan and lease losses in the loan andlease portfolio.  Management must developa consistent and systematic approach to estimate the appropriate balances tocover the probable losses.  Due to theuncertainty of future events, the approach includes a process that may differsignificantly from other methodologies and still produce an estimate inaccordance with GAAP.

 

The allowance is compiled by utilizing the Company’s loan and leaserisk rating system, which is structured to identify weaknesses in the loan andlease portfolio.  The risk rating systemhas evolved to a process whereby management believes the system will properlyidentify the credit risk associated with the loan and lease portfolio.  Due to the stratification of loans and leasesfor the allowance calculation, the estimate of the allowance for loan and leaselosses could change materially if the loan and lease risk rating system wouldnot properly identify the strength of a large or a few large loan and leasecustomers.  Although management believesit uses the best information available to determine the allowance, unforeseenmarket or borrower conditions could result in adjustments and net earningsbeing significantly affected if circumstances differ substantially from theassumptions used in making the final determinations.

 

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*Mortgage Servicing Rights (“MSR”)* — The Company records a servicing assetfor contractually separated servicing from the underlying mortgage loans.   The asset is initially recorded at fairvalue and represents an intangible asset backed by an income stream from theserviced assets.  The asset is amortizedin proportion to and over the period of estimated net servicing income.

 

At each balance sheet date, the MSRs are analyzed for impairment, whichoccurs when the fair value of the MSRs is lower than the amortized book value.The Company’s MSRs are primarily servicing rights acquired on South DakotaHousing Development Authority first time homebuyers program.  Due to the lack of quoted markets for theCompany’s servicing portfolio, the Company estimates the fair value of the MSRsusing present value of future cash flow analysis.  If the analysis produces a fair value greaterthan 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.

 

The Company has included MSRs as a critical accounting policy becausethe use of estimates for determining fair value using present value conceptsmay produce results which may significantly differ from other fair valueanalysis perhaps even to the point of recording impairment.  The risk to earnings is when the underlyingmortgages pay off significantly faster than the assumptions used in thepreviously recorded amortization. Estimating future cash flows on the underlying mortgages is a difficultanalysis and requires judgment based on the best information available.  The Company looks at alternative assumptionsand projections when preparing a reasonable and supportable analysis.  Based on the Company’s quarterly analysis ofMSRs, there was no impairment to the MSRs at March 31, 2009.

 

*Security Impairment* — Management continually monitors the investment security portfolio forimpairment on a security by security basis. During the third quarter of Fiscal 2009, the Company early adopted FASBStaff Position (“FSP”) No. FAS 115-2, *TheRecognition and Presentation of Other-Than-Temporary Impairments*,which changed the recognition and presentation of other-than-temporaryimpairment for securities.  Managementhas a process in place to identify securities that could potentially have acredit impairment that is other than temporary. This process involves the length of time and extent to which the fairvalue has been less than the amortized cost basis, review of availableinformation regarding the financial position of the issuer, monitoring the ratingof the security, cash flow projections, and the Company’s intent to sell asecurity or whether it is more likely than not the Company will be required tosell the security before the recovery of its amortized cost which, in somecases, may extend to maturity.  To theextent we determine that a security is deemed to be other-than-temporarilyimpaired, an impairment loss is recognized. If the Company intends to sell a security or it is more likely than notthat the Company would be required to sell a security before the recovery ofits amortized cost, less any current period credit loss, the Company recognizesan other-than-temporary impairment in earnings for the difference betweenamortized cost and fair value.  If we donot expect to recover the amortized cost basis, we do not plan to sell thesecurity and if it is not more likely than not that the Company would berequired to sell a security before the recovery of it amortized cost, less anycurrent period credit loss, the recognition of the other-than-temporaryimpairment is bifurcated.  For thosesecurities, the Company separates the total impairment into a credit losscomponent recognized in earnings, and the amount of the loss related to otherfactors is recognized in other comprehensive income net of taxes.

 

The amount of the credit loss component of adebt security impairment is estimated as the difference between amortized costand the present value of the expected cash flows of the security.  The present value is determined using thebest estimate cash flows discounted at the effective interest rate implicit tothe security at the date of purchase or the current yield to accrete anasset-backed or floating rate security. Cash flow estimates for trust preferred securities are derived fromscenario-based outcomes of forecasted default rates, loss severity, prepaymentspeeds and structural support.

 

*Self-Insurance*— The Companyhas a self-insured healthcare plan for its employees up to certain limits.  To mitigate a portion of these risks, theCompany has a stop-loss insurance policy through a commercial insurance carrierfor coverage in excess of $65,000 per individual occurrence with no maximumaggregate limitation.  The estimate ofself-insurance liability is based upon known claims and an estimate ofincurred, but not reported (“IBNR”) claims. IBNR claims are estimated using historical claims lag informationreceived by a third party claims administrator. Due to the uncertainty of health claims, the approach includes a processwhich may differ significantly from other methodologies and still produce anestimate in accordance with GAAP. Although management believes it uses the best information available todetermine the accrual, unforeseen health claims could result in adjustments tothe accrual.  These adjustments couldsignificantly affect net earnings if circumstances differ substantially fromthe assumptions used in estimating the accrual.

 

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**Asset Quality and Potential Problem Loans andLeases**

 

Nonperforming assets (nonaccrual loans and leases, accruing loans andleases delinquent more than 90 days and foreclosed assets) increased to $5.2million at March 31, 2009 from $3.7 million at June 30, 2008, anincrease of $1.5 million, or 39.2%. Accruing loans and leases delinquent more than 90 days increased $1.5million to $2.3 million at March 31, 2009 from $781,000 at June 30,2008.  Nonaccruing loans and leasesdecreased $65,000 from June 30, 2008 to March 31, 2009, to a total of$2.3 million.  Foreclosed assetsincreased $55,000 to $698,000 at March 31, 2009, from $643,000 at June 30,2008.  In addition, the ratio ofnonperforming assets to total assets, which is one indicator of credit riskexposure, was 0.45% at March 31, 2009, which is an increase from 0.34% asreported at June 30, 2008.

 

Nonaccruing loans and leases decreased 2.8%, or $65,000, to $2.3million at March 31, 2009 compared to $2.3 million at June 30,2008.  Included in nonaccruing loans andleases at March 31, 2009 were 14 loans totaling $963,000 secured by one-to four-family real estate, two loans totaling $177,000 secured by commercialreal estate, 10 loans totaling $245,000 secured by commercial business, threeloans totaling $338,000 secured by agriculture, two leases totaling $31,000 and29 consumer loans totaling $505,000.

 

The risk rating system in place is designed to identify and manage thenonperforming loans and leases.  Commercialand agricultural loans and equipment finance leases will have specific reserveallocations based on collateral values or based on the present value ofexpected cash flows if the loans and leases are deemed impaired.  Loans and leases that are not performing donot necessarily result in a loss.

 

As of March 31, 2009, foreclosed assets increased by $55,000, or8.6%, to $698,000 as compared to $643,000 at June 30, 2008.  The balance at March 31, 2009 consistedof $576,000 of single-family collateral owned, $36,000 of equipment financeleases and $86,000 of consumer collateral owned.

 

At March 31, 2009, the Company had designated $15.7 million of itsassets as special mention and $16.6 million of its assets as classified thatmanagement has determined need to be closely monitored because of possiblecredit problems of the borrowers or the cash flows of the securedproperties.  The Company also classified$11.9 million of trust preferred securities in accordance with OTS debtsecurity classification guidelines.  At March 31,2009 the Company had $18.0 million in multi-family, commercial business,commercial real estate and agricultural participation loans purchased, of which$2.4 million were classified as of March 31, 2009.  These loans and leases were considered indetermining the adequacy of the allowance for loan and lease losses.  The allowance for loan and lease losses isestablished based on management’s evaluation of the risks probable in the loanand lease portfolio and changes in the nature and volume of loan and leaseactivity.  Such evaluation, whichincludes a review of all loans and leases for which full collectability may notbe reasonably assured, considers the estimated fair market value of theunderlying collateral, present value of expected principal and interestpayments, economic conditions, historical loss experience and other factorsthat warrant recognition in providing for an adequate loan and lease lossallowance.

 

Although the Company’s management believes the March 31,2009 recorded allowance for loan and lease losses was adequate to provide forprobable losses on the related loans and leases, there can be no assurance theallowance existing at March 31, 2009, will be adequate in the future.

 

In accordance with the Company’s internal classificationof assets policy, management evaluates the loan and lease portfolio on amonthly basis to identify loss potential and determines the adequacy of theallowance for loan and lease losses quarterly. Loans and leases are placed on nonaccrual status when the collection ofprincipal and/or interest becomes doubtful. Foreclosed assets include assets acquired in settlement of loans andleases.

 

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The following table sets forth the amounts andcategories of the Company’s nonperforming assets for the periods indicated.

 
| ** **                                                                      | ** ** | **Nonperforming Assets**    | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                      | ** ** | **March 31,  2009**    | ** ** | **June 30,  2008** | ** ** |
| ** **                                                                      | ** ** | **(Dollars  in Thousands)** | ** ** |
| Nonaccruing  loans and leases:                                                  | ** ** | ** **                  | ** ** | ** ** | ** ** |
| One- to  four-family                                                            |       | $                           | 963        |   | $ | 503 |   |
| Commercial real  estate                                                         |       | 177                         |       | 429 |   |
| Commercial  business                                                            |       | 245                         |       | 555 |   |
| Equipment  finance leases                                                       |       | 31                          |       | 27 |   |
| Consumer                                                                        |       | 505                         |       | 566 |   |
| Agricultural                                                                    |       | 338                         |       | 244 |   |
| Total                                                                           |       | 2,259                       |       | 2,324 |   |
|                                                                            |       |                        |       |   |   |
| Accruing loans and  leases delinquent more than 90 days:                        |       |                        |       |   |   |
| One- to  four-family                                                            |       | 52                          |       | 306 |   |
| Commercial real  estate                                                         |       | 217                         |       | 24 |   |
| Commercial  business                                                            |       | 430                         |       | 71 |   |
| Equipment  finance leases                                                       |       | 361                         |       | 9 |   |
| Consumer                                                                        |       | —                      |       | 119 |   |
| Agricultural                                                                    |       | 1,201                       |       | 252 |   |
| Total                                                                           |       | 2,261                       |       | 781 |   |
|                                                                            |       |                        |       |   |   |
| Foreclosed  assets: (1)                                                         |       |                        |       |   |   |
| One- to  four-family                                                            |       | 576                         |       | 76 |   |
| Equipment  finance leases                                                       |       | 36                          |       | 443 |   |
| Consumer                                                                        |       | 86                          |       | 124 |   |
| Total                                                                           |       | 698                         |       | 643 |   |
|                                                                            |       |                        |       |   |   |
| Total  nonperforming assets                                                     |       | $                           | 5,218      |   | $ | 3,748 |   |
|                                                                            |       |                        |       |   |   |
| Ratio of  nonperforming assets to total assets                                  |       | 0.45                        | %          | 0.34 | % |
|                                                                            |       |                        |       |   |   |
| Ratio of  nonperforming loans and leases to total loans and leases (2) (3) |       | 0.54                        | %          | 0.39 | % |

----

(1)  Total foreclosed assets do not include landor other real estate owned held for sale.

(2)  Nonperforming loans and leases include bothnonaccruing and accruing loans and leases delinquent more than 90 days.

(3)  Total loans andleases include loans held for sale.

 

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The following table sets forth information with respectto activity in the Company’s allowance for loan and lease losses during theperiods indicated.

 
| ** **                                                                                               | ** ** | **Nine Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                               | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| ** **                                                                                               | ** ** | **(Dollars in Thousands)**           | ** ** |
|                                                                                                     |       |                                 |       |   |   |
| Balance at  beginning of period                                                                          |       | $                                    | 5,933      |   | $ | 5,872 |   |
| Charge-offs:                                                                                             |       |                                 |       |   |   |
| One- to  four-family                                                                                     |       | (97                                  | )          | (3 | ) |
| Commercial real  estate                                                                                  |       | (108                                 | )          | — |   |
| Commercial  business                                                                                     |       | (36                                  | )          | (873 | ) |
| Equipment  finance leases                                                                                |       | (45                                  | )          | (198 | ) |
| Consumer                                                                                                 |       | (661                                 | )          | (626 | ) |
| Construction                                                                                             |       | (35                                  | )          | — |   |
| Total charge-offs                                                                                        |       | (982                                 | )          | (1,700 | ) |
|                                                                                                     |       |                                 |       |   |   |
| Recoveries:                                                                                              |       |                                 |       |   |   |
| One- to  four-family                                                                                     |       | 4                                    |       | 2 |   |
| Commercial  business                                                                                     |       | 2,217                                |       | 9 |   |
| Equipment  finance leases                                                                                |       | —                               |       | 18 |   |
| Consumer                                                                                                 |       | 162                                  |       | 193 |   |
| Agricultural                                                                                             |       | 5                                    |       | 5 |   |
| Total recoveries                                                                                         |       | 2,388                                |       | 227 |   |
|                                                                                                     |       |                                 |       |   |   |
| Net recoveries  (charge-offs)                                                                            |       | 1,406                                |       | (1,473 | ) |
|                                                                                                     |       |                                 |       |   |   |
| Additions  charged to operations                                                                         |       | 801                                  |       | 1,171 |   |
|                                                                                                     |       |                                 |       |   |   |
| Balance at end  of period                                                                                |       | $                                    | 8,140      |   | $ | 5,570 |   |
|                                                                                                     |       |                                 |       |   |   |
| Ratio of net  (charge-offs) during the period to average loans and leases outstanding  during the period |       | 0.17                                 | %          | (0.19 | )% |
|                                                                                                     |       |                                 |       |   |   |
| Ratio of  allowance for loan and lease losses to total loans and leases at end of  period (1)            |       | 0.97                                 | %          | 0.72 | % |
|                                                                                                     |       |                                 |       |   |   |
| Ratio of  allowance for loan and lease losses to nonperforming loans and leases at end  of period (2)    |       | 180.09                               | %          | 144.19 | % |

----

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

(2)  Nonperforming loans and leases include bothnonaccruing and accruing loans and leases delinquent more than 90 days.

 

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The distribution of the Company’s allowance for loanand lease losses and impaired loss summary as required by FASB Statement No. 114,“Accounting by Creditors for Impairment of a Loan” are summarized in thefollowing tables.  The combination ofFASB Statement No. 5 “Accounting for Contingencies” and FASB Statement No. 114calculations comprise the Company’s allowance for loan and lease losses.

 
| ** **                | ** ** | **Allowance**               | ** ** | **Impaired Loan**      | ** ** | **Allowance**    | ** ** | **Impaired Loan** | ** ** |
|---------------------------|------------|-----------------------------|------------|------------------------|------------|------------------|------------|-------------------|------------|
| ** **                | ** ** | **for Loan and**            | ** ** | **Valuation**          | ** ** | **for Loan and** | ** ** | **Valuation**     | ** ** |
| ** **                | ** ** | **Lease Losses**            | ** ** | **Allowance**          | ** ** | **Lease Losses** | ** ** | **Allowance**     | ** ** |
| **Loan and Lease Type**   | ** ** | **March 31, 2009**     | ** ** | **June 30, 2008** | ** ** |
| ** **                | ** ** | **(Dollars  in Thousands)** | ** ** |
| One- to  four-family      |       | $                           | 417        |                   | $          | —           |       | $                 | 294        |   | $ | — |   |
| Commercial real  estate   |       | 1,059                       |       | —                 |       | 740              |       | —            |       |
| Multi-family  real estate |       | 176                         |       | —                 |       | 135              |       | —            |       |
| Commercial  business      |       | 2,131                       |       | 57                     |       | 1,678            |       | —            |       |
| Equipment  finance leases |       | 444                         |       | —                 |       | 496              |       | —            |       |
| Consumer                  |       | 1,131                       |       | —                 |       | 1,190            |       | —            |       |
| Agricultural              |       | 2,595                       |       | 130                    |       | 1,270            |       | 130               |       |
| Total                     |       | $                           | 7,953      |                   | $          | 187              |       | $                 | 5,803      |   | $ | 130 |   |

 

**Impaired Loan Summary**

** **
| ** **               | ** ** | ** **                  | ** ** | ** **             | ** ** | **Impaired**  | ** ** | ** **    | ** ** | ** **  | ** ** | **Impaired**  | ** ** |
|--------------------------|------------|-----------------------------|------------|------------------------|------------|---------------|------------|---------------|------------|-------------|------------|---------------|------------|
| ** **               | ** ** | **Number**                  | ** ** | ** **             | ** ** | **Loan**      | ** ** | **Number**    | ** ** | ** **  | ** ** | **Loan**      | ** ** |
| **Loan**                 | ** ** | **of Loan**                 | ** ** | **Loan**               | ** ** | **Valuation** | ** ** | **of Loan**   | ** ** | **Loan**    | ** ** | **Valuation** | ** ** |
| **Balance**              | ** ** | **Customers**               | ** ** | **Balance**            | ** ** | **Allowance** | ** ** | **Customers** | ** ** | **Balance** | ** ** | **Allowance** | ** ** |
| **Loan  and Lease Type** | ** ** | **March 31, 2009**     | ** ** | **June 30, 2008** | ** ** |
| ** **               | ** ** | **(Dollars  in Thousands)** | ** ** |
| Commercial real  estate  |       | 2                           |       | $                      | 177        |          | $          | —        |       | —      |       | $             | —     |   | $ | — |   |
| Commercial  business     |       | 3                           |       | 208                    |       | 57            |       | —        |       | —      |       | —        |       |
| Consumer                 |       | 1                           |       | 27                     |       | —        |       | —        |       | —      |       | —        |       |
| Agricultural             |       | 2                           |       | 403                    |       | 130           |       | 2             |       | 316         |       | 130           |       |
| Total                    |       | 8                           |       | $                      | 815        |          | $          | 187           |       | 2           |       | $             | 316        |   | $ | 130 |   |

 

The allowance for loan and lease losses was $8.1 million at March 31,2009, as compared to $5.6 million at March 31, 2008.  The ratio of the allowance for loan and leaselosses to total loans and leases was 0.97% at March 31, 2009, compared to0.72% at March 31, 2008.  TheCompany’s management has considered nonperforming loans and leases andpotential problem loans and leases in establishing the allowance for loan andlease losses.  The Company continues tomonitor its allowance for probable loan and lease losses and make futureadditions or reductions in light of the level of loans and leases in itsportfolio and as economic conditions dictate. The current level of the allowance forloan and lease losses is a result of management’s assessment of the riskswithin the portfolio based on the information revealed in credit reportingprocesses. The Company utilizes a risk-rating system on all commercialbusiness, agricultural, construction and multi-family and commercial realestate loans, including purchased loans and leases.  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.

 

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Real estate propertiesacquired through foreclosure are recorded at the lower of cost or fair value(less a deduction for disposition costs). Valuations are periodically updated by management and a specificprovision for losses on such properties is established by a charge tooperations if the carrying values of the properties exceed their estimated netrealizable values.

 

Althoughmanagement believes 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 allowancesmay result from periodic loan, property or collateral reviews which cannot bepredicted at this time.

 

**Comparison of the Three Months Ended March 31,2009, and March 31, 2008**

 

*General*. The Company’s net income available for common shareholders was $1.8million, or $0.45 in basic and $0.45 in diluted earnings per common share forthe three months ended March 31, 2009, a $208,000 increase in earningsavailable for common shareholders compared to $1.6 million, or $0.41 in basicand $0.40 in diluted earnings per common share for the same period in the priorfiscal year.  For the three months ended March 31,2009, the return on average equity and the return on average assets were 9.49%and 0.75%, respectively, compared to 10.02% and 0.64%, respectively, for thesame period in the prior fiscal year.  Asdiscussed in more detail below, the increases to earnings were due to a varietyof key factors, including an increase in net interest income of $1.5 millionand non-interest income of $197,000. These increases were partially offset by increases of non-interestexpense and preferred stock dividends and accretion in the amounts of $854,000and $340,000, respectively, for the third quarter of Fiscal 2009 as compared tothe third quarter of Fiscal 2008.

 

*Interest, Dividend and Loan FeeIncome.*  Interest, dividend and loan fee income was$15.0 million for the three months ended March 31, 2009 as compared to$15.5 million for the same period in the prior fiscal year, a decrease of$534,000 or 3.4%.  This decrease wasprimarily the result of declining average yields on the interest earningassets.  Loans and leases receivable hadan average yield of 5.83% for the three months ended March 31, 2009, whichis 109 basis points less than the average yield of 6.92% for the three monthsended March 31, 2008.  Investmentsecurities also had a decline in average yield of 50 basis points whencomparing the third quarter of Fiscal 2009 against the same period of the prioryear.  The average interest-earningassets for loans and leases receivables increased $70.5 million, or 9.2% to$837.5 million for the three months ended March 31, 2009, when compared tothe three months ended March 31, 2008. Investment securities also increased in average balance by $79.0million, or 45.4% to $252.8 million for the third quarter of Fiscal 2009, whencompared to the average balance of the same quarter of the prior fiscalyear.  The net revenue decrease attributableto the overall declining yields was $2.7 million when comparing the threemonths ended March 31, 2009 against the same period ended March 31,2008.  This net revenue decrease wasoffset by $2.2 million of revenue increases from larger average assets investedfor the third quarter of Fiscal 2009 as compared to the third quarter of Fiscal2008.

 

*Interest Expense.*  Interestexpense was $5.9 million for the three months ended March 31, 2009 ascompared to $7.8 million for the same period in the prior fiscal year, adecrease of $2.0 million or 25.3%.  A$2.6 million decrease in interest expense was the result of a decrease in theaverage rate paid of 3.47% on interest-bearing deposits for the three monthsended March 31, 2008 to an average rate paid of 2.09% for the three monthsended March 31, 2009.  Averagevolume of interest-bearing deposits increased by 3.2% for the three monthperiod ended March 31, 2009, as compared to the three month period ended March 31,2008.  This increase in volume slightlyoffset the overall decrease in interest expense for interest-bearing depositsby $395,000.   The average volume of FHLBadvances and other borrowings increased $81.6 million, or 51.1%, which alsopartially offset the overall decrease in interest expense.  This volume increase resulted in an increaseto interest expense in the amount of $832,000, when compared to the samequarter in the prior fiscal year.  Theaverage yield of FHLB advances and other borrowings declined to 3.19% for thethree months ended March 31, 2009 from 4.18% for the three month periodended March 31, 2008, resulting in a reduction in interest expense of$596,000.  Interest expense forsubordinated debentures payable to trusts also declined by $47,000 as a resultof the yield declining from 7.14% to 6.51% during the same comparablequarters.  The average rate paid on totalinterest-bearing liabilities was 2.50% for the three months ended March 31,2009 as compared to 3.72% for the same period in the prior fiscal year.

 

*Net Interest Income.* The Company’snet interest income for the three months ended March 31, 2009 increased$1.5 million or 18.9%, to $9.2 million compared to $7.7 million for the sameperiod in the prior fiscal year.  Theincrease in net interest income was due primarily to decreases in the averagerate paid on interest-bearing liabilities for the three months ended March 31,2009 compared to the same period in the prior fiscal year.  The Company’s net interest margin on a fullytaxable equivalent basis was 3.55% for the three months ended March 31,2009 as compared to 3.32% for the same period in the prior fiscal year.

 

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*Provision for Losses on Loans andLeases.*The allowancefor loan and lease losses is maintained at a level which is considered bymanagement to be adequate to absorb probable losses on existing loans andleases that may become uncollectible, based on an evaluation of the collectabilityof loans and leases and prior loan and lease loss experience.  The evaluation takes into consideration suchfactors as changes in the nature and volume of the loan and lease portfolio,overall portfolio quality, review of specific problem loans and leases, andcurrent economic conditions that may affect the borrower’s ability to pay.  The allowance for loan and lease losses isestablished through a provision for losses on loans and leases charged toexpense.

 

During the three months ended March 31,2009, the Company recorded a provision for losses on loans and leases of$414,000 compared to $551,000 for the three months ended March 31,2008.  See “Asset Quality” for furtherdiscussion.

 

*Non-interest Income.*  Non-interest income was $3.0 million for thequarter ended March 31, 2009 compared to $2.8 million at for the quarterended March 31, 2008, an increase of $197,000 or 7.0%.  Gain on sale of loans and net gain on sale ofsecurities increased $286,000 and $387,000, respectively, while trust incomedecreased $71,000.  Net impairment lossesrecognized in earnings were $361,000 for the quarter ended March 31,2009.  There were no impairment lossesrecognized for the quarter ended March 31, 2008.

 

Gainon sale of loans increased $286,000 to $543,000 for the three months ended March 31,2009 from $257,000 for the three months ended March 31, 2008, primarilydue to an increase in mortgage loan activity and the related loan sales.  Net gain on sale of securities increased$387,000 for which there were none in the prior year’s comparable quarter.  Trust income decreased to $158,000 for thethree months ended March 31, 2009 from $229,000 for the three months endedMarch 31, 2008, due in part to a decrease in managed assets from  decreased market values when compared to theprior year.  Net impairment lossesrecognized in earnings were $361,000 for the quarter ended March 31,2009.  The Company determined that atotal of $3.2 million of losses due to other-than temporary impairments wereincurred of which $2.8 million were recognized in other comprehensiveincome.  The net of $361,000 of losseswere recognized as a reduction of other non-interest income.

 

*Non-interest Expense.*  Non-interest expense was $8.4 million for thethree months ended March 31, 2009 as compared to $7.6 million for thethree months ended March 31, 2008, an increase of $854,000, or 11.3%.  The increase in non-interest expense wasprimarily due to increases in compensation and employee benefits of $245,000,FDIC insurance of $249,000 and other non-interest expenses of $213,000.

 

Compensation and employee benefits increased$245,000, or 4.9%, from $5.0 million for the three months ended March 31,2008 to $5.2 million for the three months ended March 31, 2009.  Employee compensation increased $179,000, or6.0%, variable pay relating to employee incentives and commissions decreased$238,000, or 30.7% and net healthcare costs increased $376,000, or 114.6%.  Employee compensation increased due to annualraises awarded and additional personnel since the three month period ended March 31,2008.  Variable pay relating to employeeincentive programs increased due to higher production and increased financialperformance outcomes.  Healthcare costs increased as a result ofhigher claim activity in the third quarter of Fiscal 2009.  Management continues to believe theself-insured structure is a reasonable alternative to traditional healthcareplans over the long term.  The level ofhealthcare costs which the Company incurs may vary from year to year, and theincrease in net healthcare costs does not necessarily indicate a trend.

 

FDIC insurance premiums increased $249,000to $272,000 for the three month period ended March 31, 2009 as compared to$23,000 for the three month period ended March 31, 2008.  The increase is a combination of new depositguarantee programs and assessment schedule changes initiated by the FDIC andthe expiration of credits previously used to lower costs.  On January 1, 2009, the FDIC raisedpremium rates by approximately 7 basis points to a total of 12.5 basispoints.  Prior to the second quarter ofFiscal 2009, the Company had credits to offset federal deposit insurancepremiums which saved approximately 5 basis points from the previously lowerrate of about 5.5 basis points.   No futurecredits exist to offset this cost.

 

Other non-interest expenses rose $213,000largely due to increasesin legal and professional expenses of $132,000. These costs increased due in part to continuing costs associated withparticipation in the CPP.

 

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*Incometax expense.*  The Company’s income tax expensefor the three months ended March 31, 2009 increased $387,000 or 50.0% to$1.2 million compared to $774,000 for the same period in the prior fiscalyear.  The effective tax rate was 34.8%and 32.3% for the three months ended March 31, 2009 and 2008,respectively.

 

**Comparison of the Nine Months Ended March 31,2009, and March 31, 2008**

 

*General*. The Company’s net income available for common shareholders was $5.7million, or $1.41 in basic and $1.40 in diluted earnings per common share forthe nine months ended March 31, 2009, a $1.4 million increase in earningsavailable for common shareholders compared to $4.2 million, or $1.06 in basicand $1.05 in diluted earnings per common share for the same period in the priorfiscal year.  For the nine months ended March 31,2009, the return on average equity and the return on average assets were 10.16%and 0.70%, respectively, compared to 8.80% and 0.56%, respectively, for thesame period in the prior fiscal year.  Asdiscussed in more detail below, the increases to earnings were due to a varietyof key factors, including an increase in net interest income of $5.5 millionand non-interest income of $394,000. These increases were partially offset by increases of non-interestexpense and preferred stock dividends and accretion in the amounts of $3.6million and $340,000, respectively, for the nine months ended March 31,2009 as compared to the nine months ended March 31, 2008.

 

*Interest, Dividend and Loan FeeIncome.*  Interest, dividend and loan fee income was$46.4 million for the nine months ended March 31, 2009 as compared to $47.6million for the same period in the prior fiscal year, a decrease of $1.2million or 2.5%.  This decrease wasprimarily the result of declining average yields on the interest earningassets.  Loans and leases receivable hadan average yield of 6.12% for the nine months ended March 31, 2009, whichis 97 basis points less than the average yield of 7.09% for the nine monthsended March 31, 2008.  Investmentsecurities also had a decline in average yield of 41 basis points whencomparing the nine months ended March 31, 2009 against the same period ofthe prior year.  The averageinterest-earning assets for loans and leases receivables increased $48.0million, or 6.2% to $820.8 million for the nine months ended March 31,2009, when compared to the nine months ended March 31, 2008.  Investment securities also increased inaverage balance by $80.0 million, or 49.8% to $240.6 million for the ninemonths ended March 31, 2009, when compared to the average balance of thesame quarter of the prior fiscal year. The net revenue decrease attributable to the overall declining yieldswas $7.0 million when comparing the nine months ended March 31, 2009against the same period ended March 31, 2008.  This net revenue decrease was offset by $5.8million of revenue increases from larger average assets invested for the ninemonths ended March 31, 2009 as compared to the nine months ended March 31,2008.

 

*Interest Expense.*  Interestexpense was $19.6 million for the nine months ended March 31, 2009 ascompared to $26.3 million for the same period in the prior fiscal year, adecrease of $6.7 million or 25.5%.  An$8.2 million decrease in interest expense was the result of a decrease in theaverage rate paid of 3.92% on interest-bearing deposits for the nine monthsended March 31, 2008 to an average rate paid of 2.38% for the nine monthsended March 31, 2009.  Averagevolume of interest-bearing deposits increased by 0.2% for the nine month periodended March 31, 2009, as compared to the nine month period ended March 31,2008.  This increase in volume slightlyoffset the overall decrease in interest expense for interest-bearing depositsby $274,000.   The average volume of FHLBadvances and other borrowings increased $106.5 million, or 82.4%, which alsopartially offset the overall decrease in interest expense.  This volume increase resulted in an increaseto interest expense in the amount of $3.7 million, when compared to the samenine month period of Fiscal 2008.  Theaverage yield of FHLB advances and other borrowings declined to 3.36% for thenine months ended March 31, 2009 from 4.59% for the nine month periodended March 31, 2008, resulting in a reduction in interest expense of $2.2million.  Interest expense forsubordinated debentures payable to trusts also declined by $310,000 as a resultof the yield declining from 8.09% to 6.62% during the same comparable ninemonth period.  The average rate paid ontotal interest-bearing liabilities was 2.75% for the nine months ended March 31,2009 as compared to 4.16% for the same period in the prior fiscal year.

 

*Net Interest Income.* The Company’snet interest income for the nine months ended March 31, 2009 increased$5.5 million or 25.7%, to $26.8 million compared to $21.4 million for the sameperiod in the prior fiscal year.  Theincrease in net interest income was due primarily to decreases in the averagerate paid on interest-bearing liabilities for the nine months ended March 31,2009 compared to the same period in the prior fiscal year.  The Company’s net interest margin on a fullytaxable equivalent basis was 3.37% for the nine months ended March 31,2009 as compared to 3.08% for the same period in the prior fiscal year.

 

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*Provision for Losses on Loans and Leases.*The allowance for loan and lease losses ismaintained at a level which is considered by management to be adequate toabsorb probable losses on existing loans and leases that may becomeuncollectible, based on an evaluation of the collectability 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.

 

During the nine months ended March 31, 2009, the Company recordeda provision for losses on loans and leases of $801,000 compared to $1.2 millionfor the nine months ended March 31, 2008, a decrease of $370,000.  The reduction in the provision was due inpart to a large loan loss recovery which increased the allowance for loan andlease losses during the second quarter of Fiscal 2009.  The Company previously announced a net loanloss recovery of $2.2 million from a settlement of a previously disclosedlawsuit against MetaBank.  During thesecond quarter, the Company bolstered its methodology for calculating theallowance for loan and lease losses to better capture the impact of theeconomic recession currently being experienced across the country.  See “Asset Quality” for further discussion.

 

*Non-interest Income.*  Non-interest income was $9.0 million for thenine months ended March 31, 2009 compared to $8.6 million at for the ninemonths ended March 31, 2008, an increase of $394,000 or 4.6%.  Gain on sale of loans and net gain on sale ofsecurities increased $124,000 and $512,000, respectively, while trust incomedecreased $194,000.  Net impairmentlosses recognized in earnings were $361,000, which were recognized in the thirdquarter of Fiscal 2009.  There were noimpairment losses recognized in the prior fiscal year.

 

Gainon sale of loans increased $124,000 to $1.1 million for the nine months ended March 31,2009 from $955,000 for the nine months ended March 31, 2008, primarily dueto an increase in mortgage loan activity and the related loan sales.  Net gain on sale of securities increased$512,000 for which there were none during the nine month period of Fiscal2008.  Trust income decreased to $533,000for the nine months ended March 31, 2009 from $727,000 for the nine monthsended March 31, 2008, due in part to a decrease in managed assetsfrom  decreased market values whencompared to the prior year.  Netimpairment losses recognized in earnings were $361,000 during the third quarterof Fiscal 2009.  The Company determinedthat a total of $3.2 million of losses due to other-than temporary impairmentswere incurred of which $2.8 million were recognized in other comprehensiveincome.  The net of $361,000 of losseswere recognized as a reduction of other non-interest income.

 

*Non-interest Expense.* Non-interest expense was $26.0 million for the nine months ended March 31,2009 as compared to $22.4 million for the nine months ended March 31,2008, an increase of $3.6 million, or 16.0%. The increase in non-interest expense was primarily due to increases incompensation and employee benefits of $2.0 million, FDIC insurance of $465,000,marketing of $109,000, net foreclosed real estate and other properties of$106,000, and other non-interest expense of $644,000.

 

Compensation and employee benefits increased $2.0 million, or 13.8%,from $14.2 million for the nine months ended March 31, 2008 to $16.2million for the nine months ended March 31, 2009.  Employee compensation increased $741,000, or8.2%, variable pay relating to employee incentives and commissions increased$242,000, or 15.1% and net healthcare costs increased $1.0 million, or109.5%.  Employee compensation increaseddue to annual raises awarded and additional personnel since the nine month periodended March 31, 2008.  Variable payrelating to employee incentive programs increased due to higher production andincreased financial performance outcomes. Healthcare costs increased as a result of higher claim activity in thesecond and third quarters of Fiscal 2009. Management continues to believe the self-insured structure is areasonable alternative to traditional healthcare plans over the long term.  The level of healthcare costs which theCompany incurs may vary from year to year, and the increase in net healthcarecosts does not necessarily indicate a trend.

 

FDIC insurance premiums increased $465,000to $535,000 for the nine month period ended March 31, 2009 as compared to$70,000 for the nine month period ended March 31, 2008.  The increase is a combination of new depositguarantee programs and assessment schedule changes initiated by the FDIC andthe expiration of credits previously used to lower costs.  On January 1, 2009, the FDIC raisedpremium rates by approximately 7 basis points to a total of 12.5 basis pointsof applicable deposits.  Prior to thesecond quarter of Fiscal 2009, the Company had credits to offset federaldeposit insurance premiums which saved approximately 5 basis points from the previouslylower rate of approximately 5.5 basis points.  No further credits exist to offset this cost.

 

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Marketing increased $109,000 from $783,000 for the nine months ended March 31,2008 to $892,000 for the nine months ended March 31, 2009 due to increasedpromotional activities.

 

Foreclosed real estate and other properties, net, increased by $106,000to $219,000 for the nine months ended March 31, 2009 as compared to thesame period in the prior fiscal year due to increased activity in repossessedequipment.

 

Other non-interest expenses grew $644,000 largely due to increases inlegal and professional expenses of $434,000, and audit and regulatory examinationfees of $95,000.  Legal and consultingcosts increased due in part to a lawsuit, which was settled in the secondquarter of Fiscal 2009, and legal costs related to the participation in the CPPas mentioned earlier.  Audit andregulatory examination fees increased $95,000 due to increases in professionalservices performed for the nine month period of Fiscal 2009.

 

*Income tax expense.*  The Company’s income tax expense for the ninemonths ended March 31, 2009 increased $899,000 or 41.8% to $3.0 million comparedto $2.1 million for the same period in the prior fiscal year.  The effective tax rate was 33.7% and 33.7%for the nine months ended March 31, 2009 and 2008, respectively.

 

**Liquidity and Capital Resources**

 

The Bank’s primarysources of funds are earnings, in-market deposits, FHLB advances and otherborrowings, repayments of loan principal, mortgage-backed securities andcallable agency securities and, to a lesser extent, sales of mortgage loans,sales and maturities of securities, out-of-market deposits and short-terminvestments.  While scheduled loanpayments and maturing securities are relatively predictable, deposit flows andloan and security prepayments are more influenced by interest rates, generaleconomic conditions and competition. The Bank attempts to price its deposits tomeet its asset/liability objectives consistent with local marketconditions.  Excess balances are investedin 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) expectedloan demand, (ii) projected loan sales, (iii) expected deposit flows,(iv) yields available on interest-bearing deposits, and (v) theobjectives of its asset/liability management program.  Excess liquidity is invested generally ininterest-bearing overnight deposits and other short-term government and agencyobligations.

 

The Bank anticipates it will have sufficient funds available to meetcurrent loan commitments.  At March 31,2009, the Bank had outstanding commitments to originate and purchase mortgageand commercial loans of $36.9 million. In addition, the Bank had outstanding commitments to sell mortgage loansof $32.9 million.  Commitments by theBank to originate loans are not necessarily executed by the customer.  The Bank monitors the ratio of commitments tofunding for use in liquidity management. At March 31, 2009, the Bank had no outstanding commitments topurchase investment securities available for sale and no commitments to sellinvestment 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 hasunsecured federal funds accommodations totaling $15.0 million with acorrespondent bank.  In addition, theCompany has a revolving line of credit totaling $6.0 million with acorrespondent bank.  There were no fundsdrawn on either line of credit at March 31, 2009.  Additionally, as of March 31, 2009, theBank had $29.8 million in out-of-market certificates of deposit.  The Bank may also seek other sources ofcontingent liquidity including additional federal funds purchased lines withcorrespondent banks and lines of credit with the Federal Reserve Bank.

 

The Company uses its capital resources to paydividends to its stockholders, to repurchase Company stock pursuant to Board ofDirectors approved plans, to support organic growth, to make acquisitions, toservice its debt obligations and to provide funding for investment into theBank of Tier 1 (core) capital.

 

In conjunction with the Company’s participation in the CPP, the Company’sBoard of Directors terminated the stock buyback program in the second quarterwhich had been in place through November 21, 2008, in which up to 10% ofthe common stock of the Company outstanding on May 1, 2008 could beacquired through April 30, 2009. See Part II, Item 2 “Unregistered Sales of Equity Securities andUse of Proceeds” of this Form 10-Q for more details.

 

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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.  At March 31,2009, the Bank met all current regulatory capital requirements.

 

The minimum OTS Tier 1(core) capital requirement for well-capitalized institutions is 5.00% of totaladjusted assets for thrifts.  The Bankhad Tier 1 (core) capital of 8.25% at March 31, 2009.  The minimum OTS total risk-based capitalrequirement for well-capitalized institutions is 10.00% of risk-weightedassets.  The Bank had total risk-basedcapital of 11.02% at March 31, 2009.

 

**Impact ofInflation 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 industrialcompanies, nearly all the assets and liabilities of the Bank are monetary innature.  As a result, interest rates havea greater impact on the Bank’s performance than do the effects of generallevels of inflation.  Interest rates donot necessarily move in the same direction or to the same extent as the pricesof goods and services.

 

**RecentAccounting Pronouncements**

 

In September 2006,FASB issued Statement of Financial Accounting Standards No. 157 (SFAS157), “Fair Value Measurements.”  SFAS157 provides a common definition of fair value and a framework for measuringassets and liabilities at fair values when a particular standard prescribesit.  In addition, the Statement expandsdisclosures about fair value measurements. The Company adopted SFAS 157 effective July 1, 2008, and theadoption did not have a material impact on its results of operations, financialposition, and liquidity.

 

In February 2007,FASB issued Statement of Financial Accounting Standards No. 159 (SFAS159), “The Fair Value Option for Financial Assets and Financial Liabilities —Including an Amendment of FASB Statement No. 115.”  SFAS 159 allows companies the choice tomeasure many financial instruments and certain other items at fair value.  This gives a company the opportunity tomitigate volatility in reported earnings caused by measuring related assets andliabilities differently without having to apply complex hedge accountingprovisions.  The Company adopted SFAS 159effective July 1, 2008, and the adoption did not have a material impact onits results of operations, financial position, and liquidity.  The Company did not adopt fair value for anyadditional financial instruments or other items.

 

In December 2007, FASB issued Statement of Financial AccountingStandards No. 141R (SFAS 141R), “Business Combinations.”  SFAS 141R improves reporting by creatinggreater consistency in the accounting and financial reporting of businesscombinations, resulting in more complete, comparable, and relevant informationfor investors and other users of financial statements.  SFAS 141R is effective July 1,2009.  Management has reviewed SFAS 141Rand does not expect the adoption of this statement to have a material impact onthe Company’s consolidated financial condition, results of operations or cashflow.

 

In December 2007, FASB issued Statement of Financial AccountingStandards No. 160 (SFAS 160), “Non-controlling Interests in ConsolidatedFinancial Statements — an amendment of ARB No. 51.”  SFAS 160 is effective for the Companybeginning July 1, 2009.  SFAS 160improves the relevance, comparability, and transparency of financialinformation provided to investors by requiring all entities to reportnon-controlling (minority) interest in subsidiaries in the same way — as equityin the consolidated financial statements. The Company does not currently have any non-controlling interest in theconsolidated financial statements.

 

In March 2008,FASB issued Statement of Financial Accounting Standards No. 161 (SFAS161), “Disclosures about Derivative Instruments and Hedging Activities.”  SFAS 161 is intended to improve financialreporting about derivative instruments and hedging activities by requiringenhanced disclosures to enable investors to better understand their effects onan entity’s financial position, financial performance, and cash flows.  The Company adopted SFAS 161 effective January 1,2009, and the adoption did not have a material impact on its results ofoperations, financial position, and liquidity. 

 

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In May 2008, the FASB issued SFAS No. 162, “The Hierarchy ofGenerally Accepted Accounting Principles” (SFAS 162).  This statement makes the hierarchy explicitlyand directly applicable to preparers of financial statements, a step thatrecognizes preparers’ responsibilities for selecting the accounting principlesfor their financial statements.  SFAS 162provides for slight modifications to the current hierarchy in place by addingFASB Staff Positions, Statement 133 Implementation Issues, and EITF D-Topics toit.  The Company adopted SFAS 162effective November 15, 2008, and the adoption did not have a material impacton its results of consolidated financial condition, results of operations orcash flow.

 

In May 2008, the FASB issued SFAS No. 163, “Accounting forFinancial Guarantee Insurance Contracts — An Interpretation of FASB Statement No. 60”(SFAS 163).  This statement requires thatan insurance enterprise recognize a claim liability prior to an event ofdefault when there is evidence that credit deterioration has occurred in aninsured financial obligation.  SFAS 163also clarifies how Statement 60 applies to financial guarantee insurancecontracts, including the recognition and measurement to be used to account forpremium revenue and claim liabilities. Expanded disclosures about financial guarantee insurance contracts arealso required by this statement.  SFAS163 is effective July 1, 2009.  TheCompany is in the process of assessing the impact on its results of operations,financial position, and cash flow.

 

In December 2008, the FASB issued Staff Position No. FAS132(R)-1, amending the disclosure guidance in FASB Statement No. 132, “Employers’Disclosures about Pensions and Other Postretirement Benefits”.  The FSP states  that the purpose is to increase thetransparency in the disclosure of Postretirement Benefit Plan Assets and toprovide users an understanding of the following:  investment allocation decision-making,including the factors that are pertinent to the investment policies andstrategies; the major categories of plan assets; the valuation techniques usedto measure the fair value of plan assets, the effect of fair value measurementsusing significant unobservable inputs (Level 3) on changes in plan assets forthe period; and significant concentrations of risk with plan assets.  FAS 132(R)-1 is effective for annualreporting for the fiscal year beginning July 1, 2009.  The Company is in the process of assessingthe impact on its results of operations, financial position, and cash flow.

 

In December 2008, the FASB issued Staff Position No. FAS140-4, amending FASB Statement No. 140, “Accounting for Transfers andServicing of Financial Assets and Extinguishments of Liabilities”.  It also amends FASB Interpretation No. 46“Consolidation of Variable Interest Entities” to require public enterprises toprovide additional disclosures about their involvement with variable interestentities.  FAS 140-4 is effectiveimmediately and management does not expect the adoption of this statement tohave a material impact on the Company’s consolidated financial condition,results of operations or cash flow.

 

In January 2009, the FASB issued Staff Position No. EITF99-20-1, amending the impairment guidance in EITF Issue No. 99-20, “Recognitionof Interest Income and Impairment on Purchased Beneficial Interests andBeneficial Interests That Continue to Be Held by a Transferor in SecuritizedFinancial Assets,” (EITF 99-20-1).  Fordebt securities that are not within the scope of Issue 99-20, SFAS No. 115applies.  SFAS No. 115 does notrequire exclusive reliance on market participant assumptions about future cashflows.  Rather, SFAS No. 115 permitsthe use of reasonable management judgment of the probability that the holderwill be unable to collect all amounts due. The FSP is effective immediately and the application of the FSP did nothave a material impact on our financial results or fair value determinations.

 

In April 2009, FASB issued Staff Position No. 141(R)-1 (FAS141R-1), “Accounting for Assets Acquired and Liabilities Assumed in a BusinessCombination That Arise from Contingencies.” FAS 141R-1 amends and clarifies FAS 141R to address the applicationissues on the initial recognition and measurement, subsequent measurement andaccounting, and disclosure of assets and liabilities arising from contingenciesin a business combination.  FAS 141R-1 iseffective July 1, 2009.  Managementhas reviewed FAS 141R-1 and does not expect the adoption of this statement tohave a material impact on the Company’s consolidated financial condition,results of operations or cash flow.

 

In April 2009,FASB issued Staff Position No. 157-4 (FAS 157-4), “Determining Fair ValueWhen the Volume and Level of Activity for the Asset or Liability HaveSignificantly Decreased and Identifying Transactions That Are Not Orderly.”  FAS 157-4 provides additional guidance forestimating fair value in accordance with SFAS 157, Fair Value Measurements,when the volume and level of activity for the asset or liability havesignificantly decreased. This FSP also includes guidance on identifyingcircumstances that indicate a transaction is not orderly. This FSP emphasizesthat even if there has been a significant decrease in the volume and level ofactivity for the asset or liability and regardless of the valuation technique(s) used,the objective of a fair value measurement remains the same. Fair value is theprice that would be received to sell an asset or paid to transfer a liabilityin an orderly transaction (that is, not a forced liquidation or distressedsale) between market participants at the measurement date under current marketconditions.  The Company early adoptedFAS 157-4 effective January 1, 2009, and the adoption did have a materialimpact on results of operations, financial position, and liquidity.  See Note 6 “Fair Value Measurement” foradditional disclosures required by the early adoption of FAS 157-4.

 

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In April 2009,FASB issued Staff Position No. 107-1 (FAS 107-1) and APB 28-1, “InterimDisclosures about Fair Value of Financial Instruments.”  FAS 107-1 amends FASB Statement No. 107,*Disclosures about Fair Value of FinancialInstruments,*to require disclosures about fair value of financialinstruments for interim reporting periods of publicly traded companies as wellas in annual financial statements. APB 28-1 amends APB Opinion No. 28, *Interim Financial Reporting,*to requirethose disclosures in summarized financial information at interim reportingperiods.  FAS 107-1 is effective forinterim reporting periods ending after June 15, 2009, with early adoptionpermitted for periods ending after March 15, 2009.  The Company will adopt FAS 107-1 for thequarter ended June 30, 2009, which is not expected to have a materialimpact on our financial results or fair value determinations.

 

In April 2009,FASB issued Staff Position No. 115-2 (FAS 115-2) and 124-2 (FAS 124-2), “Recognitionand Presentation of Other-Than-Temporary Impairments.”  FAS 115-2 and FAS 124-2 amends theother-than-temporary impairment guidance in U.S. GAAP for debt securities tomake the guidance more operational and to improve the presentation anddisclosure of other-than-temporary impairments on debt and equity securities inthe financial statements. It does not amend existing recognition andmeasurement guidance related to other-than-temporary impairments of equitysecurities.  The Company early adoptedFAS 115-2 and FAS 124-2 effective January 1, 2009, and the adoption didhave a material impact on results of operations, financial position, andliquidity.  See Note 4 “Investments InSecurities” for additional disclosures required by the early adoption of FAS115-2.

 

**Item 3.                    Quantitative and QualitativeDisclosures About Market Risk**

 

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

 

In an attempt to manage its exposure to change ininterest rates, management monitors the Company’s interest rate risk.  The Company’s Asset/Liability Committee meetsperiodically to review the Company’s interest rate risk position andprofitability, and to recommend adjustments for consideration by executivemanagement.  Management also reviews theBank’s securities portfolio, formulates investment strategies, and oversees thetiming and implementation of transactions to assure attainment of the Board’sobjectives in the most effective manner. In managing market risk and the asset/liability mix, the Bank has placedits emphasis on developing a portfolio in which, to the extent practicable,assets and liabilities reprice within similar periods.  Notwithstanding the Company’s interest raterisk management activities, the potential for changing interest rates is anuncertainty which may have an adverse effect on net income.

 

The Company adjusts its asset/liability position to mitigate theCompany’s interest rate risk.  At times,depending on the level of general interest rates, the relationship betweenlong- and short-term interest rates, market conditions and competitive factors,management may increase the Company’s interest rate risk position in order toincrease its net interest margin.  TheCompany’s results of operations and net portfolio values remain vulnerable toincreases in interest rates and to fluctuations in the difference between long-and short-term interest rates.

 

As set forth below, the volatility of a ratechange, the change in asset or liability mix of the Company or other factorsmay produce a decrease in net interest margin in an upward moving rateenvironment even as the net portfolio value (“NPV”) estimate indicates anincrease in net value.  The inversesituation may also occur.  One approachused by the Company to quantify interest rate risk is an NPV analysis.  This analysis calculates the differencebetween the present value of the liabilities and the present value of expectedcash flows from assets and off-balance sheet contracts.  The following tables set forth, at March 31,2009 and 2008, respectively, an analysis of the Company’s interest rate risk asmeasured by the estimated changes in NPV resulting from instantaneous andsustained parallel shifts in the yield curve. Management does not believe that the Company has experienced anymaterial changes in its market risk position from that disclosed in the Company’sAnnual Report on Form 10-K for Fiscal 2008 or that the Company’s primarymarket risk exposures and how those exposures were managed during the ninemonths ended March 31, 2009 changed significantly when compared to June 30,2008.

 

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Even if interest rates change in the designatedamounts, there can be no assurance that the Company’s assets and liabilitieswould perform as set forth below.  Inaddition, a change in U.S. Treasury rates in the designated amounts accompaniedby a change in the shape of the Treasury yield curve would cause significantlydifferent changes to the NPV than indicated below.

 

| **March 31, 2009** | ** ** |
|-------------------------|------------|
| ** **              | ** ** | ** ** | ** ** | **Estimated Increase** | ** ** |
| **Change in**           | ** ** | **Estimated** | ** ** | **(Decrease) in NPV** | ** ** |
| **Interest Rates**      | ** ** | **NPV Amount** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| **Basis Points**        | ** ** | **(Dollars in Thousands)** | ** ** | ** ** | ** ** |
| +300                    |       | $ | 113,963 |   | $ | 4,196 |   | 4 | % |
| +200                    |       | 114,842 |   | 5,075 |   | 5 |   |
| +100                    |       | 114,075 |   | 4,308 |   | 4 |   |
| —                  |       | 109,767 |   | — |   | — |   |
| -100                    |       | 100,012 |   | (9,755 | ) | (9 | ) |
|                    |       |   |   |   |   |   |   |
|                    |       |   |   |   |   |   |   |
|                    |       |   |   |   |   |   |   |
| **March 31, 2008** | ** ** |
| ** **              | ** ** | ** ** | ** ** | **Estimated Increase** | ** ** |
| **Change in**           | ** ** | **Estimated** | ** ** | **(Decrease) in NPV** | ** ** |
| **Interest Rates**      | ** ** | **NPV Amount** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| **Basis Points**        | ** ** | **(Dollars in Thousands)** | ** ** | ** ** | ** ** |
| +300                    |       | $ | 104,412 |   | $ | 4,396 |   | 4 | % |
| +200                    |       | 105,956 |   | 5,940 |   | 6 |   |
| +100                    |       | 105,023 |   | 5,007 |   | 5 |   |
| —                  |       | 100,016 |   | — |   | — |   |
| -100                    |       | 90,311 |   | (9,705 | ) | (10 | ) |
| -200                    |       | 80,699 |   | (19,317 | ) | (19 | ) |
|                    |       |   |   |   |   |   |   |

 

In managing market risk and the asset/liability mix,the Bank has placed an emphasis on developing a portfolio in which, to theextent practicable, assets and liabilities reprice within similar periods.  The goal of this policy is to provide arelatively consistent level of net interest income in varying interest ratecycles and to minimize the potential for significant fluctuations from periodto period.

 

**Item 4.                    Controls and Procedures**

 

The Company’s management has evaluated, underthe supervision and with the participation of the Company’s Chairman, Presidentand Chief Executive Officer and the Company’s Executive Vice President, ChiefFinancial Officer and Treasurer, the effectiveness of the design and operationof the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e),and have concluded that, as of the end of the period covered by this QuarterlyReport, the Company’s disclosure controls and procedures are effective forgathering, analyzing and disclosing information the Company is required todisclose in its periodic reports filed under the Exchange Act.  There were no significant changes in theCompany’s internal control over financial reporting during the period coveredby the Quarterly Report that materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

 

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**PART II - OTHER INFORMATION**

 

**Item 1.                    LegalProceedings**

 

The Company,the Bank and each of their subsidiaries are, from time to time, involved asplaintiff or defendant in various legal actions arising in the normal course oftheir businesses.  While the ultimateoutcome of any such proceedings cannot be predicted with certainty, it isgenerally the opinion of management, after consultation with counselrepresenting the Bank and the Company in any such proceedings, the resolutionof any such proceedings should not have a material effect on the Company’sconsolidated financial position or results of operations.  The Company, the Bank and each of theirsubsidiaries are not aware of any legal actions or other proceedingscontemplated by governmental authorities outside of the normal course ofbusiness.

 

**Item 1A.                 Risk Factors**

 

There have been no material changes from the risk factors disclosed in Part 1,Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K forFiscal 2008.

 

**Item 2.                    Unregistered Sales of EquitySecurities and Use of Proceeds**

 

The following table sets forth the purchases by the Company of itscommon stock and the remaining amount that can be purchased in the currentprogram during the quarterly period ended March 31, 2009:

 
| ** **                  | ** **                   | **Total**     | ** **                   | ** **      | ** **                   | **Total  Number**             | ** **                   | **Maximum  Number of**        | ** **                   |
|-----------------------------|------------------------------|---------------|------------------------------|-----------------|------------------------------|-------------------------------|------------------------------|-------------------------------|------------------------------|
| ** **                  | ** **                   | **Number**    | ** **                   | **Average**     | ** **                   | **of  Shares Purchased**      | ** **                   | **Shares  that May Yet** | ** **                   |
| ** **                  | **    ** | **of Shares** | **    ** | **Price  Paid** | **    ** | **as  Part of Publicly** | **    ** | **Be  Purchased Under**       | **    ** |
| **Period**                  | ** **                   | **Purchased** | ** **                   | **per  Share**  | ** **                   | **Announced  Programs**       | ** **                   | **the  Current Program**      | ** **                   |
| January 1 -  31, 2009  |                         | —        |                         | $               | 0.00                         |                          | —                       |                          | 0                            |   |
| February 1  - 29, 2009 |                         | —        |                         | $               | 0.00                         |                          | —                       |                          | 0                            |   |
| March 1 -  31, 2009    |                         | —        |                         | $               | 0.00                         |                          | —                       |                          | 0                            |   |
| 3rd Quarter  Total          |                         | —        |                         | $               | 0.00                         |                          | —                       |                          |                         |   |

 

In conjunction with the Company’s participation in the CPP, the Company’sBoard of Directors terminated the stock buyback program in the second quarterwhich had been in place through November 21, 2008, in which up to 10% ofthe common stock of the Company outstanding on May 1, 2008 could beacquired through April 30, 2009.

 

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**Item 6.                    Exhibits**

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

 

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**HFFINANCIAL CORP.**

 

**FORM 10-QSIGNATURES**

 

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

 

|   |              |   |   | HF Financial Corp.                            |
|--------|-------------------|--------|--------|-----------------------------------------------|
|   |              |   |   | (Registrant)                                  |
|   |              |   |   |
| Date:  | May 14, 2009 |   | By:    | /s/ Curtis L. Hage                            |
|   |              |   |   | Curtis L. Hage, Chairman, President           |
|   |              |   |   | and Chief Executive Officer                   |
|   |              |   |   | (Principal Executive Officer)                 |
|   |              |   |   |                                          |
| Date:  | May 14, 2009 |   | By:    | /s/ Darrel L. Posegate                        |
|   |              |   |   | Darrel L. Posegate, Executive Vice President, |
|   |              |   |   | Chief Financial Officer and Treasurer         |
|   |              |   |   | (Principal Financial and Accounting Officer)  |
|   |              |   |   |                                          |
|        |                   |        |        |                                               |  |

 

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**Index toExhibits**

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

 

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