**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

WASHINGTON, D.C.  20549

---------------------------------------------

**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 December 31, 2006

Commission FileNumber: 0-19972

---------------------------------------------

**HF FINANCIAL CORP.**

*(Exactname of registrant as specified in its charter.)*

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

 

**(605)  333-7556**

*(Registrant’stelephone number, including area code)*

Indicateby check mark whether the registrant  (1)has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.  YES X      NO___

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

LARGE ACCELERATEDFILER____     ACCELERATED FILER____     NON-ACCELERATED FILER   X

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

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

Asof February 8, 2007 there were 3,978,584 issued and outstanding shares of theRegistrant’s Common Stock, with $.01 par value per share.

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**HF FINANCIAL CORP.**

**Form 10-Q**

**Table of Contents**
|                                            |                                                                                        | Page Number |
|--------------------------------------------|---------------------------------------------------------------------------------------------|-------------|
| ** **                                 |                                                                                        |        |
| **PART I – FINANCIAL  INFORMATION**   |
|                                       |                                                                                        |        |
| Item 1. Financial  Statements (Unaudited): |                                                                                        |
|                                       |                                                                                        |        |
|                                       | Consolidated  Statements of Financial Condition                                             |        |
|                                       | As of  December 31, 2006 and June 30, 2006                                                  | 1           |
|                                       |                                                                                        |        |
|                                       | Consolidated  Statements of Income for the                                                  |        |
|                                       | Six Months  Ended December 31, 2006 and 2005                                                | 2           |
|                                       |                                                                                        |        |
|                                       | Consolidated Statements of Cash Flows for the                                               |        |
|                                       | Six Months Ended December 31, 2006 and 2005                                                 | 3           |
|                                       |                                                                                        |        |
|                                       | Notes to Consolidated Financial Statements                                                  | 5           |
|                                       |                                                                                        |        |
| Item 2.                                    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 17          |
|                                       |                                                                                        |        |
| Item 3.                                    | Quantitative  and Qualitative Disclosures about Market Risk                                 | 39          |
|                                       |                                                                                        |        |
| Item 4.                                    | Controls and  Procedures                                                                    | 40          |
| ** **                                 |
| **PART II — OTHER  INFORMATION**      |
|                                       |                                                                                        |        |
| Item 1.                                    | Legal Proceedings                                                                           | 41          |
|                                       |                                                                                        |        |
| Item  1A.                                  | Risk  Factors                                                                               | 41          |
|                                       |                                                                                        |        |
| Item 2.                                    | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 41          |
|                                       |                                                                                        |        |
| Item 4.                                    | Submission  of Matters to a Vote of Security Holders                                        | 42          |
|                                       |                                                                                        |        |
| Item  6.                                   | Exhibits                                                                                    | 43          |
|                                       |                                                                                        |        |
| Form  10-Q                                 | Signature  Page                                                                             | 44          |

 

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**PART I – FINANCIAL INFORMATION**

**Item1.             Financial Statements**

**HF FINANCIALCORP. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION**

**(Dollars in Thousands)**
| ** **                                                          | ** ** | **December 31,  2006** | ** ** | ** ** | **June 30, 2006** | ** ** |
|---------------------------------------------------------------------|------------|------------------------|------------|------------|-------------------|------------|
| ** **                                                          | ** ** | **(Unaudited)**        | ** ** | ** ** | **(Audited)**     | ** ** |
| **ASSETS**                                                          |       |                   |       |       |              |       |
| Cash and cash  equivalents                                          |       | $                      | 47,070     |       |              | $          | 27,037 |   |
| Securities available  for sale                                      |       | 146,369                |       |       | 145,518           |       |
| Federal Home Loan Bank  stock                                       |       | 5,475                  |       |       | 5,647             |       |
| Loans held for sale                                                 |       | 8,711                  |       |       | 7,623             |       |
| Loans and leases  receivable                                        |       | 748,928                |       |       | 727,260           |       |
| Allowance for loan and  lease losses                                |       | (5,869                 | )          |       | (5,657            | )          |
| Net loans and  leases receivable                                    |       | 743,059                |       |       | 721,603           |       |
|                                                                |       |                   |       |       |              |       |
| Accrued interest  receivable                                        |       | 8,618                  |       |       | 6,880             |       |
| Office properties and  equipment, net of accumulated depreciation   |       | 15,697                 |       |       | 14,459            |       |
| Foreclosed real estate  and other properties                        |       | 1,676                  |       |       | 1,889             |       |
| Cash value of life  insurance                                       |       | 13,265                 |       |       | 13,013            |       |
| Servicing rights                                                    |       | 10,784                 |       |       | 5,648             |       |
| Goodwill, net                                                       |       | 4,951                  |       |       | 4,951             |       |
| Other assets                                                        |       | 6,343                  |       |       | 7,026             |       |
| Total assets                                                        |       | $                      | 1,012,018  |       |              | $          | 961,294 |   |
|                                                                |       |                   |       |       |              |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                      | ** ** | ** **             | ** ** | ** ** | ** **        | ** ** |
| **LIABILITIES**                                                     | ** ** | ** **             | ** ** | ** ** | ** **        | ** ** |
| Deposits                                                            |       | $                      | 808,836    |       |              | $          | 769,002 |   |
| Advances from Federal  Home Loan Bank                               |       |                   |       |       |              |       |
| and other  borrowings                                               |       | 90,500                 |       |       | 91,620            |       |
| Subordinated debentures  payable to trusts                          |       | 27,837                 |       |       | 27,837            |       |
| Advances by borrowers  for taxes and insurance                      |       | 10,009                 |       |       | 6,969             |       |
| Accrued expenses and  other liabilities                             |       | 14,237                 |       |       | 9,808             |       |
| Total  liabilities                                                  |       | 951,419                |       |       | 905,236           |       |
|                                                                |       |                   |       |       |              |       |
| **STOCKHOLDERS’ EQUITY**                                       | ** ** | ** **             | ** ** | ** ** | ** **        | ** ** |
| Preferred stock, $.01  par value, 500,000 shares authorized,        |       |                   |       |       |              |       |
| none outstanding                                                    |       | - - - -                |       |       | - - - -           |       |
| Series A Junior  Participating Preferred Stock, $1.00 stated value, |       |                   |       |       |              |       |
| 50,000 shares  authorized, none outstanding                         |       | - - - -                |       |       | - - - -           |       |
| Common stock, $.01 par  value, 10,000,000 shares authorized,        |       |                   |       |       |              |       |
| 5,955,170 and  5,926,496 shares issued                              |       |                   |       |       |              |       |
| at December 31,  2006 and June 30, 2006, respectively               |       | 59                     |       |       | 59                |       |
| Common stock subscribed  for but not issued,                        |       |                   |       |       |              |       |
| 4,078 shares at  June 30, 2006                                      |       | - - - -                |       |       | 65                |       |
| Additional paid-in  capital                                         |       | 20,226                 |       |       | 19,384            |       |
| Retained earnings,  substantially restricted                        |       | 70,565                 |       |       | 68,179            |       |
| Accumulated other  comprehensive income (loss), net                 |       |                   |       |       |              |       |
| of related  deferred tax effect                                     |       | (1,084                 | )          |       | (2,462            | )          |
| Less cost of treasury  stock, 1,977,836 and 1,977,836 shares        |       |                   |       |       |              |       |
| at December 31,  2006 and June 30, 2006, respectively               |       | (29,167                | )          |       | (29,167           | )          |
| Total  stockholders’ equity                                    |       | 60,599                 |       |       | 56,058            |       |
| Total liabilities and  stockholders’ equity                    |       | $                      | 1,012,018  |       |              | $          | 961,294 |   |

 

*See accompanying notes to unaudited consolidated financialstatements.*

Page 1

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**HF FINANCIAL CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME**

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

 
| ** **                                                              | ** ** | **Three Months Ended  December 31,** | ** ** | ** ** | **Six Months Ended  December 31,** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|------------|---------------------------------------------------|------------|
| ** **                                                              | ** ** | **2006**                                            | ** ** | ** ** | **2005**                                          | ** ** | ** ** | **2006** | ** ** | ** ** | **2005** | ** ** |
| Interest, dividend and loan fee income:                                 |       |                                                |       |       |                                              |       |   |   |   |   |   |   |
| Loans and leases  receivable                                            |       | $                                                   | 13,728     |       |                                              | $          | 11,593 |   |   | $ | 26,968 |   |   | $ | 22,714 |   |
| Investment securities  and interest-earning deposits                    |       | 1,935                                               |       |       | 1,550                                             |       |   | 3,773 |   |   | 2,901 |   |
|                                                                    |       | 15,663                                              |       |       | 13,143                                            |       |   | 30,741 |   |   | 25,615 |   |
| Interest expense:                                                       |       |                                                |       |       |                                              |       |   |   |   |   |   |   |
| Deposits                                                                |       | 7,359                                               |       |       | 4,793                                             |       |   | 13,900 |   |   | 9,089 |   |
| Advances from Federal  Home Loan Bank and other borrowings              |       | 2,244                                               |       |       | 1,957                                             |       |   | 4,363 |   |   | 3,798 |   |
|                                                                    |       | 9,603                                               |       |       | 6,750                                             |       |   | 18,263 |   |   | 12,887 |   |
| **Net interest income**                                                 |       | 6,060                                               |       |       | 6,393                                             |       |   | 12,478 |   |   | 12,728 |   |
|                                                                    |       |                                                |       |       |                                              |       |   |   |   |   |   |   |
| Provision for losses on loans and leases                                |       | 461                                                 |       |       | 3,630                                             |       |   | 752 |   |   | 4,092 |   |
| ** **                                                              |       |                                                |       |       |                                              |       |   |   |   |   |   |   |
| **Net interest income after  provision for losses on loans and leases** |       | 5,599                                               |       |       | 2,763                                             |       |   | 11,726 |   |   | 8,636 |   |
|                                                                    |       |                                                |       |       |                                              |       |   |   |   |   |   |   |
| Noninterest income:                                                     |       |                                                |       |       |                                              |       |   |   |   |   |   |   |
| Gain on sale of  branches, net                                          |       | 2,763                                               |       |       | - - - -                                           |       |   | 2,763 |   |   | - - - - |   |
| Fees on deposits                                                        |       | 1,315                                               |       |       | 1,170                                             |       |   | 2,508 |   |   | 2,346 |   |
| Loan servicing income                                                   |       | 441                                                 |       |       | 257                                               |       |   | 770 |   |   | 528 |   |
| Gain on sale of loans,  net                                             |       | 260                                                 |       |       | 271                                               |       |   | 456 |   |   | 567 |   |
| Trust income                                                            |       | 230                                                 |       |       | 200                                               |       |   | 446 |   |   | 395 |   |
| Gain on sale of land,  net                                              |       | - - - -                                             |       |       | 3,557                                             |       |   | - - - - |   |   | 3,557 |   |
| Other                                                                   |       | 413                                                 |       |       | 534                                               |       |   | 823 |   |   | 981 |   |
|                                                                    |       | 5,422                                               |       |       | 5,989                                             |       |   | 7,766 |   |   | 8,374 |   |
| Noninterest expense:                                                    |       |                                                |       |       |                                              |       |   |   |   |   |   |   |
| Compensation and  employee benefits                                     |       | 4,478                                               |       |       | 4,212                                             |       |   | 8,634 |   |   | 8,515 |   |
| Occupancy and equipment                                                 |       | 958                                                 |       |       | 829                                               |       |   | 1,896 |   |   | 1,609 |   |
| Advertising                                                             |       | 704                                                 |       |       | 252                                               |       |   | 1,147 |   |   | 431 |   |
| Check and data  processing expense                                      |       | 567                                                 |       |       | 529                                               |       |   | 1,119 |   |   | 1,059 |   |
| Other                                                                   |       | 984                                                 |       |       | 870                                               |       |   | 1,804 |   |   | 1,752 |   |
|                                                                    |       | 7,691                                               |       |       | 6,692                                             |       |   | 14,600 |   |   | 13,366 |   |
| ** **                                                              |       |                                                |       |       |                                              |       |   |   |   |   |   |   |
| **Income before income taxes**                                          |       | 3,330                                               |       |       | 2,060                                             |       |   | 4,892 |   |   | 3,644 |   |
|                                                                    |       |                                                |       |       |                                              |       |   |   |   |   |   |   |
| Income tax expense                                                      |       | 1,219                                               |       |       | 761                                               |       |   | 1,684 |   |   | 1,322 |   |
| **Net income**                                                          |       | $                                                   | 2,111      |       |                                              | $          | 1,299 |   |   | $ | 3,208 |   |   | $ | 2,322 |   |
| **Comprehensive income**                                                |       | $                                                   | 2,254      |       |                                              | $          | 715 |   |   | $ | 4,443 |   |   | $ | 1,576 |   |
| **Cash dividends declared per share (1)**                               |       | $                                                   | 0.1050     |       |                                              | $          | 0.1023 |   |   | $ | 0.2075 |   |   | $ | 0.2023 |   |
|                                                                    |       |                                                |       |       |                                              |       |   |   |   |   |   |   |
| **Earnings per share:(1)**                                              |       |                                                |       |       |                                              |       |   |   |   |   |   |   |
| Basic                                                                   |       | $                                                   | 0.53       |       |                                              | $          | 0.33 |   |   | $ | 0.81 |   |   | $ | 0.60 |   |
| Diluted                                                                 |       | $                                                   | 0.52       |       |                                              | $          | 0.33 |   |   | $ | 0.79 |   |   | $ | 0.58 |   |

 

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

*See accompanying notes to unaudited consolidatedfinancial statements.*

Page 2

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**HF FINANCIAL CORP. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(Dollars in Thousands)(Unaudited)**
| ** **                                                                                    | ** ** | **Six Months Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                                    | ** ** | **2006**                                              | ** ** | ** ** | **2005** | ** ** |
| **Cash  flows from operating activities**                                                     | ** ** | ** **                                            | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                                    |       | $                                                     | 3,208      |   |   | $ | 2,322 |   |
| Adjustments to reconcile net income to net cash provided  by operating activities:            |       |                                                  |       |   |   |   |
| Provision for losses on loans and leases                                                      |       | 752                                                   |       |   | 4,092 |   |
| Depreciation                                                                                  |       | 803                                                   |       |   | 738 |   |
| Amortization of discounts and premiums on securities  and other                               |       | 971                                                   |       |   | 1,030 |   |
| Stock based compensation                                                                      |       | 452                                                   |       |   | 292 |   |
| Deferred income taxes (credits)                                                               |       | (572                                                  | )          |   | (985 | ) |
| Loans originated for resale                                                                   |       | (43,241                                               | )          |   | (55,716 | ) |
| Proceeds from the sale of loans                                                               |       | 38,353                                                |       |   | 54,900 |   |
| (Gain) on sale of loans, net                                                                  |       | (456                                                  | )          |   | (474 | ) |
| (Gain) on sale of land                                                                        |       | - - - -                                               |       |   | (3,557 | ) |
| (Gain) on sale of branches                                                                    |       | (2,763                                                | )          |   | - - - - |   |
| Losses and provision for losses on sales of foreclosed  real estate and other properties, net |       | 32                                                    |       |   | 21 |   |
| (Gain) loss on disposal of office properties and  equipment, net                              |       | (7                                                    | )          |   | 20 |   |
| Change in other assets and liabilities                                                        |       | 5,334                                                 |       |   | (1,640 | ) |
| Net cash provided by operating activities                                                     |       | 2,866                                                 |       |   | 1,043 |   |
| ** **                                                                                    | ** ** | ** **                                            | ** ** | ** ** | ** ** | ** ** |
| **Cash  flows from investing activities**                                                     | ** ** | ** **                                            | ** ** | ** ** | ** ** | ** ** |
| Loan participations purchased                                                                 |       | (18,815                                               | )          |   | - - - - |   |
| Loans and leases originated and held                                                          |       | (204,380                                              | )          |   | (200,612 | ) |
| Principal collected on loans and leases                                                       |       | 200,461                                               |       |   | 175,857 |   |
| Proceeds from sale of land                                                                    |       | - - - -                                               |       |   | 4,863 |   |
| Proceeds from sale of loans associated with branch  sales                                     |       | 4,256                                                 |       |   | - - - - |   |
| Securities available for sale:                                                                |       |                                                  |       |   |   |   |
| Sales and maturities and repayments                                                           |       | 18,668                                                |       |   | 24,005 |   |
| Purchases                                                                                     |       | (17,485                                               | )          |   | (31,955 | ) |
| Purchase of Federal Home Loan Bank stock                                                      |       | (2,658                                                | )          |   | (2,015 | ) |
| Redemption of Federal Home Loan Bank stock                                                    |       | 2,830                                                 |       |   | 3,069 |   |
| Proceeds from sale of office properties and  equipment                                        |       | 9                                                     |       |   | 2 |   |
| Proceeds from sale of office properties and  equipment associated with branch sales           |       | 341                                                   |       |   | - - - - |   |
| Purchase of office properties and equipment                                                   |       | (2,384                                                | )          |   | (1,523 | ) |
| Purchase of servicing rights                                                                  |       | (5,514                                                | )          |   | (689 | ) |
| Purchase of cash value of life insurance                                                      |       | - - - -                                               |       |   | - - - - |   |
| Proceeds from sale of foreclosed real estate and  other properties, net                       |       | 581                                                   |       |   | 139 |   |
| Net cash (used  in) investing activities                                                      |       | (24,090                                               | )          |   | (28,859 | ) |
|                                                                                               |            |                                                       |            |  |  |  |  |  |

 

*See accompanying notes to unaudited consolidated financialstatements.*

 

Page 3

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**HF FINANCIAL CORP. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)(Dollars in Thousands)(Unaudited)**
| ** **                                                             | ** ** | **Six Months Ended December 31,** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                             | ** ** | **2006**                                              | ** ** | ** ** | **2005** | ** ** |
|                                                                   |       |                                                  |       |   |   |   |
| **Cash  flows from financing activities**                              |       |                                                  |       |   |   |   |
| Net increase in deposit accounts                                       |       | $                                                     | 73,397     |   |   | $ | 44,495 |   |
| Proceeds of advances from Federal Home Loan Bank and  other borrowings |       | 492,902                                               |       |   | 260,083 |   |
| Payments on advances from Federal Home Loan Bank and  other borrowings |       | (494,022                                              | )          |   | (272,267 | ) |
| Proceeds from issuance of subordinated debentures                      |       | 10,000                                                |       |   | - - - - |   |
| Deposit account disbursements associated with branch  sales            |       | (33,563                                               | )          |   | - - - - |   |
| Redemption of subordinated debentures                                  |       | (10,000                                               | )          |   | - - - - |   |
| Increase in advances by borrowers                                      |       | 3,040                                                 |       |   | 487 |   |
| Proceeds from issuance of common stock                                 |       | 325                                                   |       |   | 296 |   |
| Cash dividends paid                                                    |       | (822                                                  | )          |   | (786 | ) |
| Net cash provided by financing activities                              |       | 41,257                                                |       |   | 32,308 |   |
|                                                                   |       |                                                  |       |   |   |   |
| Increase in cash and cash equivalents                                  |       | 20,033                                                |       |   | 4,492 |   |
|                                                                   |       |                                                  |       |   |   |   |
| Cash and cash  equivalents                                             |       |                                                  |       |   |   |   |
| Beginning                                                              |       | 27,037                                                |       |   | 18,248 |   |
| Ending                                                                 |       | $                                                     | 47,070     |   |   | $ | 22,740 |   |
|                                                                   |       |                                                  |       |   |   |   |
| Supplemental  Disclosures of Cash Flows Information                    |       |                                                  |       |   |   |   |
| Cash payments for interest                                             |       | $                                                     | 17,013     |   |   | $ | 11,931 |   |
| Cash payments for income and franchise taxes, net                      |       | 396                                                   |       |   | 1,772 |   |

 

*See accompanying notes tounaudited consolidated financial statements.*

* *

Page 4

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**HF FINANCIAL CORP. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

For The Six Months Ended December 31, 2006and 2005

(Unaudited)

**NOTE 1.****                                                 SELECTEDACCOUNTING POLICIES**

*Basis ofpresentation:*

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

Theinterim consolidated financial statements include the accounts of the Company,its wholly-owned subsidiaries, Home Federal Bank (the “Bank”), HF FinancialGroup, Inc. (“HF Group”) and HomeFirst Mortgage Corp. (the “Mortgage Corp.”),and the Bank’s wholly-owned subsidiaries, Mid America Capital Services, Inc.(“Mid America Capital”), Hometown Insurors, Inc. (“Hometown”), Home FederalSecuritization Corp. (“HFSC”), Mid-America Service Corporation and PMD,Inc.  The interim consolidated financialstatements reflect the deconsolidation of the wholly-owned subsidiary trusts ofthe Company, HF Financial Capital Trust I (“Trust I”), HF Financial CapitalTrust II (“Trust II”), HF Financial Capital Trust III (“Trust III”), HFFinancial Capital Trust IV (“Trust IV”) and HF Financial Capital Trust V(“Trust V”). Trust V was formed during the fiscal second quarter ended December31, 2006.  See Note 10 of “Notes toConsolidated Financial Statements.”  Allintercompany balances and transaction have been eliminated in consolidation.

Stock-basedcompensation:  InDecember 2004, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 123R, *“Share-Based Payment,”* which requires all companies tomeasure compensation cost for all share-based payments (including stockoptions) at fair value and to record such expense in their consolidatedfinancial statements.  SFAS No. 123R is arevision of SFAS No. 123, *“Accounting forStock-Based Compensation,”*and supersedes Accounting PrinciplesBoard (“APB”) Opinion No. 25, *“Accountingfor Stock Issued to Employees”*.

The Company adopted SFAS No. 123R effective as of July1, 2005, using the Black-Scholes option-pricing model and the modifiedprospective method in which compensation cost is recognized for all awardsgranted subsequent to the Company’s adoption of this statement as well as forthe unvested portion of awards outstanding as of the Company’s adoption of thisstatement.  Prior to July 1, 2005, theCompany accounted for stock-based compensation in accordance with APB No. 25and related interpretations. As such, no stock-based employee compensation costwas recognized for grants under the Company’s stock option and incentive plans,as all options granted under those plans had an exercise price equal to themarket value of the underlying common stock on the date of grant.  These stock option and incentive plans aredescribed more fully in Part II, Item 8 “Financial Statements and SupplementaryData” of the Company’s Annual Report on Form 10-K for Fiscal 2006, under Note17 of “Notes to Consolidated Financial Statements.”

Page 5

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**NOTE 2.****                                                 REGULATORYCAPITAL**

Thefollowing table sets forth the Bank’s compliance with its minimum capitalrequirements for a well-capitalized institution at December 31, 2006:

|                                                    | ** ** | **Amount**                           | ** ** | **Percent** | ** ** |
|----------------------------------------------------|------------|--------------------------------------|------------|-------------|------------|
| ** **                                         | ** ** | **(Dollars in Thousands)** | ** ** |
| Tier I (core)  capital (to adjusted total assets): |       |                                 |       |        |       |
| Required                                           |       | $50,335                              |       | 5.00        | %          |
| Actual                                             |       | 81,748                               |       | 8.12        |       |
| Excess over required                               |       | 31,413                               |       | 3.12        |       |
|                                               |       |                                 |       |        |       |
| Risk-based  capital (to risk-weighted assets):     |       |                                 |       |        |       |
| Required                                           |       | $80,783                              |       | 10.00       | %          |
| Actual                                             |       | 87,617                               |       | 10.85       |       |
| Excess over  required                              |       | 6,834                                |       | 0.85        |       |

 

**NOTE 3.****                                                 EARNINGSPER SHARE**

Basicearnings per share is computed by dividing income available to commonstockholders (the numerator) by the weighted-average number of common sharesoutstanding  (the denominator) during theperiod.  Shares issued during the periodand shares reacquired during the period are weighted for the portion of theperiod that they were outstanding. The weighted average number of basic commonshares outstanding for the three months ended December 31, 2006 and 2005 was3,968,451 and 3,931,699, respectively. The weighted average number of basic common shares outstanding for thesix months ended December 31, 2006 and 2005 was 3,964,261 and 3,889,358,respectively.

Dilutiveearnings per share is similar to the computation of basic earnings per shareexcept that the denominator is increased to include the number of additionalcommon shares that would have been outstanding if the dilutive optionsoutstanding had been exercised. The weighted average number of common anddilutive potential common shares outstanding for the three months endedDecember 31, 2006 and 2005 was 4,046,493 and 4,015,316, respectively.  The weighted average number of common anddilutive potential common shares outstanding for the six  months ended December 31, 2006 and 2005 was4,040,227 and 3,977,091, respectively.

Allearnings per share data and number of common shares outstanding have beenretroactively adjusted for the 10% stock dividend paid on April 24, 2006 tostockholders of record as of April 10, 2006.

Page 6

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**NOTE 4.****                                                 INVESTMENTSIN SECURITIES**

The amortized cost and fair values of investments in securities, all ofwhich are classified as available for sale according to management’s intent,are as follows:

|                             | ** ** | **December 31, 2006**       | ** ** |
|-----------------------------|------------|---------------------------------------|------------|
| ** **                  | ** ** | ** **                            | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                  | ** ** | **Amortized**                         | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| ** **                  | ** ** | **Cost**                              | ** ** | **Gains** | ** ** | **(Losses)** | ** ** | **Value** | ** ** |
| ** **                  | ** ** | **(Dollars in Thousands)**  | ** ** |
|                        |       |                                  |       |   |   |   |   |   |   |
| Debt securities:            |       |                                  |       |   |   |   |   |   |   |
| U.S. government agencies    |       | $     12,061 |       | $            25 |   | $           (89 | ) | $     11,997 |   |
| Federal Home Loan Bank      |       | 13,450                                |       | 14 |   | (82 | ) | 13,382 |   |
| Municipal bonds             |       | 7,925                                 |       | 30 |   | (66 | ) | 7,889 |   |
| Preferred Term Securities   |       | 11,019                                |       | 102 |   | (80 | ) | 11,041 |   |
| Other Investments           |       | 5,274                                 |       | 92 |   | - - - - |   | 5,366 |   |
|                        |       | 49,729                                |       | 263 |   | (317 | ) | 49,675 |   |
|                        |       |                                  |       |   |   |   |   |   |   |
| Common Stock:               |       |                                  |       |   |   |   |   |   |   |
| FNMA                        |       | 8                                     |       | 16 |   | - - - - |   | 24 |   |
| Federal Ag Mortgage         |       | 7                                     |       | 3 |   | - - - - |   | 10 |   |
| Other Investments           |       | 100                                   |       | - - - - |   | - - - - |   | 100 |   |
|                        |       | 115                                   |       | 19 |   | - - - - |   | 134 |   |
|                        |       |                                  |       |   |   |   |   |   |   |
| Mortgage-backed  securities |       | 98,273                                |       | 100 |   | (1,813 | ) | 96,560 |   |
|                        |       | $   148,117            |       | $          382 |   | $      (2,130 | ) | $   146,369 |   |

 

Page 7

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|                             | ** ** | **December 31, 2005**                  | ** ** |
|-----------------------------|------------|--------------------------------------------------|------------|
| ** **                  | ** ** | ** **                                       | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                  | ** ** | **Amortized**                                    | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| ** **                  | ** ** | **Cost**                                         | ** ** | **Gains** | ** ** | **(Losses)** | ** ** | **Value** | ** ** |
| ** **                  | ** ** | **(Dollars in Thousands)**             | ** ** |
| Debt securities:            |       |                                             |       |   |   |   |   |   |   |
| U.S. government agencies    |       | $       7,955 |       | $              2 |   | $           (73 | ) | $       7,884 |   |
| Federal Home Loan Bank      |       | 8,966                                            |       | 6 |   | (83 | ) | 8,889 |   |
| Municipal bonds             |       | 2,287                                            |       | - - - - |   | (21 | ) | 2,266 |   |
| Preferred Term Securities   |       | 11,019                                           |       | 68 |   | - - - - |   | 11,087 |   |
|                        |       | 30,227                                           |       | 76 |   | (177 | ) | 30,126 |   |
|                        |       |                                             |       |   |   |   |   |   |   |
| Equity  securities:         |       |                                             |       |   |   |   |   |   |   |
| FNMA                        |       | 8                                                |       | 11 |   | - - - - |   | 19 |   |
| Federal Ag Mortgage         |       | 7                                                |       | 4 |   | - - - - |   | 11 |   |
| Other Investments           |       | 39                                               |       | - - - - |   | - - - - |   | 39 |   |
|                        |       | 54                                               |       | 15 |   | - - - - |   | 69 |   |
|                        |       |                                             |       |   |   |   |   |   |   |
| Mortgage-backed  securities |       | 120,834                                          |       | 6 |   | (2,471 | ) | 118,369 |   |
|                        |       | $   151,115                       |       | $            97 |   | $      (2,648 | ) | $   148,564 |   |

 

The following table presents the fair value and age of gross unrealizedlosses by investment category at December 31, 2006 in accordance with FASBStaff Position (FSP) No. FAS 115-1, *TheMeaning of Other-Than-Temporary Impairment and Its Application to CertainInvestments,*which supersedes Emerging Issues Task Force Issue No.03-1:

|                             | ** ** | **Less than 12 Months**     | ** ** | **12 Months or More**                  | ** ** | **Total**                                  | ** ** |
|-----------------------------|------------|--------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                  | ** ** | ** **                                 | ** ** | **Gross**                                             | ** ** | ** **                                 | ** ** | **Gross** | ** ** | ** ** | ** ** | **Gross** | ** ** |
| ** **                  | ** ** | **Fair**                                   | ** ** | **Unrealized**                                        | ** ** | **Fair**                                   | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| ** **                  | ** ** | **Value**                                  | ** ** | **(Losses)**                                          | ** ** | **Value**                                  | ** ** | **(Losses)** | ** ** | **Value** | ** ** | **(Losses)** | ** ** |
| ** **                  | ** ** | **(Dollars in Thousands)**       | ** ** |
| Debt securities:            |       |                                       |       |                                                  |       |                                       |       |   |   |   |   |   |   |
| U.S. government agencies    |       | $      4,043 |       | $        (27) |       | $      5,432 |       | $        (62) |   | $      9,475 |   | $        (89) |   |
| Federal Home Loan Bank      |       | 6,065                                      |       | (8)                                                   |       | 6,352                                      |       | (74) |   | 12,417 |   | (82) |   |
| Municipal bonds             |       | 4,150                                      |       | (59)                                                  |       | 938                                        |       | (7) |   | 5,088 |   | (66) |   |
| Preferred term securities   |       | -                                          |       | -                                                     |       | 1,938                                      |       | (80) |   | 1,938 |   | (80) |   |
| Mortgage-backed  securities |       | 13,222                                     |       | (130)                                                 |       | 65,712                                     |       | (1,683) |   | 78,934 |   | (1,813) |   |
|                        |       | $    27,480            |       | $      (224)            |       | $    80,372            |       | $   (1,906) |   | $  107,852 |   | $   (2,130) |   |

 

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Management does not believeany individual unrealized losses as of December 31, 2006 represent another-than-temporary impairment.  Theunrealized losses reported for mortgage-backed securities relate to securitiesissued by the Federal National Mortgage Association (“FNMA”), the GovernmentNational Mortgage Association and the Federal Home Loan Mortgage Corporation(“FHLMC”).  These unrealized losses intotal are primarily attributable to changes in interest rates and thecontractual cashflows of those investments are guaranteed by an agency of theU.S. government.  As a group, theunrealized losses were less than 1.9% of its respective amortized cost basis atDecember 31, 2006.  Because the declinein market value is attributable to changes in interest rates and not creditquality and because the Company has the ability and intent to hold thoseinvestments until a recovery of fair value, which may be at maturity, theCompany does not consider those investments to be other-than-temporarilyimpaired at December 31, 2006.

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**NOTE 5.****                                                 SEGMENTREPORTING**

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

Themanagement approach is used as the conceptual basis for identifying reportablesegments and is based on the way that management organizes the segments withinthe enterprise for making operating decisions, allocating resources andmonitoring performance, which is primarily based on products.

| Three Months Ended December 31, 2006 | ** ** | **Banking**                                            | ** ** | **Other**                                                   | ** ** | **Total**                                              | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                    | ** ** | **(Dollars in Thousands)**                   | ** ** |
|                                                          |       |                                                   |       |                                                        |       |                                                   |       |
| Net interest  income                                          |       | $        7,174 |       | $      (1,114                 | )          | $        6,060 |       |
| Intersegment  interest income                                 |       | (230                                                   | )          | 230                                                         |       | - - - -                                                |       |
| Provision for  losses on loans and leases                     |       | (461                                                   | )          | - - - -                                                     |       | (461)                                                  |       |
| Noninterest  income                                           |       | 5,475                                                  |       | (53                                                         | )          | 5,422                                                  |       |
| Intersegment  noninterest income                              |       | (201                                                   | )          | 201                                                         |       | - - - -                                                |       |
| Noninterest  expense                                          |       | (7,463                                                 | )          | (228                                                        | )          | (7,691)                                                |       |
| Intersegment  noninterest expense                             |       | 3                                                      |       | (3                                                          | )          | - - - -                                                |       |
| Income (loss) before income taxes                             |       | $        4,297 |       | $         (967 | )          | $        3,330 |       |
|                                                          |       |                                                   |       |                                                        |       |                                                   |       |
| Total assets at  December 31, 2006                            |       | $ 1,009,944                                       |       | $        2,074      |       | $ 1,012,018                                       |       |

 

| Three Months Ended December 31, 2005 | ** ** | **Banking**                                                       | ** ** | **Other**                                                         | ** ** | **Total**                                              | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                    | ** ** | **(Dollars in Thousands)**                              | ** ** |
|                                                          |       |                                                              |       |                                                              |       |                                                   |       |
| Net interest  income                                          |       | $        7,222            |       | $          (829 | )          | $        6,393 |       |
| Intersegment  interest income                                 |       | (301                                                              | )          | 301                                                               |       | - - - -                                                |       |
| Provision for  losses on loans and leases                     |       | (3,630                                                            | )          | - - - -                                                           |       | (3,630                                                 | )          |
| Noninterest  income                                           |       | 2,400                                                             |       | 3,589                                                             |       | 5,989                                                  |       |
| Intersegment  noninterest income                              |       | (50                                                               | )          | 50                                                                |       | - - - -                                                |       |
| Noninterest  expense                                          |       | (6,497                                                            | )          | (195                                                              | )          | (6,692                                                 | )          |
| Intersegment  noninterest expense                             |       | 8                                                                 |       | (8                                                                | )          | - - - -                                                |       |
| Income (loss) before income taxes                             |       | $          (848 | )          | $        2,908            |       | $        2,060 |       |
|                                                          |       |                                                              |       |                                                              |       |                                                   |       |
| Total assets at  December 31, 2005                            |       | $    932,299                                  |       | $        1,765            |       | $    934,064                       |       |

 

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| Six Months Ended December 31, 2006 | ** ** | **Banking**                                            | ** ** | **Other**                                              | ** ** | **Total**                                              | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                  | ** ** | **(Dollars in Thousands)**                   | ** ** |
|                                                        |       |                                                   |       |                                                   |       |                                                   |       |
| Net interest  income                                        |       | $      14,453            |       | $      (1,975            | )          | $      12,478            |       |
| Intersegment  interest income                               |       | (477                                                   | )          | 477                                                    |       | - - - -                                                |       |
| Provision for  losses on loans and leases                   |       | (752                                                   | )          | - - - -                                                |       | (752                                                   | )          |
| Noninterest  income                                         |       | 7,901                                                  |       | (135                                                   | )          | 7,766                                                  |       |
| Intersegment  noninterest income                            |       | (208                                                   | )          | 208                                                    |       | - - - -                                                |       |
| Noninterest  expense                                        |       | (14,179                                                | )          | (421                                                   | )          | (14,600                                                | )          |
| Intersegment  noninterest expense                           |       | 4                                                      |       | (4                                                     | )          | - - - -                                                |       |
| Income (loss) before income taxes                           |       | $        6,742 |       | $      (1,850            | )          | $        4,892 |       |
|                                                        |       |                                                   |       |                                                   |       |                                                   |       |
| Total assets at  December 31, 2006                          |       | $ 1,009,944                                       |       | $        2,074 |       | $ 1,012,018                                       |       |

 

| Six Months Ended December 31, 2005 | ** ** | **Banking**                                            | ** ** | **Other**                                              | ** ** | **Total**                                              | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                  | ** ** | **(Dollars in Thousands)**                   | ** ** |
|                                                        |       |                                                   |       |                                                   |       |                                                   |       |
| Net interest  income                                        |       | $      14,364            |       | $       (1,636      | )          | $      12,728            |       |
| Intersegment  interest income                               |       | (599                                                   | )          | 599                                                    |       | - - - -                                                |       |
| Provision for  losses on loans and leases                   |       | (4,092                                                 | )          | - - - -                                                |       | (4,092                                                 | )          |
| Noninterest  income                                         |       | 4,782                                                  |       | 3,592                                                  |       | 8,374                                                  |       |
| Intersegment  noninterest income                            |       | (102                                                   | )          | 102                                                    |       | - - - -                                                |       |
| Noninterest  expense                                        |       | (12,977                                                | )          | (389                                                   | )          | (13,366                                                | )          |
| Intersegment  noninterest expense                           |       | 9                                                      |       | (9                                                     | )          | - - - -                                                |       |
| Income before income taxes                                  |       | $        1,385 |       | $        2,259 |       | $        3,644 |       |
|                                                        |       |                                                   |       |                                                   |       |                                                   |       |
| Total assets at  December 31, 2005                          |       | $    932,299                       |       | $        1,765 |       | $    934,064                       |       |

 

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**NOTE 6.****                                                 DEFINEDBENEFIT PLAN**

TheCompany has a noncontributory (cash balance) defined benefit pension plancovering all employees of the Company and its wholly-owned subsidiaries whohave attained the age of 21 and have completed 1,000 hours in a plan year.  The benefits are based on 6% of each eligibleparticipant’s annual compensation, plus income earned in the accounts at a ratedetermined annually based on 30-year treasury note rates.  The Company’s funding policy is to make theminimum annual required contribution plus such amounts as the Company maydetermine to be appropriate from time to time. One hundred percent vesting occurs after five years with a normalretirement age of 65.  Informationrelative to the components of net periodic benefit cost for the Company’sdefined benefit plan is presented below:

|                                    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                         | ** ** | **December 31,**            | ** ** | **December 31,**          | ** ** |
| ** **                         | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|                               |       |                             |       |                           |       |   |   |   |   |
| Service cost                       |       | $   116,521       |       | $   116,367     |       | $   233,042 |   | $   232,734 |   |
| Interest cost                      |       | 97,748                           |       | 91,238                         |       | 195,496 |   | 182,476 |   |
| Expected return  on plan assets    |       | (109,101                         | )          | (93,185                        | )          | (218,202 | ) | (186,370 | ) |
| Amortization of  transition asset  |       | - - - -                          |       | 2,908                          |       | - |   | 5,816 |   |
| Total costs  recognized in expense |       | $   105,168       |       | $   117,328     |       | $   210,336 |   | $   234,656 |   |

 

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

**NOTE 7.****                                                 SELF-INSUREDHEALTHCARE PLAN**

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

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

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

|                             | ** ** | **Fiscal Years Ended June 30,**                                      | ** ** |
|-----------------------------|------------|------------------------------------------------------------------------------------------|------------|
| ** **                  | ** ** | **2007**                                                                                 | ** ** | ** ** | **2006** | ** ** |
| ** **                  | ** ** | **(Dollars in Thousands)**                                                     | ** ** |
|                        |       |                                                                                     |       |   |   |   |
| Quarter ended September  30 |       | $              436 |       |   | $              419 |   |
| Quarter ended December  31  |       | 357                                                                                      |       |   | 409 |   |
| Quarter ended March 31      |       | - - - -                                                                                  |       |   | 382 |   |
| Quarter ended June 30       |       | - - - -                                                                                  |       |   | 285 |   |
| Net healthcare costs        |       | $              793 |       |   | $           1,495 |   |

 

**NOTE8.          FASB STATEMENT NO. 140**

During the thirdquarter of Fiscal 2006, the Company completed a line item change ofits income recorded on originated mortgage servicing rights for loans soldto South Dakota Housing Development Authority.  This process was doneupon a fuller interpretation of Statement No. 140, *“Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities”*as issued by theFASB.   All periods presented have been revised in presentation toreflect this line item and there was no change to netincome, earnings per share, or recorded value of servicing rights asa result of this line item change. The following table reflects the effects of the line item change onthe Company’s consolidated statements of income for the three and six monthsended December 31, 2006 and 2005.

|                             | ** ** | **Three Months  Ended**                                                                | ** ** | ** ** | **Six Months Ended**                                                                   | ** ** |
|-----------------------------|------------|----------------------------------------------------------------------------------------|------------|------------|----------------------------------------------------------------------------------------|------------|
| ** **                  | ** ** | **December 31,**                                                                       | ** ** | ** ** | **December 31,**                                                                       | ** ** |
| ** **                  | ** ** | **2006**                                                                               | ** ** | **2005**   | ** **                                                                             | **2006**   | ** ** | **2005** | ** ** |
| ** **                  | ** ** | **(Dollars  in Thousands)**                                                            | ** ** |
|                        |       |                                                                                   |       |       |                                                                                   |       |   |   |   |   |   |   |
| Loan servicing income       |       | $             - - - - |       |       | (52                                                                                    | )          |   | $             - - - - |   |   | (93 | ) |
| Gain on sale of loans,  net |       | - - - -                                                                                |       | 52         |                                                                                   |       | - - - - |   | 93 |   |
|                        |       |                                                                                   |       |       |                                                                                   |       |   |   |   |   |   |   |
| Net income change           |       | $             - - - - |       |       | $             - - - - |       |   | $             - - - - |   |   | $             - - - - |   |

 

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**NOTE9.          STOCK-BASED COMPENSATION PLANS**

Thefair value of each incentive stock option grant and stock appreciation right isestimated at the grant date using the Black-Scholes option-pricing model.  The following weighted average assumptionswere used for grants in the six months ended December 31, 2006 and 2005:

|                           | ** ** | **For the Six Months Ended** | ** ** |
|---------------------------|------------|--------------------------------------------------|------------|
| ** **                | ** ** | **December 31,**                            | ** ** |
| ** **                | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| Expected  volatility      |       | 23.00%                                           |       | 24.00% |   |
| Expected  dividend yield  |       | 2.56%                                            |       | 2.75% |   |
| Risk-free  interest rate  |       | 4.61%                                            |       | 4.09% |   |
| Expected term (in  years) |       | 4                                                |       | 7 |   |

 

Stockoption and stock appreciation right activity for the six months ended December31 follows:

|                              | ** ** | **2006**   | ** ** |
|------------------------------|------------|------------|------------|
| ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | ** ** | ** ** | **Weighted** | ** ** | **Remaining** | ** ** | **Aggregate** | ** ** |
| ** **                   | ** ** | ** ** | ** ** | **Average** | ** ** | **Contractual** | ** ** | **Intrinsic** | ** ** |
| ** **                   | ** ** | ** ** | ** ** | **Exercise** | ** ** | **Term** | ** ** | **Value** | ** ** |
| ** **                   | ** ** | **Shares** | ** ** | **Price** | ** ** | **(in years)** | ** ** | **(In thousands)** | ** ** |
| Balance, beginning July  1   |       | 318,977    |       | $12.77 |   |   |   |   |   |
| Granted                      |       | 20,953     |       | 16.00 |   |   |   |   |   |
| Forfeited                    |       | (12,056    | )          | 16.48 |   |   |   |   |   |
| Exercised                    |       | (23,267    | )          | 12.69 |   |   |   |   |   |
| Balance, ending  December 31 |       | 304,607    |       | $12.85 |   | 5.63 |   | $1,349 |   |
|                         |       |       |       |   |   |   |   |   |   |
| Exercisable at December 31   |       | 243,642    |       | $12.11 |   | 4.89 |   | $1,259 |   |

 

|                              | ** ** | ** ** | **2005**   | ** **   |
|------------------------------|------------|------------|------------|--------------|
| ** **                   | ** ** | ** ** | ** ** | ** **   | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | ** ** | ** ** | ** **   | ** ** | **Average** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | ** ** | ** ** | **Weighted** | ** ** | **Remaining** | ** ** | **Aggregate** | ** ** |
| ** **                   | ** ** | ** ** | ** ** | **Average**  | ** ** | **Contractual** | ** ** | **Intrinsic** | ** ** |
| ** **                   | ** ** | ** ** | ** ** | **Exercise** | ** ** | **Term** | ** ** | **Value** | ** ** |
| ** **                   | ** ** | **Shares** | ** ** | **Price**    | ** ** | **(in years)** | ** ** | **(In thousands)** | ** ** |
| Balance, beginning July  1   |       | 325,422    |       | $12.22       |   |   |   |   |   |
| Granted                      |       | 30,769     |       | 17.27        |   |   |   |   |   |
| Forfeited                    |       | (2,955     | )          | 14.87        |   |   |   |   |   |
| Exercised                    |       | (16,950    | )          | 11.24        |   |   |   |   |   |
| Balance, ending  December 31 |       | 336,286    |       | $12.71       |   | 6.27 |   | $1,534 |   |
|                         |       |       |       |         |   |   |   |   |   |
| Exercisable at December 31   |       | 242,210    |       | $11.57       |   | 5.21 |   | $1,382 |   |
|                              |            |            |            |              |  |  |  |  |  |  |

 

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Theweighted-average grant date fair value of options and appreciation rightsgranted during the six months ended December 31, 2006 and 2005 was $3.11 and$3.83, respectively.  The total intrinsicvalue of options exercised during the six months ended December 31, 2006 and2005 was $107,000 and $102,000 respectively. As of December 31, 2006, there was $50,000 of total unrecognizedcompensation cost related to nonvested stock option awards.  The cost is expected to be recognized over aperiod of two years.  Cash received fromthe exercise of options for the six months ended December 31, 2006 and 2005 was$295,000 and $191,000, respectively.  Thetax benefit realized for the tax deductions from cashless option exercisestotaled $30,000 and $18,000 for the six months ended December 31, 2006 and2005, respectively.  The Companygenerally uses treasury shares to satisfy stock option exercises.

Restrictedshare activity for the six months ended December 31 follows:

|                               | ** ** | **2006**   | ** ** | ** **   | ** ** | **2005**   | ** ** |
|-------------------------------|------------|------------|------------|--------------|------------|------------|------------|
| ** **                    | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                    | ** ** | ** ** | ** ** | **Average**  | ** ** | ** ** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                    | ** ** | ** ** | ** ** | **Grant**    | ** ** | ** ** | ** ** | ** ** | ** ** | **Grant** | ** ** |
| ** **                    | ** ** | ** ** | ** ** | **Date**     | ** ** | ** ** | ** ** | ** ** | ** ** | **Date** | ** ** |
| ** **                    | ** ** | ** ** | ** ** | **Fair**     | ** ** | ** ** | ** ** | ** ** | ** ** | **Fair** | ** ** |
|                          | ** ** | **Shares** | ** ** | **Value**    | ** ** | ** ** |       | **Shares** | ** ** | **Value** | ** ** |
| Nonvested Balance,  beginning |       | 158,159    |       | $15.85       |       |       |       | 91,888 |   | $13.62 |   |
| Granted                       |       | 10,335     |       | 16.67        |       |       |       | 85,572 |   | 17.42 |   |
| Vested                        |       | (16,447    | )          | 13.97        |       |       |       | (14,914 | ) | 11.52 |   |
| Forfeited                     |       | (5,733     | )          | 15.35        |       |       |       | (1,848 | ) | 15.94 |   |
| Nonvested Balance, ending     |       | 146,314    |       | $16.06       |       |       |       | 160,698 |   | $15.65 |   |

 

Pretaxcompensation expense recognized for restricted shares for the six months endedDecember 31, 2006 and 2005 was $234,000 and $196,000, respectively.  The tax benefit for the six months endedDecember 31, 2006 and 2005 was $80,000 and $67,000, respectively.  As of December 31, 2006, there was $1.6million of total unrecognized compensation cost related to restricted sharesgranted under the Company’s 2002 Stock Option and Incentive Plan, as amended(“the Plan”).  That cost is expected tobe recognized over a weighted-average period of five years.  The total fair value of shares vested duringthe six months ended December 31, 2006 and 2005 was $230,000 and $172,000,respectively.

TheCompany has a Director Restricted Stock Plan which provides that awards ofrestricted shares of the Company’s common stock be made to outside directors ofthe Company.  The plan is designed toallow for payment of the annual retainer fee in shares of the Company’s commonstock, with the inclusion of an annual cost of living adjustment based on theConsumer Price Index.  Each outsidedirector is entitled to all voting, dividend and distribution rights during therestriction period.  The effective dateof the plan was July 1, 1997.  The planhas 90,750 shares allocated to it and is in effect for a period of tenyears.  During the six months endedDecember 31, 2006 and 2005, 4,824 and 6,571 shares were awarded and $49,000 and$48,000 of expense was incurred under the plan, respectively, as the annualretainer for the Company’s Board of Directors.

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

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

OnDecember 7, 2006, the Company issued 10,000 shares totaling $10.0 million ofCompany Obligated Mandatorily Redeemable Preferred Securities of Trust V.  Trust V was established and exists for thesole purpose of issuing trust preferred securities and investing the proceedsin subordinated debentures of the Company. These subordinated debentures constitute the sole asset of Trust V.  The securities provide for cumulative cashdistributions calculated at a rate based on three-month LIBOR plus 1.83%adjusted quarterly.  The Company may, atone or more times, defer interest payments on the capital securities for up to20 consecutive  quarterly periods, butnot beyond March 1, 2037.  At the end ofthe deferral period, all accumulated and unpaid distributions must bepaid.  The capital securities must beredeemed on March 1, 2037; however, the Company has the option to shorten thematurity date to a date not earlier than March 1, 2012.  Holders of the capital securities have novoting rights, are unsecured, and rank junior in priority of the payment to allof the Company’s indebtedness and senior to the Company’s capital stock.

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

**NOTE 11.       SALE OF BRANCHES**

**           **During the secondquarter of Fiscal 2007, the Bank closed on the sale of three branches and theirassociated book of business, along with one physical location, to Great WesternBank.  The Bank recognized a gain on saleof $2.8 million that resulted in the sale of $4.2 million in loans and $33.6million in deposits.

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

**Forward-Looking Statements**

ThisQuarterly Report on Form 10-Q and other reports issued by the Company,including reports filed with the Securities and Exchange Commission, contain “forward-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 ofincome, loss, revenues, earnings or losses per share, dividends, capitalexpenditures, capital structure, tax benefit or other financial items.

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

*                 Forecasts offuture economic performance.

*                 Useand descriptions of assumptions and estimates underlying or relating to suchmatters.

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

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

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

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**ExecutiveSummary**

The Company’s net income for the secondquarter of Fiscal 2007 was $2.1 million, or $0.52 per diluted share, comparedto $1.3 million, or $0.33 per diluted share, for the second quarter of Fiscal2006.  For the first six months of Fiscal2007, net income was $3.2 million, or $0.79 per diluted share, compared to $2.3million, or $0.58 per diluted share, for the first six months of Fiscal2006.  Return on average equity was11.05% at December 31, 2006 compared to 8.59% at December 31, 2005.

Aspreviously announced, the Company closed on the sale of three branches, theirassociated book of business and one physical location in December 2006.  The gain on sale recognized was $2.8 million,which increased diluted earnings per share by $0.42.  In addition, during the second quarter of Fiscal2007, the Company expensed $290,000 of unamortized debt issuance costs relatingto the redemption of the Trust I trust preferred securities, which reduceddiluted earnings per share by $0.05. Comparatively, in December 2005, the Company closed on a land sale.  The gain on sale recognized was $3.6 million,which increased diluted earnings per share by $0.65.  In addition, during the second quarter offiscal 2006, there were additional provisions to the loan loss allowance of$3.1 million, for a large impaired commercial participation loan, which wassold in December 2005.  This reduceddiluted earnings per share by $0.54.

Thenet interest margin on a fully taxable equivalent basis for the six monthsended December 31, 2006 was 2.76%, compared to 3.03% for the same period a yearago, a decline of 27 basis points.  Theincrease over the same period last year in interest rates for the Company’svariable priced trust preferred securities tied to LIBOR, and theaforementioned expense of debt issuance costs, caused a decrease in margin ofnine basis points.  During the six monthsended December 31, 2006, $1.0 million in loans were placed into nonaccrualresulting in a reversal of $125,000 in interest income.  This action had the effect of lowering thenet interest margin by eight basis points. Comparatively, for the same period a year ago, $1.9 million in loanswere placed into nonaccrual with a reversal of $89,000 in interest income.

Netinterest income for the first six months of Fiscal 2007 was $12.5 million, adecrease of  $250,000, or 2.0%, over thesame period a year ago.  Net interestincome decreased $333,000, or 5.2%, to $6.1 million for the three months endedDecember 31, 2006 from $6.4 million for same period in the prior fiscalyear.  For the six months ended December31, 2006, average interest-earning assets and average interest-bearingliabilities increased 8.5% and 8.1%, respectively, compared to the same perioda year ago.  Yields on earning assetsincreased to 6.67% in the first six months of Fiscal 2007, compared to 6.03% ayear ago, an increase of 64 basis points. For the same time period, cost of funds increased to 4.40%, compared to3.36%, an increase of 104 basis points.

Netinterest margin ratio may vary due to many factors, including Federal Reservepolicies for short-term interest rates, competitive and economic factors andcustomer preferences for various products and services.  From December 31, 2005 to June 30, 2006, theFederal Reserve increased short-term interest rates four times at 25 basispoints each, for a total increase of 100 basis points, however, there has beenno change since June 2006.  Theflattening and subsequent inversion of the treasury yield curve caused byincreasing short-term rates and lagging and declining long-term rates continuedto affect the Company’s net interest margin ratio during the quarter.  This inverted yield curve is evidenced by theinterest rate spread of 25 basis points between the 3-month Treasury and the10-year Treasury at December 31, 2005, decreasing to a negative 36 basis pointsat December 31, 2006.

TheCompany had previously issued trust preferred securities primarily to providefunding for stock repurchases and to repay other borrowings.  Interest expense on the $27.8 million oftrust preferred securities outstanding increased to $1.6 million for the sixmonths ended December 31, 2006, compared to $1.1 million for the same period ayear ago, an increase of $502,000 or 47.6%. The average rate paid on these securities increased 358 basis points,from 7.52% at December 31, 2005 to 11.10% at December 31, 2006.  In December 2006, the Company refinanced$10.0 million of trust preferred securities, originally issued in November2001.  The funding was calculated at arate based on three-month LIBOR plus 1.83%, compared to the existing six-monthLIBOR plus 3.75%.  As a result of thisrefinancing, the Company expensed $290,000 of unamortized debt issuancecosts.  Excluding this expense, theoverall cost on the trust preferred securities was 9.03%, compared to 11.10%, a207 basis point decrease.

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Theallowance for loan and lease losses increased to $5.9 million at December 31,2006, compared to $5.2 million at December 31, 2005, an increase of $695,000 or13.4%.  The ratio of allowance for loanand lease losses to total loans and leases was 0.77% as of December 31, 2006compared to 0.73% at December 31, 2005. Total nonperforming assets at December 31, 2006 were $4.5 million ascompared to $4.6 million a year ago, a decrease of $137,000 or 3.0%.  The ratio of nonperforming assets to totalassets decreased to 0.44% at December 31, 2006, compared to 0.50% at December31, 2005.  The allowance for loan andlease losses is calculated based on loan and lease levels, loan and lease losshistory, credit quality of the loan and lease portfolio, and environmentalfactors such as economic health of the region and management experience.  This risk rating analysis is designed to givethe Company a consistent and systematic methodology to determine proper levelsfor the allowance at a given time.

Totaldeposits at December 31, 2006 were $808.8 million, an increase of $83.1million, or 11.5%, from December 31, 2005. Interest expense on these deposits was $13.9 million for the six monthsended December 31, 2006, an increase of $4.8 million, or 52.9%, over the sameperiod a year ago.  In-market depositsincreased from $684.9 million at December 31, 2005 to $693.1 million atDecember 31, 2006, an increase of $8.2 million, or 1.2%.  For the same period, out-of-market deposits increasedfrom $40.8 million to $115.7 million, respectively.  Public funds have increased, from $107.7million at December 31, 2005 to $121.1 million at December 31, 2006.  The primary factor affecting interest expensewas the increase in volume of certificates of deposits by $94.6 million, or31.7%, from December 31, 2005, to December 31, 2006.  Out-of-market certificates of depositsaccounted for $74.9 million or nearly 80% of this increase.  Interest expense for certificates of depositsincreased by $3.3 million or 68.5% in the first six months of fiscal 2007,compared to the same period in the prior fiscal year, driving its cost of fundsto 4.48% from 3.33%.

InOctober 2006, the Company announced an increase in its quarterly cash dividend,from 10.25 cents per share to 10.50 cents per share, resulting in an annualizedincrease of 2.4%.

Thetotal risk-based capital ratio of 10.85% at December 31, 2006 is above the10.66% at December 31, 2005, an increase of 19 basis points.  This continues to place the Bank in the “wellcapitalized” category within OTS regulation at December 31, 2006 and isconsistent within the “well capitalized” OTS category in which the Companyplans to operate.  The Companyhistorically has been able to manage the size of its assets through secondarymarket loan sales of single-family mortgages and student loans and a loansecuritization.

Noninterestincome was $5.4 million for the quarter ended December 31, 2006 compared to$6.0 million at December 31, 2005, a decrease of $567,000 or 9.5%.  Excluding the aforementioned one-time gainsattributable to the land sale and branch sales, noninterest income for thequarter ended December 31, 2006 was $2.6 million, compared to $2.4 million, anincrease of $227,000 or 9.3% from the same period a year ago.  The primary factor affecting noninterestincome was an increase of $184,000 in loan servicing income due to the purchaseof mortgage servicing rights at September 30, 2006 and an increase of $145,000in fees on deposits.

Noninterestexpense was $7.7 million for the quarter ended December 31, 2006 compared to$6.7 million at December 31, 2005, an increase of $999,000 or 14.9%.  The primary factors affecting noninterestexpense include increases of $452,000 in marketing expenses associated withseveral deposit product package programs, $129,000 in occupancy and equipmentcosts relating to several new branches opened one year or less, and $266,000 inemployee compensation and benefits.

**General**

The Company is a financial servicesprovider and, as such, has inherent risks that must be managed in order toachieve net income.  Primary risks thataffect net income include credit risk, liquidity risk, operational risk,regulatory compliance risk and reputation risk. The Company’s net income is derived by managing net interest margin, theability to collect fees from services provided, by controlling the costs ofdelivering services and the management of loan and lease losses.  The primary source of revenues comes from thenet interest margin, which represents the difference between income oninterest-earning assets (i.e. loans and investment securities) and expense oninterest-bearing liabilities (i.e. deposits and borrowed funding).  The net interest margin is affected byregulatory,

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economicand competitive factors that influence interest rates, loan demand and depositflows.  Fees earned include charges fordeposit services, trust services and loan services.  Personnel costs are the primary expensesrequired to deliver the services to customers. Other costs include occupancy and equipment and general andadministrative expenses.

**Financial Condition Data**

At December 31, 2006, theCompany had total assets of $1.0 billion, an increase of $50.7 million from thelevel at June 30, 2006.  The increase inassets was due primarily to increases in net loans and leases receivable of$21.5 million, cash and cash equivalents of $20.0 million and loan servicingrights of $5.1 million.  The increase inliabilities of $46.2 million from June 30, 2006 to December 31, 2006 wasprimarily due to increases in deposits of $39.8 million, accrued expenses andother liabilities of $4.4 million and advances by borrowers for taxes andinsurance of $3.0 million.  In addition,stockholders’ equity increased $4.5 million to $60.6 million at December 31,2006 from $56.1 million at June 30, 2006, primarily due to net income of $3.2million and decrease of accumulated other comprehensive loss of $1.4 million.

Theincrease in net loans and leases receivable of $21.5 million was due primarily toan increase in purchases and originations over sales, amortization andrepayments of principal**.** In addition, net deferred (fees), costs anddiscounts decreased $126,000 from the levels at June 30, 2006 to $757,000 atDecember 31, 2006.

Cashand cash equivalents increased $20.0 million due primarily to an increase indeposits of $39.8 million resulting primarily from seasonal fluctuation inpublic fund deposits.

Loanservicing rights increased $5.1 million primarily due to the purchase of $4.9million in mortgage servicing rights from Great Western Bank at the end of thefirst quarter of fiscal 2007.

The $39.8 million increase in deposits was due toincreases in out-of-market certificates of deposit of $57.8  million, in-market certificates of deposit of$15.2 million and interest-bearing checking accounts of $7.6 million offset bydecreases in savings accounts of $28.1 million, money market accounts of $11.9million and noninterest-bearing checking accounts of $831,000.  The $28.1 million decrease in savingsaccounts was primarily due to temporary fluctuations experienced with onepublic fund entity, while the increase in certificates of deposit was primarilydriven by commercial business accounts.

Accruedexpenses and other liabilities increased $4.4 million from the level at June30, 2006 in part due to an increase in accrued income taxes payable of $1.8million resulting primarily from the Company’s net income of $3.2 million forthe six months ended December 31, 2006.

Advancesby borrowers for taxes and insurance increased $3.0 million primarily due tothe purchase of $4.9 million in mortgage servicing rights during the firstquarter of fiscal 2007 which resulted in an increase in escrow accounts fortaxes and insurance of $3.7 million.

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During the time period of fiscal years 2002 through2004, the Company issued a total of $27.8 million in subordinated debenturespayable to trusts at various times through its trust subsidiaries.  Each of the issuances included an option  to shorten the maturity date at a specifictime as stated in the contract.  Theissuance of $10.0 million of Company Obligated Mandatorily Redeemable PreferredSecurities of Trust I on November 28, 2001 included an option to shorten thematurity date to December 8, 2006.  TheCompany exercised this option to redeem $10.0 million of trust preferredsecurities.  Also during the secondquarter of Fiscal 2007, the Company issued $10.0 million of Company ObligatedMandatorily Redeemable Preferred Securities of Trust V.  The new funding is calculated at a rate basedon three-month LIBOR plus 1.83%, compared to the original issuance which isbased on six-month LIBOR plus 3.75%.  Theunamortized amount of $290,000 deferred debt issuance costs related to the originalissuance was expensed.

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The following tables show the compositionof the Company’s loan and lease portfolio and deposit accounts:

|                                              | ** ** | **At December 31, 2006** | ** ** | **At June 30, 2006** |       |
|----------------------------------------------|------------|-----------------------------------------|------------|-------------------------------------|------------|
| ** **                                   | ** ** | **Amount**                              | ** ** | **Percent**                         | ** ** | **Amount** | ** ** | **Percent** |   |
| ** **                                   | ** ** | **(Dollars in Thousands)**    |       |
|                                         |       |                                    |       |                                |       |   |   |   |
| One-to  four-family (1)                      |       | $    106,302        |       | 14.19%                              |       | $    100,585 |   | 13.83% |
| Commercial  business and real estate (2) (3) |       | 268,290                                 |       | 35.82%                              |       | 247,643 |   | 34.05% |
| Multi-family  real estate                    |       | 33,760                                  |       | 4.51%                               |       | 34,066 |   | 4.69% |
| Equipment  finance leases                    |       | 25,580                                  |       | 3.42%                               |       | 29,406 |   | 4.04% |
| Consumer Direct  (4)                         |       | 106,714                                 |       | 14.25%                              |       | 110,493 |   | 15.19% |
| Consumer  Indirect                           |       | 89,405                                  |       | 11.94%                              |       | 91,601 |   | 12.60% |
| Agricultural                                 |       | 93,946                                  |       | 12.54%                              |       | 89,437 |   | 12.30% |
| Construction and  development                |       | 24,931                                  |       | 3.33%                               |       | 24,029 |   | 3.30% |
| Total Loans and  Leases Receivable (5)       |       | $    748,928        |       | 100.00%                             |       | $    727,260 |   | 100.00% |
|                                              |            |                                         |            |                                     |            |  |  |  |  |  |  |  |  |  |  |  |

 

 

(1) Excludes $6,883 and $6,980 loans held for sale at December 31, 2006and June 30, 2006, respectively.

(2) Includes $3,388 taxexempt leases at December 31, 2006 and June 30, 2006.

(3) Excludes $223 commercialloans held for sale at December 31, 2006 and June 30, 2006.

(4) Excludes $1,604 and $420 student loans held for sale at December 31,2006 and June 30, 2006, respectively.

(5) Includes deferred loanfees and discounts and undisbursed portion of loans in process.

 

|                                       | ** ** | **At December 31, 2006**           | ** ** | **At June 30, 2006** |
|---------------------------------------|------------|---------------------------------------------------|------------|-------------------------------------|
| ** **                            | ** ** | **Amount**                                        | ** ** | **Percent**                         | ** ** | **Amount** | ** ** | **Percent** |
| ** **                            | ** ** | **(Dollars in Thousands)**              |
|                                  |       |                                              |       |                                |   |   |   |   |
| Noninterest bearing checking accounts |       | $       83,926 |       | 10.38%                              |   | $       84,757 |   | 11.02% |
| Interest bearing accounts             |       | 62,474                                            |       | 7.72%                               |   | 54,862 |   | 7.14% |
| Money market accounts                 |       | 220,540                                           |       | 27.27%                              |   | 232,471 |   | 30.23% |
| Savings accounts                      |       | 48,631                                            |       | 6.01%                               |   | 76,695 |   | 9.97% |
| Certificates of deposit               |       | 393,265                                           |       | 48.63%                              |   | 320,217 |   | 41.64% |
| Total Deposits                        |       | $     808,836            |       | 100.00%                             |   | $     769,002 |   | 100.00% |

 

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**Analysisof Net Interest Income**

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

*Average Balances, Interest Rates and Yields.*  The following table presents for the periodsindicated, the total dollar amount of interest income from averageinterest-earning assets and the resulting yields, as well as the interest expenseon average interest-bearing liabilities, expressed both in dollars and rates,and the net interest margin.  The tabledoes not reflect any effect of income taxes. 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.
|                                                 | ** ** | **Three Months Ended December 31,**  |
|-------------------------------------------------|------------|----------------------------------------------------------|
| ** **                                      | ** ** | **2006**                                                 | ** ** | **2005** |
| ** **                                      | ** ** | **Average  Outstanding  Balance**                        | ** ** | **Interest  Earned/  Paid** | ** ** | **Yield/  Rate** | ** ** | **Average  Outstanding  Balance** | ** ** | **Interest  Earned/  Paid** | ** ** | **Yield/  Rate** |
| ** **                                      | ** ** | **(Dollars in Thousands)**                     |
| Interest-earning  assets:                       |       |                                                     |   |   |   |   |   |   |   |   |   |   |
| Loans and leases receivable (1) (3)             |       | $        762,367 |   | $        13,728 |   | 7.14% |   | $         692,818 |   | $         11,593 |   | 6.64% |
| Investment securities (2) (3)                   |       | 157,222                                                  |   | 1,860 |   | 4.69% |   | 150,788 |   | 1,491 |   | 3.92% |
| FHLB stock                                      |       | 6,657                                                    |   | 75 |   | 4.47% |   | 7,289 |   | 59 |   | 3.21% |
|                                            |       |                                                     |   |   |   |   |   |   |   |   |   |   |
| Total  interest-earning assets                  |       | 926,246                                                  |   | $        15,663 |   | 6.71% |   | 850,895 |   | $         13,143 |   | 6.13% |
| Noninterest-earning assets                      |       | 71,653                                                   |   |   |   |   |   | 73,186 |   |   |   |   |
| Total assets                                    |       | $        997,899 |   |   |   |   |   | $         924,081 |   |   |   |   |
|                                            |       |                                                     |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                  |       |                                                     |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                       |       |                                                     |   |   |   |   |   |   |   |   |   |   |
| Checking and money market                       |       | $        277,185 |   | $          2,676 |   | 3.83% |   | $         272,261 |   | $           1,987 |   | 2.90% |
| Savings                                         |       | 38,123                                                   |   | 207 |   | 2.15% |   | 48,872 |   | 257 |   | 2.09% |
| Certificates of deposit                         |       | 383,073                                                  |   | 4,476 |   | 4.64% |   | 292,653 |   | 2,549 |   | 3.46% |
| Total interest-bearing deposits                 |       | 698,381                                                  |   | 7,359 |   | 4.18% |   | 613,786 |   | 4,793 |   | 3.10% |
| FHLB advances and  other borrowings             |       | 111,084                                                  |   | 1,332 |   | 4.76% |   | 127,876 |   | 1,414 |   | 4.39% |
| Subordinated  debentures payable to trusts (4)  |       | 27,837                                                   |   | 912 |   | 13.00% |   | 27,837 |   | 543 |   | 7.74% |
| Total  interest-bearing liabilities             |       | 837,302                                                  |   | 9,603 |   | 4.55% |   | 769,499 |   | 6,750 |   | 3.48% |
| Noninterest-bearing deposits                    |       | 77,757                                                   |   |   |   |   |   | 80,529 |   |   |   |   |
| Other liabilities                               |       | 23,836                                                   |   |   |   |   |   | 19,705 |   |   |   |   |
| Total  liabilities                              |       | 938,895                                                  |   |   |   |   |   | 869,733 |   |   |   |   |
| Equity                                          |       | 59,004                                                   |   |   |   |   |   | 54,348 |   |   |   |   |
| Total  liabilities and equity                   |       | $        997,899 |   |   |   |   |   | $         924,081 |   |   |   |   |
|                                            |       |                                                     |   |   |   |   |   |   |   |   |   |   |
| Net interest  income; interest rate  spread (5) |       |                                                     |   | $          6,060 |   | 2.16% |   |   |   | $           6,393 |   | 2.65% |
|                                            |       |                                                     |   |   |   |   |   |   |   |   |   |   |
| Net interest  margin (5) (6)                    |       |                                                     |   |   |   | 2.60% |   |   |   |   |   | 2.98% |
|                                            |       |                                                     |   |   |   |   |   |   |   |   |   |   |
| Net interest margin, TE  (7)                    |       |                                                     |   |   |   | 2.66% |   |   |   |   |   | 3.02% |

 

 

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

(2) Includes federal funds sold.

(3)  Yields do not reflect thetax-exempt nature of loans, equipment leases and municipal securities.

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

(5)  Percentages for the threemonths ended December 31, 2006 and December 31, 2005 have been annualized.

(6)  Net interest margin is netinterest income divided by average interest-earning assets.

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

Page 23

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|                                                | ** ** | **Six Months Ended December 31,**    |
|------------------------------------------------|------------|----------------------------------------------------------|
| ** **                                     | ** ** | **2006**                                                 | ** ** | **2005** |
| ** **                                     | ** ** | **Average  Outstanding  Balance**                        | ** ** | **Interest  Earned/  Paid** | ** ** | **Yield/  Rate** | ** ** | **Average  Outstanding  Balance** | ** ** | **Interest  Earned/  Paid** | ** ** | **Yield/  Rate** |
| ** **                                     | ** ** | **(Dollars in Thousands)**                     |
| Interest-earning  assets:                      |       |                                                     |   |   |   |   |   |   |   |   |   |   |
| Loans and leases receivable (1) (3)            |       | $        753,432 |   | $        26,968 |   | 7.10% |   | $         688,398 |   | $         22,714 |   | 6.55% |
| Investment securities (2) (3)                  |       | 154,397                                                  |   | 3,619 |   | 4.65% |   | 147,326 |   | 2,834 |   | 3.82% |
| FHLB stock                                     |       | 6,816                                                    |   | 154 |   | 4.48% |   | 7,133 |   | 67 |   | 1.86% |
|                                           |       |                                                     |   |   |   |   |   |   |   |   |   |   |
| Total interest-earning  assets                 |       | 914,645                                                  |   | $        30,741 |   | 6.67% |   | 842,857 |   | $         25,615 |   | 6.03% |
| Noninterest-earning assets                     |       | 67,087                                                   |   |   |   |   |   | 70,140 |   |   |   |   |
| Total assets                                   |       | $        981,732 |   |   |   |   |   | $         912,997 |   |   |   |   |
|                                           |       |                                                     |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                 |       |                                                     |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                      |       |                                                     |   |   |   |   |   |   |   |   |   |   |
| Checking and money market                      |       | $        278,628 |   | $          5,314 |   | 3.78% |   | $         270,476 |   | $           3,774 |   | 2.77% |
| Savings                                        |       | 40,939                                                   |   | 468 |   | 2.27% |   | 50,078 |   | 497 |   | 1.97% |
| Certificates of deposit                        |       | 359,060                                                  |   | 8,118 |   | 4.48% |   | 287,060 |   | 4,818 |   | 3.33% |
| Total interest-bearing deposits                |       | 678,627                                                  |   | 13,900 |   | 4.06% |   | 607,614 |   | 9,089 |   | 2.97% |
| FHLB advances  and other borrowings            |       | 116,476                                                  |   | 2,806 |   | 4.78% |   | 126,090 |   | 2,743 |   | 4.32% |
| Subordinated  debentures payable to trusts (4) |       | 27,837                                                   |   | 1,557 |   | 11.10% |   | 27,837 |   | 1,055 |   | 7.52% |
|                                           |       |                                                     |   |   |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities            |       | 822,940                                                  |   | 18,263 |   | 4.40% |   | 761,541 |   | 12,887 |   | 3.36% |
| Noninterest-bearing deposits                   |       | 78,596                                                   |   |   |   |   |   | 78,016 |   |   |   |   |
| Other liabilities                              |       | 22,124                                                   |   |   |   |   |   | 19,360 |   |   |   |   |
| Total  liabilities                             |       | 923,660                                                  |   |   |   |   |   | 858,917 |   |   |   |   |
| Equity                                         |       | 58,072                                                   |   |   |   |   |   | 54,080 |   |   |   |   |
| Total  liabilities and equity                  |       | $        981,732 |   |   |   |   |   | $         912,997 |   |   |   |   |
|                                           |       |                                                     |   |   |   |   |   |   |   |   |   |   |
| Net interest  income; interest rate spread (5) |       |                                                     |   | $        12,478 |   | 2.27% |   |   |   | $         12,728 |   | 2.67% |
|                                           |       |                                                     |   |   |   |   |   |   |   |   |   |   |
| Net interest  margin (5) (6)                   |       |                                                     |   |   |   | 2.71% |   |   |   |   |   | 3.00% |
|                                           |       |                                                     |   |   |   |   |   |   |   |   |   |   |
| Net interest margin, TE  (7)                   |       |                                                     |   |   |   | 2.76% |   |   |   |   |   | 3.03% |

 

 

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

(2)  Includes federal funds sold.

(3)  Yields do not reflect thetax-exempt nature of loans, equipment leases and municipal securities.

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

(5)  Percentages for the sixmonths ended December 31, 2006 and December 31, 2005 have been annualized.

(6)  Net interest margin is netinterest income divided by average interest-earning assets.

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

Page 24

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**Rate/VolumeAnalysis of Net Interest Income**

Thefollowing schedule presents the dollar amount of changes in interest income andinterest expense for major components of interest-earning assets and interest-bearingliabilities.  It distinguishes betweenthe increases and decreases due to fluctuating outstanding balances that aredue to the levels and volatility of interest rates.  For each category of interest-earning assetsand interest-bearing liabilities, information is provided on changesattributable to (i) changes in volume (i.e., changes in volume multiplied byold rate) and (ii) changes in rate (i.e., changes in rate multiplied by oldvolume).  For purposes of this table,changes attributable to both rate and volume, which cannot be segregated, havebeen allocated proportionately to the change due to volume and the change dueto rate.
|                                            | ** ** | **Three Months Ended December 31,**                                 | ** ** | **Six Months Ended December 31,**                        | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **2006 vs 2005**                                                              | ** ** | **2006 vs 2005**                                                   | ** ** |
| ** **                                 | ** ** | **Increase**                                                                            | ** ** | ** **                                                                   | ** ** | ** ** | ** ** | **Increase** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **(Decrease)**                                                                          | ** ** | **Increase**                                                                 | ** ** | **Total** | ** ** | **(Decrease)** | ** ** | **Increase** | ** ** | **Total** | ** ** |
| ** **                                 | ** ** | **Due to**                                                                         | ** ** | **Due to**                                                              | ** ** | **Increase** | ** ** | **Due to** | ** ** | **Due to** | ** ** | **Increase** | ** ** |
| ** **                                 | ** ** | **Volume**                                                                              | ** ** | **Rate**                                                                     | ** ** | **(Decrease)** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **(Decrease)** | ** ** |
| ** **                                 | ** ** | **(Dollars in Thousands)**                                                    | ** ** |
| Interest-earning  assets:                  |       |                                                                                    |       |                                                                         |       |   |   |   |   |   |   |   |   |
| Loans and leases receivable (1)            |       | $         1,164                            |       | $            971 |       | $         2,135 |   | $         2,146 |   | $         2,108 |   | $         4,254 |   |
| Investment securities (2)                  |       | 64                                                                                      |       | 305                                                                          |       | 369 |   | 136 |   | 649 |   | 785 |   |
| FHLB stock                                 |       | (5                                                                                      | )          | 21                                                                           |       | 16 |   | (5 | ) | 92 |   | 87 |   |
|                                       |       |                                                                                    |       |                                                                         |       |   |   |   |   |   |   |   |   |
| Total  interest-earning assets             |       | $         1,223                            |       | $         1,297                 |       | $         2,520 |   | $         2,277 |   | $         2,849 |   | $         5,126 |   |
|                                       |       |                                                                                    |       |                                                                         |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:             |       |                                                                                    |       |                                                                         |       |   |   |   |   |   |   |   |   |
| Deposits:                                  |       |                                                                                    |       |                                                                         |       |   |   |   |   |   |   |   |   |
| Checking and money market                  |       | $              36 |       | $            653 |       | $            689 |   | $            114 |   | $         1,426 |   | $         1,540 |   |
| Savings                                    |       | (57                                                                                     | )          | 7                                                                            |       | (50 | ) | (91 | ) | 62 |   | (29 | ) |
| Certificates of deposit                    |       | 788                                                                                     |       | 1,139                                                                        |       | 1,927 |   | 1,208 |   | 2,092 |   | 3,300 |   |
| Total interest-bearing deposits            |       | 767                                                                                     |       | 1,799                                                                        |       | 2,566 |   | 1,231 |   | 3,580 |   | 4,811 |   |
| FHLB advances and  other borrowings        |       | (186                                                                                    | )          | 104                                                                          |       | (82 | ) | (209 | ) | 272 |   | 63 |   |
| Subordinated  debentures payable to trusts |       | -                                                                                       |       | 369                                                                          |       | 369 |   |   |   | 502 |   | 502 |   |
|                                       |       |                                                                                    |       |                                                                         |       |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities        |       | $            581            |       | $         2,272                 |       | $         2,853 |   | $         1,022 |   | $         4,354 |   | $         5,376 |   |
|                                       |       |                                                                                    |       |                                                                         |       |   |   |   |   |   |   |   |   |
|                                       |       |                                                                                    |       |                                                                         |       |   |   |   |   |   |   |   |   |
| Net interest income  increase              |       |                                                                                    |       |                                                                         |       | $          (333 | ) |   |   |   |   | $          (250 | ) |

 

 

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

(2)  Includes federal funds sold.

 

Page 25

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**Applicationof Critical Accounting Policies**

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

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

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

*Mortgage Servicing Rights (“MSR”)*  The Company records a servicing asset forcontractually 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 the servicedassets.  The asset is amortized inproportion to and over the period of estimated net servicing income.

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

TheCompany has included MSRs as a critical accounting policy because the use ofestimates for determining fair value using present value concepts may produceresults which may significantly differ from other fair value analysis perhapseven to the point of recording impairment. The risk to earnings is when the underlying mortgages payoff significantlyfaster than the assumptions used in the previously recorded amortization.  Estimating future cash flows on theunderlying mortgages is a difficult analysis and requires judgment based on thebest information available.  The Companylooks at alternative assumptions and projections when preparing a reasonableand supportable analysis.  Based on theCompany’s quarterly analysis of MSRs, there was no impairment to the MSRs atDecember 31, 2006.

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

**AssetQuality and Potential Problem Loans and Leases**

Nonperformingassets (nonaccrual loans and leases, accruing loans and leases delinquent morethan 90 days and foreclosed assets) increased to $4.5 million at December 31,2006 from $3.9 million at June 30, 2006, an increase of $597,000, or15.3%.  Nonaccruing loans and leasesincreased $155,000 to $1.2 million at December 31, 2006 from $1.0 million atJune 30, 2006.  In addition, the ratio ofnonperforming assets to total assets, which is one indicator of credit riskexposure, increased to 0.44% at December 31, 2006 from 0.40% at June 30, 2006.

Nonaccruingloans and leases increased 15.0%, or $155,000, to $1.2 million at December 31,2006 compared to $1.0 million at June 30, 2006. Included in nonaccruing loans and leases at December 31, 2006 were twoloans totaling $39,000 secured by one- to four-family real estate, eight loanstotaling $792,000 secured by commercial business, two leases totaling $44,000and 33 consumer loans totaling $315,000.

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

Asof December 31, 2006, the Company had $466,000 of foreclosed assets.  The balance of foreclosed assets at December31, 2006 consisted of $69,000 of single-family collateral owned, $286,000 ofequipment finance leases and $111,000 of consumer collateral owned.

AtDecember 31, 2006, the Company haddesignated $17.5 million of its assets as special mention and classified $3.1million of its assets that management has determined need to be closelymonitored because of possible credit problems of the borrowers or the cashflows of the secured properties.  AtDecember 31, 2006 the Company had $21.0 million in multi-family, commercialbusiness, commercial real estate and agricultural participation loanspurchased, of which $243,000 were classified as of December 31, 2006.  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 collectibility may notbe reasonably assured, considers the estimated fair market value of theunderlying collateral, present value of expected principal and interestpayments, economic conditions, historical loss experience and other factorsthat warrant recognition in providing for an adequate loan and lease lossallowance.

Althoughthe Company’s management believes that the December 31, 2006 recorded allowancefor loan and lease losses was adequate to provide for probable losses on therelated loans and leases, there can be no assurance that the allowance existingat December 31, 2006 will be adequate in the future.

Page 27

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Inaccordance with the Company’s internal classification of assets policy,management evaluates the loan and lease portfolio on a monthly basis toidentify loss potential and determines the adequacy of the allowance for loanand lease losses quarterly.  Loans andleases are placed on nonaccrual status when the collection of principal and/orinterest become doubtful.  Foreclosed assetsinclude assets acquired in settlement of loans and leases.  The following table sets forth the amountsand categories of the Company’s nonperforming assets for the periods indicated.
| ** **                                               | ** ** | **Nonperforming Assets As Of**                                                                                        | ** ** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------|------------|------------|
|                                                     | ** ** | **December 31,**                                                                                                      | ** ** | ** ** | **June 30,** | ** ** | ** ** |
| ** **                                               | ** ** | **2006**                                                                                                              | ** ** | ** ** | **2006** | ** ** | ** ** |
|                                                     |       | (Dollars  in Thousands)                                                                                               |       |       |
| Nonaccruing  loans and leases:                           |       |                                                                                                                  |       |       |   |   |   |
| One- to four-family                                      |       |   $                 39 |       |       |   $               371 |   |   |
| Commercial real estate                                   |       | - - - -                                                                                                               |       |       | - - - - |   |   |
| Commercial business                                      |       | 792                                                                                                                   |       |       | 341 |   |   |
| Equipment finance leases                                 |       | 44                                                                                                                    |       |       | 36 |   |   |
| Consumer (1)                                             |       | 315                                                                                                                   |       |       | 287 |   |   |
| Agricultural                                             |       | - - - -                                                                                                               |       |       | - - - - |   |   |
| Total                                                    |       | 1,190                                                                                                                 |       |       | 1,035 |   |   |
|                                                     |       |                                                                                                                  |       |       |   |   |   |
| Accruing loans  and leases delinquent more than 90 days: |       |                                                                                                                  |       |       |   |   |   |
| One- to four-family                                      |       | 235                                                                                                                   |       |       | 358 |   |   |
| Commercial real estate                                   |       | 202                                                                                                                   |       |       | 308 |   |   |
| Commercial business                                      |       | 343                                                                                                                   |       |       | 814 |   |   |
| Equipment finance leases                                 |       | 812                                                                                                                   |       |       | 302 |   |   |
| Consumer (1)                                             |       | 32                                                                                                                    |       |       | 7 |   |   |
| Agricultural                                             |       | 1,209                                                                                                                 |       |       | 541 |   |   |
| Total                                                    |       | 2,833                                                                                                                 |       |       | 2,330 |   |   |
|                                                     |       |                                                                                                                  |       |       |   |   |   |
| Foreclosed  assets: (2)                                  |       |                                                                                                                  |       |       |   |   |   |
| One- to four-family                                      |       | 69                                                                                                                    |       |       | 96 |   |   |
| Equipment finance leases                                 |       | 286                                                                                                                   |       |       | 254 |   |   |
| Consumer (1)                                             |       | 111                                                                                                                   |       |       | 177 |   |   |
| Total                                                    |       | 466                                                                                                                   |       |       | 527 |   |   |
|                                                     |       |                                                                                                                  |       |       |   |   |   |
| Total  nonperforming assets                              |       |   $            4,489                            |       |       |   $            3,892 |   |   |
|                                                     |       |                                                                                                                  |       |       |   |   |   |
| Ratio of  nonperforming assets to total assets           |       | 0.44%                                                                                                                 |       |       | 0.40% |   |   |
|                                                     |       |                                                                                                                  |       |       |   |   |   |
| Ratio of  nonperforming loans and leases                 |       |                                                                                                                  |       |       |   |   |   |
| to total loans  and leases (3) (4)                       |       | 0.53%                                                                                                                 |       |       | 0.46% |   |   |

 

 

(1)  Includes mobile home loans.

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

(3)  Non performing loans and leases include bothnonaccruing and accruing loans and leases delinquent more than 90 days.

(4)  Total loans and leases include loans held forsale.

Page 28

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Thefollowing table sets forth information with respect to activity in the Company’sallowance for loan and lease losses during the periods indicated.
| ** **                                              | ** ** | **Six Months Ended December 31,**                                                                                  | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|
|                                                    | ** ** | **2006**                                                                                                           | ** ** | **2005** | ** ** |
| ** **                                              |       | **(Dollars in Thousands)**                                                                                         |       |
|                                                    |       |                                                                                                               |       |   |   |
| Balance at  beginning of period                         |       |   $               5,657  |       |   $               5,076  |   |
| Charge-offs:                                            |       |                                                                                                               |       |   |   |
| One- to four-family                                     |       | - - - -                                                                                                       |       | (1) |   |
| Commercial real estate                                  |       | - - - -                                                                                                       |       | - - - -  |   |
| Commercial business                                     |       | (216)                                                                                                              |       | (3,242) |   |
| Equipment finance leases                                |       | (115)                                                                                                              |       | (17) |   |
| Consumer (1)                                            |       | (370)                                                                                                              |       | (542) |   |
| Agriculture                                             |       | - - - -                                                                                                            |       | (350) |   |
| Total charge-offs                                       |       | (701)                                                                                                              |       | (4,152) |   |
|                                                    |       |                                                                                                               |       |   |   |
| Recoveries:                                             |       |                                                                                                               |       |   |   |
| One- to four-family                                     |       | 3                                                                                                             |       | 1  |   |
| Commercial real estate                                  |       | - - - -                                                                                                       |       | - - - -  |   |
| Commercial business                                     |       | - - - -                                                                                                       |       | - - - -  |   |
| Equipment finance leases                                |       | - - - -                                                                                                       |       | 39  |   |
| Consumer (1)                                            |       | 101                                                                                                           |       | 118  |   |
| Agriculture                                             |       | 57                                                                                                            |       | - - - -  |   |
| Total recoveries                                        |       | 161                                                                                                           |       | 158  |   |
|                                                    |       |                                                                                                               |       |   |   |
| Net (charge-offs)                                       |       | (540)                                                                                                              |       | (3,994) |   |
|                                                    |       |                                                                                                               |       |   |   |
| Additions  charged to operations                        |       | 752                                                                                                           |       | 4,092  |   |
|                                                    |       |                                                                                                               |       |   |   |
| Balance at end  of period                               |       |   $               5,869  |       |   $               5,174  |   |
|                                                    |       |                                                                                                               |       |   |   |
| Ratio of net  (charge-offs) during the period to        |       |                                                                                                               |       |   |   |
| average loans and leases outstanding during the  period |       | (0.07)%                                                                                                            |       | (0.58)% |   |
|                                                    |       |                                                                                                               |       |   |   |
| Ratio of  allowance for loan and lease losses to        |       |                                                                                                               |       |   |   |
| total loans and leases at end of period (2)             |       | 0.77%                                                                                                              |       | 0.73% |   |
|                                                    |       |                                                                                                               |       |   |   |
| Ratio of  allowance for loan and lease losses to        |       |                                                                                                               |       |   |   |
| nonperforming  loans and leases at end of period (3)    |       | 145.89%                                                                                                            |       | 115.39% |   |

 

 

(1)  Includes mobile home loans.

(2)  Total loans and leases include loans held forsale.

(3)  Non performing loans and leases include bothnonaccruing and accruing loans and leases delinquent more than 90 days.

Page 29

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Thedistribution of the Company’s allowance for loan and lease losses and impairedloss summary as required by FASB Statement No. 114, “Accounting by Creditorsfor Impairment of a Loan” are summarized in the following tables.  The combination of FASB Statement No. 5 “Accountingfor Contingencies” and FASB Statement No. 114 calculations comprise the Company’sallowance for loan and lease losses.
|                          | ** ** | **Allowance**                                                                                                                |       | **Impaired Loan**                                                                                                    |                                                                                                                 | **Allowance**                                                                                                                |       | **Impaired Loan**                                                                                                    |       |
|--------------------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|
| ** **               | ** ** | **for Loan and**                                                                                                             | ** ** | **Valuation**                                                                                                        | ** **                                                                                                           | **for Loan and**                                                                                                             | ** ** | **Valuation**                                                                                                        | ** ** |
| ** **               | ** ** | **Lease Losses**                                                                                                             | ** ** | **Allowance**                                                                                                        | ** **                                                                                                           | **Lease Losses**                                                                                                             | ** ** | **Allowance**                                                                                                        | ** ** |
| **Loan and Lease Type**  | ** ** | **At December 31, 2006**                                                                                                     | ** ** | **At June 30, 2006**                                                                                                 | ** **                                                                                                           |
| ** **               | ** ** | (Dollars  in Thousands)                                                                                                      |       |
|                     |       |                                                                                                                         |       |                                                                                                                 |                                                                                                                 |                                                                                                                         |       |                                                                                                                 |       |
| One- to four-family      |       |   $                  209 |       |   $                - - - - |                                                                                                                 |   $                  193 |       |   $                - - - - |       |
| Commercial real  estate  |       | 350                                                                                                                          |       | - - - -                                                                                                              |                                                                                                                 | 317                                                                                                                          |       | - - - -                                                                                                              |       |
| Multi-family real estate |       | 80                                                                                                                           |       | - - - -                                                                                                              |                                                                                                                 | 79                                                                                                                           |       | - - - -                                                                                                              |       |
| Commercial  business     |       | 2,959                                                                                                                        |       | - - - -                                                                                                              |                                                                                                                 | 2,563                                                                                                                        |       | - - - -                                                                                                              |       |
| Equipment finance leases |       | 502                                                                                                                          |       | - - - -                                                                                                              |                                                                                                                 | 570                                                                                                                          |       | - - - -                                                                                                              |       |
| Consumer (1)             |       | 1,293                                                                                                                        |       | - - - -                                                                                                              |                                                                                                                 | 1,432                                                                                                                        |       | - - - -                                                                                                              |       |
| Agricultural             |       | 476                                                                                                                          |       |                                                                                                                 | - - - -                                                                                                              |                                                                                                                         |       | 503                                                                                                                  |       |   | - - - - |   |
| Total                    |       |   $               5,869                 |       |                                                                                                                 |   $                - - - - |                                                                                                                         |       |   $               5,657         |       |   |   $                - - - - |   |

 

 

(1) Includes mobile homeloans.

**ImpairedLoan Summary**
|                         | ** ** | ** **               |       |                    | ** **                                                                   | **Impaired**  | ** ** | ** **                                                     |       |        | ** ** | **Impaired**  | ** ** |
|-------------------------|------------|--------------------------|------------|-------------------------|------------------------------------------------------------------------------|---------------|------------|----------------------------------------------------------------|------------|-------------|------------|---------------|------------|
| ** **              | ** ** | **Number**               |       |                    | ** **                                                                   | **Loan**      | ** ** | **Number**                                                     | ** ** | ** **  | ** ** | **Loan**      | ** ** |
|                    | ** ** | **of Loan**              | ** ** | **Loan**                | ** **                                                                   | **Valuation** | ** ** | **of Loan**                                                    | ** ** | **Loan**    | ** ** | **Valuation** | ** ** |
|                    | ** ** | **Customers**            | ** ** | **Balance**             | ** **                                                                   | **Allowance** | ** ** | **Customers**                                                  | ** ** | **Balance** | ** ** | **Allowance** | ** ** |
| **Loan and Lease Type** | ** ** | **At December 31, 2006** |       | **At June 30, 2006**    | ** **                                                                   |
|                    | ** ** | (Dollars  in Thousands)  |       | (Dollars  in Thousands) | ** **                                                                   |
|                    | ** ** | ** **               |       |                    | ** **                                                                   | ** **    |       |                                                           | ** ** | ** **  | ** ** | ** **    | ** ** |
| Commercial business     |       | 5                   |       |                    |   $         762  |          |       | - - - -                                                   |       |        | 4     |          |       |   $         325  |   |   | - - - -  |   |
| Total                   |       | 5                   |       |                    |   $         762  |          |       |   $      - - - -  |       |        | 4     |          |       |   $         325  |   |   |   $      - - - -  |   |

 

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Theallowance for loan and lease losses was $5.9 million at December 31, 2006 ascompared to $5.2 million at December 31, 2005. The ratio of the allowance for loan and lease losses to total loans andleases was 0.77% at December 31, 2006 compared to 0.73% at December 31,2005.  The Company’s management hasconsidered nonperforming loans and leases and potential problem loans andleases in establishing the allowance for loan and lease losses.  The Company continues to monitor itsallowance for probable loan and lease losses and make future additions orreductions in light of the level of loans and leases in its portfolio and as economicconditions dictate.  Thecurrent level of the allowance for loan and lease losses is a result ofmanagement’s assessment of the risks within the portfolio based on theinformation revealed in credit reporting processes. The Company utilizes arisk-rating system on all commercial business, agricultural, construction andmulti-family and commercial real estate loans, including purchased loans andleases.  A periodic credit review isperformed on all types of loans and leases to establish the necessary reservebased on the estimated risk within the portfolio. This assessment of risk takesinto account the composition of the loan and lease portfolio, historical lossexperience for each loan and lease category, previous loan and leaseexperience, concentrations of credit, current economic conditions and otherfactors that in management’s judgment deserve recognition.

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

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

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**Comparison of the Three Months Ended December 31,2006 and December 31, 2005**

*General*.  The Company’s net income was $2.1 million, or$0.53 for basic and $0.52 for diluted earnings per share for the three monthsended December 31, 2006, a $812,000 increase in earnings compared to $1.3million, or $0.33 for both basic and diluted earnings per share for the sameperiod in the prior fiscal year.  For thethree months ended December 31, 2006, the return on average equity was 14.31%,a 49.7% increase compared to 9.56% for the same period in the prior fiscalyear.  For the three months endedDecember 31, 2006, the return on average assets was 0.85%, an increase of50.49% compared to 0.56% for the same period in the prior fiscal year.  As discussed in more detail below, theincreases were due to a variety of key factors, including a decrease in provisionfor losses on loans of $3.2 million offset by decreases in net interest incomeof $333,000 and noninterest income of $567,000 and an increase in noninterestexpense of $999,000.

*Interest, Dividend and Loan Fee Income.*  Interest, dividend and loan fee income was$15.7 million for the three months ended December 31, 2006 as compared to $13.1million for the same period in the prior fiscal year, an increase of $2.5million or 19.2%.  A $1.2 millionincrease in interest, dividend and loan fee income was due to a 10.0% increasein the average volume of loans and leases receivable and a $971,000 increase ininterest, dividend and loan fee income was the result of an increase in theaverage yield on loans and leases receivable from 6.64% for the three monthsended December 31, 2005 to 7.14% for the three months ended December 31,2006.  The average yield on totalinterest-earning assets was 6.71% for the three months ended December 31, 2006as compared to 6.13% for the same period in the prior fiscal year.

*Interest Expense.*  Interest expense was $9.6 million for thethree months ended December 31, 2006 as compared to $6.8 million for the sameperiod in the prior fiscal year, an increase of $2.9 million or 42.3%.  A $1.8 million increase in interest expense wasthe result of an increase in average rate paid on interest-bearing depositsfrom 3.10% for the three months ended December 31, 2005 to 4.18% for the threemonths ended December 31, 2006.  A$369,000 increase in interest expense was the result of an increase in theaverage rate paid on subordinated debentures payable to trusts increasing from7.74% for the three months ended December 31, 2005 to 13.00% for the threemonths ended December 31, 2006.  This wasprimarily the result of a $290,000 expense of unamortized debt issuance costsrelating to the redemption of the Trust I trust preferred securities during thefiscal second quarter ended December 31, 2006. An increase of $2.3 million in interest expense was the result of anincrease in the average rate paid on total interest-bearing liabilities from3.48% for the three months ended December 31, 2005 to 4.55% for the threemonths ended December 31, 2006.

*Net Interest Income.* The Company’snet interest income for the three months ended December 31, 2006 decreased$333,000, or 5.2%, to $6.1 million compared to $6.4 million for the same periodin the prior fiscal year.  The decreasein net interest income was due primarily to increases in the average rate paidon interest-bearing liabilities offset by increases in the average yield oninterest-earning assets and average volume of interest-earning assets for thethree months ended December 31, 2006 compared to the same period in the priorfiscal year.  The Company’s net interestmargin was 2.60% for the three months ended December 31, 2006 as compared to2.98% for the same period in the prior fiscal year.

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

Duringthe three months ended December 31, 2006, the Company recorded a provision forlosses on loans and leases of $461,000 compared to $3.6 million for the threemonths ended December 31, 2005, a decrease of $3.2 million.  During the second quarter of Fiscal 2006,there were additional provisions to the loan loss allowance of $3.1 million,for a large impaired commercial participation loan, which was sold in December2005.  See “Asset Quality” for furtherdiscussion.

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*Noninterest Income.*  Noninterest income was $5.4 million for thethree months ended December 31, 2006 as compared to $6.0 million for the sameperiod in the prior fiscal year, a decrease of $567,000, or 9.5%.  The decrease in noninterest income was primarilyattributable to one-time events in the second quarter of each of fiscal 2006and fiscal 2007.  In the second quarterof fiscal 2007, there was a $2.8 million gain on the sale of branches.  See Note 11 of “Notes to ConsolidatedFinancial Statements.”  In the secondquarter of fiscal 2006, there was a $3.6 million gain on a land sale.  In addition, there were increases in loanservicing income of $184,000 and fees on deposits of $145,000 for the threemonths ended December 31, 2006 as compared to the same period in the priorfiscal year.

Loanservicing income increased $184,000 from $257,000 for the three months endedDecember 31, 2005 to $441,000 for the three months ended December 31, 2006primarily due to an increase of $407.1 million in the balances of loansserviced by the Bank from $539.1 million at December 31, 2005 to $946.2 millionat December 31, 2006.

Feeson deposit increased $145,000 for the three months ended December 31, 2006compared to the same period in the prior fiscal year primarily due to anincrease of non-sufficient fund fee income of approximately $84,000 as theresult of a fee increase.

*Noninterest Expense.*  Noninterest expense was $7.7 million for thethree months ended December 31, 2006 as compared to $6.7 million for the threemonths ended December 31, 2005, an increase of $999,000, or 14.9%.  The increase in noninterest expense wasprimarily due to increases in advertising of $452,000, compensation andemployee benefits of $266,000, occupancy and equipment of $129,000 and other noninterestexpense of $114,000.

Advertisingexpense increased $452,000, or 179.4%, from $252,000 for the three months endedDecember 31, 2005 to $704,000 for the three months ended December 31, 2006primarily due to several deposit product package programs.

Compensation and employeebenefits increased $266,000, or 6.3%, from $4.2 million for the three monthsended December 31, 2005 to $4.5 million for the three months ended December 31,2006.  A primary factor for the increasein compensation and employee benefits was an increase of $143,000 for variablepay for employee incentives. Employee compensation increases contributed to a$167,000 increase as compared to the same period in the prior fiscal year.

Occupancyand equipment expense increased $129,000 for the three months ended December31, 2006 compared to the same period in the prior fiscal year primarily due toincreases in rent expense of $68,000 and depreciation expense of $31,000.  These increases wereprimarily attributable to several new branches opened one year or less andexisting branch renovations.

Othernoninterest expense increased $114,000 for the three months ended December 31,2006 compared to the same period in the prior fiscal year primarily due toincreases in community contributions for reinvestment in the communities weserve of $82,000 and telephone expense of $33,000.

*Income tax expense.*  The Company’s income tax expense for thethree months ended December 31, 2006 increased $458,000 or 60.2% to $1.2million compared to $761,000 for the same period in the prior fiscal year.  The effective tax rate was 36.6% and 36.9%for the three months ended December 31, 2006 and 2005, respectively.  The increase in income tax expense wasdirectly related to the increase in income before income taxes of $1.3 millioncompared to the same period in the prior fiscal year.

**Comparison of the Six Months Ended December 31,2006 and December 31, 2005**

*General*.  The Company’s net income was $3.2 million, or$0.81 for basic and $0.79 for diluted earnings per share for the six monthsended December 31, 2006, a $886,000 increase in earnings compared to $2.3million, or $0.60 for basic and $0.58 for diluted earnings per share for thesame period in the prior fiscal year.  Forthe six months ended December 31, 2006, the return on average equity was11.05%, a 28.6% increase compared to 8.59% for the same period in the priorfiscal year.  For the six months endedDecember 31, 2006, the return on average

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assetswas 0.65%, an increase of 27.5% compared to 0.51% for the same period in theprior fiscal year.  As discussed in moredetail below, the increases were due to a variety of key factors, including adecrease in provision for losses on loans of $3.3 million offset by decreasesin net interest income of $250,000 and noninterest income of $608,000 and anincrease in noninterest expense of $1.2 million.

*Interest, Dividend and Loan Fee Income.*  Interest, dividend and loan fee income was$30.7 million for the six months ended December 31, 2006 as compared to $25.6million for the same period in the prior fiscal year, an increase of $5.1million or 20.0%.  A $2.1 millionincrease in interest, dividend and loan fee income was due to a 9.4% increasein the average volume of loans and leases receivable and a $2.1 million increasein interest, dividend and loan fee income was the result of an increase in theaverage yield on loans and leases receivable from 6.55% for the six monthsended December 31, 2005 to 7.10% for the six months ended December 31, 2006.  The average yield on total interest-earningassets was 6.67% for the six months ended December 31, 2006 as compared to6.03% for the same period in the prior fiscal year.

*Interest Expense.*  Interest expense was $18.3 million for thesix months ended December 31, 2006 as compared to $12.9 million for the sameperiod in the prior fiscal year, an increase of $5.4 million or 41.7%.  A $3.6 million increase in interest expensewas the result of an increase in average rate paid on interest-bearing depositsfrom 2.97% for the six months ended December 31, 2005 to 4.06% for the sixmonths ended December 31, 2006.  A$502,000 increase in interest expense was the result of an increase in theaverage rate paid on subordinated debentures payable to trusts increasing from7.52% for the six months ended December 31, 2005 to 11.10% for the six monthsended December 31, 2006.  Higher interestrates and the expensing of $290,000 of unamortized debt issuance costs relatingto the redemption of Trust I trust preferred securities during the fiscal secondquarter ended December 31, 2006 increased the interest expense by$502,000.  An increase of $4.4 million ininterest expense was the result of an increase in the average rate paid ontotal interest-bearing liabilities from 3.36% for the six months ended December31, 2005 to 4.40% for the six months ended December 31, 2006.

*Net Interest Income.* The Company’snet interest income for the six months ended December 31, 2006 decreased$250,000, or 2.0%, to $12.5 million compared to $12.7 million for the sameperiod in the prior fiscal year.  Thedecrease in net interest income was due primarily to increases in the averagerate paid on interest-bearing liabilities offset by increases in the averageyield on interest-earning assets and average volume of interest-earning assetsfor the six months ended December 31, 2006 compared to the same period in theprior fiscal year.  The Company’s netinterest margin was 2.71% for the six months ended December 31, 2006 ascompared to 3.00% for the same period in the prior fiscal year.

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

Duringthe six months ended December 31, 2006, the Company recorded a provision forlosses on loans and leases of $752,000 compared to $4.1 million for the sixmonths ended December 31, 2005, a decrease of $3.3 million.  During the second quarter of fiscal 2006,there were additional provisions to the loan loss allowance of $3.1 million,for a large impaired commercial participation loan, which was sold in December2005.  See “Asset Quality” for furtherdiscussion.

*Noninterest Income.*  Noninterest income was $7.8 million for thesix months ended December 31, 2006 as compared to $8.4 million for the sameperiod in the prior fiscal year, a decrease of $608,000, or 7.3%.  The decrease in noninterest income wasprimarily attributable to one-time events in the second quarter of each offiscal 2006 and fiscal 2007.  In thesecond quarter of fiscal 2007, there was a $2.8 million gain on the sale ofbranches.  See Note 11 of “Notes toConsolidated Financial Statements.”  Inthe second quarter of fiscal 2006, there was a $3.6 million gain on a landsale.  In addition, there were increasesin loan servicing income of $242,000 and fees on deposits of $162,000 for thesix months ended December 31, 2006 as compared to the same period in the priorfiscal year.

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Loanservicing income increased $242,000 from $528,000 for the six months endedDecember 31, 2005 to $770,000 for the six months ended December 31, 2006primarily due to an increase of $407.1 million in the balances of loansserviced by the Bank from $539.1 million at December 31, 2005 to $946.2 millionat December 31, 2006.

Feeson deposit increased $162,000 for the six months ended December 31, 2006compared to the same period in the prior fiscal year primarily due to anincrease of non-sufficient fund fee income of approximately $84,000 during thesecond quarter of fiscal 2007 as the result of a fee increase.

*Noninterest Expense.*  Noninterest expense was $14.6 million for thesix months ended December 31, 2006 as compared to $13.4 million for the sixmonths ended December 31, 2005, an increase of $1.2 million, or 9.2%.  The increase in noninterest expense wasprimarily due to increases in advertising of $716,000, occupancy and equipmentof $287,000, compensation and employee benefits of $119,000 and othernoninterest expense of $52,000.

Advertisingexpense increased $716,000, or 166.1%, from $431,000 for the six months endedDecember 31, 2005 to $1.1 million for the six months ended December 31, 2006primarily due to several deposit product package programs.

Occupancyand equipment expense increased $287,000 for the six months ended December 31,2006 compared to the same period in the prior fiscal year primarily due toincreases in rent expense of $128,000, depreciation expense of $68,000 andbuilding and property maintenance of $27,000. These increases were primarily attributable to several new branchesopened one year or less and existing branch renovations.

Compensationand employee benefits increased $119,000, or 1.4%, from $8.5 million for thesix months ended December 31, 2005 to $8.6 million for the six months endedDecember 31, 2006.  A primary factor forthe increase in compensation and employee benefits was an increase of $120,000for variable pay for employee incentives. Employee compensation increases contributed to a $102,000 increase ascompared to the same period in the prior fiscal year.

Othernoninterest expense increased $52,000 for the six months ended December 31,2006 compared to the same period in the prior fiscal year primarily due toincreases in telephone expense of $41,000.

*Income tax expense.*  The Company’s income tax expense for the sixmonths ended December 31, 2006 increased $362,000 or 27.4% to $1.7 millioncompared to $1.3 million for the same period in the prior fiscal year.  The effective tax rate was 34.4% and 36.3%for the six months ended December 31, 2006 and 2005, respectively.  The decrease in the effective tax rate forthe quarter was the result of an increase in permanent tax differencesprimarily due to increases in tax-exempt interest income offset by anincrease in income before income taxes of $1.2 million compared to the sameperiod in the prior fiscal year.

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**Liquidity and Capital Resources**

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

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

TheBank anticipates that it will have sufficient funds available to meet currentloan commitments.  At December 31, 2006,the Bank had outstanding commitments to originate residential mortgage loans of$10.8 million and commercial business loans of $6.0 million.  In addition, the Bank had outstandingcommitments to sell residential mortgage loans of $11.4 million, commercialbusiness loans of $223,000 and consumer student loans of $1.6 million.  Commitments by the Bank to originate loansare not necessarily executed by the customer. The Bank monitors the ratio of commitments to funding for use inliquidity management.  At December 31,2006, the Bank had no commitments to purchase securities available for sale andno commitments to sell securities available for sale.

Althoughin-market deposits are the Bank’s primary source of funds, the Bank’s policyhas been to utilize borrowings where the funds can be invested in either loansor securities at a positive rate of return or to use the funds for short-termliquidity purposes.  The Bank currentlyhas an unsecured line of federal funds totaling $15.0 million with a correspondentbank.  In addition, the Company has aline of credit totaling $6.0 million with a correspondent bank.  There were no funds drawn on either line ofcredit at December 31, 2006. Additionally, as of December 31, 2006, the Bank had $115.7 million inout-of-market certificates of deposit. The Bank may also seek other sources of contingent liquidity includingadditional federal funds purchased lines with correspondent banks and lines ofcredit with the Federal Reserve Bank.

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

OnDecember 31, 2006, the Company had in effect a stock buyback program in whichup to 10% of the common stock of the Company outstanding on May 1, 2006 couldbe acquired through April 30, 2007.  Asof December 31, 2006, no shares of common stock had been purchased pursuant tothe program.  See Part II, Item 2 “UnregisteredSales of Equity Securities and Use of Proceeds” of this Form 10-Q.

Savingsinstitutions insured by the Federal Deposit Insurance Corporation are requiredby the Financial Institutions Reform, Recovery and Enforcement Act of 1989 tomeet three regulatory capital requirements. If a requirement is not met, regulatory authorities may take legal oradministrative actions, including restrictions on growth or operations or, inextreme cases, seizure.  Institutions notin compliance may apply for an exemption from the requirements and submit arecapitalization plan.  At December 31,2006, the Bank met all current regulatory capital requirements.

Theminimum OTS Tier 1 (core) capital requirement for well-capitalized institutionsis 5.00% of total adjusted assets for thrifts. The Bank had Tier 1 (core) capital of 8.12% at December 31, 2006.  The minimum OTS total risk-based capitalrequirement for well-capitalized institutions is 10.00% of risk-weighted assets.  The Bank had total risk-based capital of10.85% at December 31, 2006.

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**Impact ofInflation and Changing Prices**

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

**Recent Accounting Pronouncements**

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

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

In November 2005, theFASB issued FASB Staff Position (FSP) No. FAS 115-1,**“The Meaning of Other-Than-Temporary Impairment and ItsApplication to Certain Investments”,**whichsupersedes EITF No. 03-1.  This FSPprovides additional guidance when an investment in a debt or equity securityshould be considered impaired and when that impairment should be consideredother-than-temporary and recognized as a loss in earnings. Specifically, theguidance clarifies that an investor should recognize an impairment loss nolater than when the impairment is deemed other-than-temporary, even if adecision to sell has not been made. The FSP also requires certain disclosuresabout unrealized losses that have not been recognized as other-than-temporaryimpairments. The Company adopted the guidance in  FSP No. FAS 115-1 as of April 1, 2006.

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

In June 2006, FASB issuedFASB Interpretation No. 48, (“FIN 48”) “Accounting for Uncertainty in IncomeTaxes,” an Interpretation of SFAS No. 109, “Accounting for Income Taxes.”  FIN No. 48 prescribes a recognition thresholdand measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a taxreturn.  FIN No. 48 is effective for theend of the fiscal year ending after December 15, 2006. The Company has notdetermined the effect the adoption of FIN No. 48 will have on its consolidated financialstatements.

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

In September 2006, FASBissued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension andOther Postretirement Plans,” which amends several prior FASB statements.  SFAS No. 158 requires the measurement andrecognition of an overfunded or underfunded status of a defined benefitpostretirement plan as an asset or liability. SFAS No. 158 is effective for the end of the fiscal year ending afterDecember 15, 2006.  The Company has notdetermined the effect the adoption of SFAS No. 158 will have on itsconsolidated financial statements.

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

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

Inan attempt to manage its exposure to change in interest rates, managementmonitors the Company’s interest rate risk. The Company’s Asset-Liability Committee meets periodically to review theCompany’s interest rate risk position and profitability, and to recommendadjustments for consideration by executive management. Management also reviewsthe Bank’s securities portfolio, formulates investment strategies, and overseesthe timing 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 that can have an adverse effect on net income.  The Company does not currently engage intrading activities or use derivative instruments to control interest rate riskalthough it may in the future, if necessary, to manage interest rate risk.

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

As set forth below, depending upon the volatility ofthe rate change, the change in asset or liability mix of the Company or otherfactors may produce a decrease in net interest margin in an upward moving rateenvironment even as the net portfolio value (“NPV”) estimate indicates anincrease in net value.  The conversesituation can also be expected.  Oneapproach used to quantify interest rate risk is the NPV analysis.  In essence, this analysis calculates thedifference between the present value of the liabilities and the present valueof expected cash flows from assets and off-balance sheet contracts.  The following tables set forth, at September30, 2006 (the most recent report available) and December 31, 2005, an analysisof the Company’s interest rate risk as measured by the estimated changes in NPVresulting from instantaneous and sustained parallel shifts in the yield curve(+300 or –200 basis points, measured in 100 basis point increments).  Management does not believe that the Companyhas experienced any material changes in its market risk position from thatdisclosed in the Company’s Annual Report on Form 10-K for Fiscal 2006 or thatthe Company’s primary market risk exposures and how those exposures weremanaged during the six months ended December 31, 2006 changed significantlywhen compared to June 30, 2006.

Thedata in the following tables is based on assumptions utilized by the OTS inassessing interest rate risk of thrift institutions and published in “SelectedAsset and Liability Price Tables as of September 30, 2006” and “Selected Assetand Liability Price Tables as of December 31, 2005”.  Even if interest rates change in thedesignated amounts, there can be no assurance that the Company’s assets andliabilities would perform as set forth below.

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September 30, 2006

|                         |   |                            |   | Estimated Increase  (Decrease) in NPV |     |
|-------------------------|--------|---------------------------------|--------|---------------------------------------|----------|
| Change inInterest Rates |   | Estimated  NPVAmount            |   | Amount                                |     | Percent |   |
|                    |   |                            |   |                                  |     |   |   |
| Basis Points            |   | (Dollars  in thousands)         |   |
|                    |   |                            |   |
| +300                    |   |   $  86,907 |   | $                                     | (26,413) |   | (23)% |   |
| +200                    |   | 96,391                          |   | (16,929)                              |     | (15) |   |
| +100                    |   | 105,509                         |   | (7,811)                               |     | (7) |   |
| - - - -                 |   | 113,320                         |   | - - - -                               |     | - -  - - |   |
| -100                    |   | 117,771                         |   | 4,451                                 |     | 4 |   |
| -200                    |   | 119,032                         |   | 5,712                                 |     | 5 |   |
|                         |        |                                 |        |                                       |          |  |  |  |

 

December 31, 2005

|                           |   |                    |   | Estimated Increase  (Decrease) in NPV |   |
|---------------------------|--------|-------------------------|--------|---------------------------------------|--------|
| Change in  Interest Rates |   | Estimated  NPV Amount   |   | Amount                                |   | Percent |   |
|                      |   |                    |   |                                  |   |   |   |
| Basis Points              |   | (Dollars  in thousands) |   |
|                      |   |                    |   |
| +300                      |   | $                       | 90,630 |                                  | $      | (17,361) |   | (16)% |   |
| +200                      |   | 97,846                  |   | (10,145)                              |   | (9) |   |
| +100                      |   | 103,269                 |   | (4,722)                               |   | (4) |   |
| - - - -                   |   | 107,991                 |   | - - - -                               |   | - -  - - |   |
| -100                      |   | 110,442                 |   | (2,451)                               |   | 2 |   |
| -200                      |   | 107,618                 |   | (372)                                 |   | - -  - - |   |
|                      |   |                    |   |                                  |   |   |   |
|                           |        |                         |        |                                       |        |  |  |  |  |

 

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

**Item4.  Controls and Procedures**

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

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**PART II  – OTHER INFORMATION**

**Item 1.          Legal Proceedings**

On June 26, 2006,the Company filed a$3.8 million lawsuit against MetaBank and two individuals, J. Tyler Haahr and Daniel A. Nelson, for their role in a participation loan, alleging fraud,breach of fiduciary duty, conspiracy and negligentmisrepresentation.  These damages were the result of a failure by the leadbank to make disclosures regarding an investigation of the commercial customerby the Iowa Attorney General at the time the Bank agreed to an extension ofloan participation agreements.  Thedefendants denied all claims set forth in the lawsuit and no trial date has yetbeen set.  Legal proceedings arecurrently pending in the Second Judicial Circuit Court, Minnehaha County, SouthDakota.

In addition, the Company, the Bank and each of their subsidiaries are, from time totime, involved as plaintiff or defendant in various legal actions arising inthe normal course of their businesses. While the ultimate outcome of any such proceedings cannot be predictedwith certainty, it is generally the opinion of management, after consultationwith counsel representing the Bank and the Company in any such proceedings,that the resolution of any such proceedings should not have a material effecton the Company’s consolidated 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 riskfactors disclosed in Part 1, Item 1A “Risk Factors” in the Company’s AnnualReport on Form 10-K for Fiscal 2006.

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

The following table sets forth the purchases by theCompany of its common stock during the quarterly period ended December 31,2006.

|                                           | ** ** | **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** | ** ** |
| October 1 - 31, 2006                      |       | 0             |       | $0.00          |       | 0                       |       | 394,035                 |       |
| November 1 - 30, 2006 |       | 0             |       | $0.00          |       | 0                       |       | 394,035                 |       |
| December 1 - 31, 2006                     |       | 0             |       | $0.00          |       | 0                       |       | 394,035                 |       |
|                                      |       |          |       |           |       |                    |       |                    |       |
| 2nd Quarter Total                         |       | 0             |       | $0.00          |       | 0                       |       |                    |       |

 

TheCompany currently has in effect a stock buyback program, which was publicly announcedon April 24, 2006 and pursuant to which up to 10% of the common stock of theCompany that was outstanding on May 1, 2006, which equals 394,035 shares, maybe acquired through April 30, 2007.  Asof December 31, 2006, no shares of common stock have been purchased pursuant tothe program.

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**Item 4.          Submission of Matters to a Vote ofSecurity Holders**

Atthe Company’s Annual Meeting of Stockholders held on November 15, 2006 (the “AnnualMeeting”), the stockholders elected the two individuals nominated to serve asClass I directors until 2009 or until their respective successors are electedand qualified, as set forth in Proposal 1 in the Company’s Proxy Statementrelating to the Annual Meeting.  The twoindividuals elected, and the number of votes cast for, or withheld, withrespect to each of them, is as follows:

| Curtis J. Bernard |   | For: | 2,943,794 |   | Vote Withheld: |   | 447,337 |
|-------------------|--------|------|-----------|--------|----------------|--------|---------|
| Wm. G. Pederson   |   | For: | 2,941,873 |   | Vote Withheld: |   | 449,258 |

 

The following directorscontinue to serve on the Board of Directors following the Annual Meeting:  Curtis L. Hage, Christine E. Hamilton, RobertL. Hanson, Steven R. Sershen and Thomas L. Van Whye.

Additionally, thestockholders ratified the amendment of the Company’s 2002 Stock Option andIncentive Plan as set forth in Proposal 2 in the Company’s Proxy Statementrelating to the Annual Meeting.  Thenumber of votes cast for and against the amendment, together with abstentionsand non-votes, are as follows:

| For:       |   | 1,717,165 |
|------------|--------|-----------|
| Against:   |   | 548,556   |
| Abstain:   |   | 71,147    |
| Non-Votes: |   | 1,628,611 |

 

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**Item 6.          Exhibits**
| **Regulation S-K  Exhibit Number** | ** ** | **Document**                                                                                                                                 |
|------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1                               |       | Guarantee Agreement dated December 7, 2006 by and  between HF Financial Corp. and Wilmington Trust Company                                   |
| 10.2                               |       | Indenture Agreement dated December 7, 2006 by and  between HF Financial Corp. and Wilmington Trust Company                                   |
| 10.3                               |       | Redemption Agreement dated October 11, 2006 by and  between HF Financial Corp. and Wilmington Trust Company                                  |
| 31.1                               |       | Certification of Chairman, President and Chief  Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                  |
| 31.2                               |       | Certification of Executive Vice President, Chief  Financial Officer and Treasurer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 |
| 32.1                               |       | Certification of Chairman, President and Chief  Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                  |
| 32.2                               |       | Certification of Executive Vice President, Chief  Financial Officer and Treasurer Pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 |

 

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**HF FINANCIAL CORP.**

**FORM 10-Q****SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|        |               |                                          | HF Financial  Corp. |
|--------|--------------------|-----------------------------------------------|---------------------|
|   |               |                                          | (Registrant)        |
|   |               |                                          |
|   |               |                                          |                |
| Date:  | February 12,  2007 |                                          |                | By: |    /s/ Curtis L. Hage |
|   |               | Curtis L. Hage, Chairman, President           |
|   |               | And Chief Executive Officer                   |
|   |               | (Principal Executive Officer)                 |
|   |               |                                          |
| Date:  | February 12,  2007 |                                          |                | 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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**Indexto Exhibits**
| **Exhibit Number** |   |                                                                                                                                         |
|--------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------|
| ** **         |   |                                                                                                                                         |
| 10.1               |   | Guarantee Agreement dated December 7, 2006 by and  between HF Financial Corp. and Wilmington Trust Company                                   |
| 10.2               |   | Indenture Agreement dated December 7, 2006 by and  between HF Financial Corp. and Wilmington Trust Company                                   |
| 10.3               |   | Redemption Agreement dated October 11, 2006 by and  between HF Financial Corp. and Wilmington Trust Company                                  |
| 31.1               |   | Certification of Chairman, President and Chief  Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                  |
| 31.2               |   | Certification of Executive Vice President, Chief  Financial Officer and Treasurer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 |
| 32.1               |   | Certification of Chairman, President and Chief  Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                  |
| 32.2               |   | Certification of Executive Vice President, Chief  Financial Officer and Treasurer Pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 |

 

-Index-

----