** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C.  20549**

 

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**FORM 10-Q**

** **

**ý****  QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15 (d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the QuarterlyPeriod ended December 31, 2003**

 

**Commission File Number: 0-19972**

 

**HF FINANCIAL CORP.**

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

* *

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

* *

Indicate bycheck mark whether the registrant  (1)has filed all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes  ý  No  o

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act).  Yes  oNo  ý

 

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

 

Asof February 9, 2004 there were 3,583,207 issued and outstanding shares of theRegistrant’s Common Stock, with $.01 par value.

 

 

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**HF FINANCIAL CORP.**

 

**Form 10-Q**

** **

**Table of Contents**

 
| **PART I**  |
|-------------|
|        |   |   |
| Item 1.     | Financial  Statements (Unaudited): |   |
|        |   |   |
|        | Consolidated Statements of Financial  Condition  As of December 31, 2003 and June 30, 2003 |   |
|        |   |   |
|        | Consolidated Statements of Income for the  Three and Six Months Ended December 31, 2003 and 2002 |   |
|        |   |   |
|        | Consolidated Statements of Cash Flows for  the  Six Months Ended December 31, 2003 and 2002 |   |
|        |   |   |
|        | Notes to Consolidated Financial Statements |   |
|        |   |   |
| Item 2.     | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |   |
|        |   |   |
| Item 3.     | Quantitative and Qualitative Disclosures about Market Risk |   |
|        |   |   |
| Item 4.     | Disclosure Controls and Procedures |   |
|        |   |   |
| **PART II** |
|        |   |   |
| Item 1.     | Legal Proceedings |   |
|        |   |   |
| Item 2.     | Changes in Securities and Use of Proceeds |   |
|        |   |   |
| Item 3.     | Defaults upon Senior Securities |   |
|        |   |   |
| Item 4.     | Submission of Matters to a Vote of Security  Holders |   |
|        |   |   |
| Item 5.     | Other Information |   |
|        |   |   |
| Item 6.     | Exhibits and Reports on Form 8-K |   |
|        |   |   |
| Form 10-Q   | Signature Page |   |

 

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**HF FINANCIAL CORP. ANDSUBSIDIARIES**

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

**(Dollars in Thousands)**

 
|                                                                                                                                                     |   | **December 31, 2003** |    | **June 30, 2003** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|---------|-------------------|--------|
|                                                                                                                                                     |   | **(Unaudited)**       |    | **(Audited)**     |   |
| **ASSETS**                                                                                                                                               |   |                  |    |              |   |
| Cash  and cash equivalents                                                                                                                               |   | $                     | 27,571  |              | $      | 44,214 |   |
| Securities  available for sale                                                                                                                           |   | 99,074                |    | 88,527            |   |
| Federal  Home Loan Bank stock                                                                                                                            |   | 4,694                 |    | 7,025             |   |
| Loans  held for sale                                                                                                                                     |   | 10,612                |    | 15,984            |   |
| Loans  and leases receivable                                                                                                                             |   | 601,899               |    | 599,259           |   |
| Allowance  for loan and lease losses                                                                                                                     |   | (4,013                | )       | (3,842            | )      |
| Net  loans and leases receivable                                                                                                                         |   | 597,886               |    | 595,417           |   |
| Accrued  interest receivable                                                                                                                             |   | 4,114                 |    | 4,298             |   |
| Office  properties and equipment, net of accumulated depreciation                                                                                        |   | 12,757                |    | 13,138            |   |
| Foreclosed  real estate and other properties                                                                                                             |   | 1,597                 |    | 1,812             |   |
| Cash  value of life insurance                                                                                                                            |   | 11,805                |    | 11,432            |   |
| Servicing  rights                                                                                                                                        |   | 4,447                 |    | 4,003             |   |
| Goodwill,  net                                                                                                                                           |   | 4,951                 |    | 5,020             |   |
| Intangible  asset                                                                                                                                        |   | —                |    | 175               |   |
| Other  assets                                                                                                                                            |   | 9,030                 |    | 9,438             |   |
| Total  assets                                                                                                                                            |   | $                     | 788,538 |              | $      | 800,483 |   |
|                                                                                                                                                     |   |                  |    |              |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                            |   |                  |    |              |   |
| **LIABILITIES**                                                                                                                                          |   |                  |    |              |   |
| Deposits                                                                                                                                                 |   | $                     | 625,008 |              | $      | 621,381 |   |
| Advances  from Federal Home Loan Bank and other borrowings                                                                                               |   | 68,088                |    | 89,819            |   |
| Company  obligated mandatorily redeemable preferred securities of subsidiary trusts  that solely hold subordinated debentures                            |   | 27,000                |    | 20,000            |   |
| Advances  by borrowers for taxes and insurance                                                                                                           |   | 7,643                 |    | 7,901             |   |
| Accrued  expenses and other liabilities                                                                                                                  |   | 9,718                 |    | 12,024            |   |
| Total  liabilities                                                                                                                                       |   | 737,457               |    | 751,125           |   |
|                                                                                                                                                     |   |                  |    |              |   |
| **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, 5,308,441 and 5,252,535  shares issued at December 31, 2003 and June 30, 2003, respectively |   | 53                    |    | 49                |   |
| Common  stock subscribed for but not issued, 23,534 shares at June 30, 2003                                                                              |   | —                |    | 382               |   |
| Additional  paid-in capital                                                                                                                              |   | 17,318                |    | 16,527            |   |
| Retained  earnings, substantially restricted                                                                                                             |   | 59,793                |    | 57,967            |   |
| Deferred  compensation                                                                                                                                   |   | (605                  | )       | (733              | )      |
| Accumulated  other comprehensive income (loss), net of related deferred tax effect                                                                       |   | (948                  | )       | (735              | )      |
| Less  cost of treasury stock, 1,734,546 and 1,708,946 shares at December 31, 2003  and June 30, 2003, respectively                                       |   | (24,530               | )       | (24,099           | )      |
| Total  stockholders’ equity                                                                                                                         |   | 51,081                |    | 49,358            |   |
| Total  liabilities and stockholders’ equity                                                                                                         |   | $                     | 788,538 |              | $      | 800,483 |   |

 

*See accompanying notes to unaudited consolidated financialstatements.*

 

1

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**HF FINANCIAL CORP. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFINCOME**

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

**(Unaudited)**

 
|                                                                                 |   | **Three Months Ended  December 31,** |   | **Six Months Ended  December 31,** |   |
|--------------------------------------------------------------------------------------|--------|--------------------------------------|--------|------------------------------------|--------|
|                                                                                 |   | **2003**                             |   | **2002**                           |   | **2003** |   | **2002** |   |
| **Continuing operations:**                                                           |   |                                 |   |                               |   |   |   |   |   |
| Interest,  dividend and loan fee income:                                             |   |                                 |   |                               |   |   |   |   |   |
| Loans  and leases receivable                                                         |   | $                                    | 9,112  |                               | $      | 10,489 |   | $ | 18,718 |   | $ | 21,173 |   |
| Investment  securities and interest-bearing deposits                                 |   | 732                                  |   | 1,027                              |   | 1,410 |   | 2,032 |   |
|                                                                                 |   | 9,844                                |   | 11,516                             |   | 20,128 |   | 23,205 |   |
| Interest  expense:                                                                   |   |                                 |   |                               |   |   |   |   |   |
| Deposits                                                                             |   | 2,477                                |   | 3,332                              |   | 5,073 |   | 6,720 |   |
| Advances  from Federal Home Loan Bank and other borrowings                           |   | 1,247                                |   | 1,405                              |   | 2,566 |   | 2,788 |   |
|                                                                                 |   | 3,724                                |   | 4,737                              |   | 7,639 |   | 9,508 |   |
| **Net interest income**                                                              |   | 6,120                                |   | 6,779                              |   | 12,489 |   | 13,697 |   |
| Provision  for losses on loans and leases                                            |   | 634                                  |   | 449                                |   | 1,071 |   | 1,483 |   |
| **Net interest income after provision for losses on loans and  leases**              |   | 5,486                                |   | 6,330                              |   | 11,418 |   | 12,214 |   |
| Noninterest  income:                                                                 |   |                                 |   |                               |   |   |   |   |   |
| Fees  on deposits                                                                    |   | 1,057                                |   | 1,123                              |   | 2,129 |   | 2,206 |   |
| Loan  servicing income                                                               |   | 419                                  |   | 364                                |   | 838 |   | 768 |   |
| Gain  on sale of loans, net                                                          |   | 312                                  |   | 449                                |   | 834 |   | 666 |   |
| Gain  on sale of securities, net                                                     |   | 42                                   |   | —                             |   | 42 |   | 350 |   |
| Other                                                                                |   | 642                                  |   | 611                                |   | 1,439 |   | 1,143 |   |
|                                                                                 |   | 2,472                                |   | 2,547                              |   | 5,282 |   | 5,133 |   |
| Noninterest  expense:                                                                |   |                                 |   |                               |   |   |   |   |   |
| Compensation  and employee benefits                                                  |   | 3,539                                |   | 3,916                              |   | 7,851 |   | 7,720 |   |
| Occupancy  and equipment                                                             |   | 822                                  |   | 853                                |   | 1,636 |   | 1,674 |   |
| Other                                                                                |   | 1,555                                |   | 1,774                              |   | 3,163 |   | 3,288 |   |
|                                                                                 |   | 5,916                                |   | 6,543                              |   | 12,650 |   | 12,682 |   |
| **Income from continuing operations before income taxes**                            |   | 2,042                                |   | 2,334                              |   | 4,050 |   | 4,665 |   |
| Income  tax expense                                                                  |   | 773                                  |   | 790                                |   | 1,459 |   | 1,670 |   |
| **Income from continuing operations**                                                |   | 1,269                                |   | 1,544                              |   | 2,591 |   | 2,995 |   |
|                                                                                 |   |                                 |   |                               |   |   |   |   |   |
| **Discontinued operations:**                                                         |   |                                 |   |                               |   |   |   |   |   |
| Income  from operations of discontinued segment, net of income taxes of $54 and $100 |   | —                               |   | 105                                |   | — |   | 193 |   |
| (Loss)  on discontinued segment, net of income taxes of $(111) and $(126)            |   | —                               |   | (215                               | )      | — |   | (244 | ) |
| **Income from discontinued operations**                                              |   | —                               |   | (110                               | )      | — |   | (51 | ) |
| **Net Income**                                                                       |   | $                                    | 1,269  |                               | $      | 1,434 |   | $ | 2,591 |   | $ | 2,944 |   |
| **Comprehensive income**                                                             |   | $                                    | 1,135  |                               | $      | 1,290 |   | $ | 2,378 |   | $ | 2,525 |   |
| **Cash dividends paid per share (1)**                                                |   | $                                    | 0.1068 |                               | $      | 0.1045 |   | $ | 0.2136 |   | $ | 0.2091 |   |

 

*See accompanying notes to unaudited consolidated financialstatements.*

 

2

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|                                 |   | **Three Months Ended  December 31,** |   | **Six Months Ended  December 31,** |   |
|--------------------------------------|--------|--------------------------------------|--------|------------------------------------|--------|
|                                 |   | **2003**                             |   | **2002**                           |   | **2003** |   | **2002** |   |
|                                 |   |                                 |   |                               |   |   |   |   |   |
| **Basic earnings per share: (1)**    |   |                                 |   |                               |   |   |   |   |   |
| Income  from continuing operations   |   | $                                    | 0.35   |                               | $      | 0.42 |   | $ | 0.73 |   | $ | 0.82 |   |
| Income  from discontinued operations |   | —                               |   | (0.03                              | )      | — |   | (0.02 | ) |
| Net  income                          |   | $                                    | 0.35   |                               | $      | 0.39 |   | $ | 0.73 |   | $ | 0.80 |   |
|                                 |   |                                 |   |                               |   |   |   |   |   |
| **Diluted earnings per share: (1)**  |   |                                 |   |                               |   |   |   |   |   |
| Income  from continuing operations   |   | $                                    | 0.34   |                               | $      | 0.41 |   | $ | 0.70 |   | $ | 0.81 |   |
| Income  from discontinued operations |   | —                               |   | (0.03                              | )      | — |   | (0.02 | ) |
| Net  income                          |   | $                                    | 0.34   |                               | $      | 0.38 |   | $ | 0.70 |   | $ | 0.79 |   |

 

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

 

*See accompanying notes to unaudited consolidated financialstatements.*

 

3

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**HF FINANCIAL CORP. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(Dollars in Thousands)**

**(Unaudited)**

 
|                                                                                                                                   |   | **Six Months Ended December 31,** |   |
|----------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                                                                   |   | **2003**                          |   | **2002** |   |
| **Cash flows from operating activities**                                                                                               |   |                              |   |   |   |
| Net  income                                                                                                                            |   | $                                 | 2,591  |   | $ | 2,944 |   |
| Adjustments  to reconcile net income to net cash provided by (used in) operating  activities: Provision for losses on loans and leases |   | 1,071                             |   | 1,483 |   |
| Depreciation                                                                                                                           |   | 803                               |   | 824 |   |
| Amortization  of discounts and premiums                                                                                                |   |                              |   |   |   |
| on  securities and other                                                                                                               |   | 821                               |   | 656 |   |
| Stock  based compensation                                                                                                              |   | 170                               |   | 123 |   |
| Loans  originated for resale                                                                                                           |   | (85,199                           | )      | (72,926 | ) |
| Proceeds  from the sale of loans                                                                                                       |   | 91,405                            |   | 62,441 |   |
| (Gain)  on sale of loans, net                                                                                                          |   | (834                              | )      | (677 | ) |
| Realized  (gain) on sale of securities, net                                                                                            |   | (42                               | )      | (350 | ) |
| Losses  and provision for losses on sales of foreclosed real estate and other properties,  net                                         |   | 92                                |   | 70 |   |
| Loss  on disposal of office properties and equipment, net                                                                              |   | 1                                 |   | 20 |   |
| Change  in other assets and liabilities                                                                                                |   | (1,821                            | )      | (6,410 | ) |
| Net  cash provided by (used in) operating activities                                                                                   |   | 9,058                             |   | (11,802 | ) |
|                                                                                                                                   |   |                              |   |   |   |
| **Cash flows from investing activities**                                                                                               |   |                              |   |   |   |
| Loans  and leases purchased                                                                                                            |   | (2,186                            | )      | (172 | ) |
| Loans  and leases originated and held                                                                                                  |   | (101,701                          | )      | (126,692 | ) |
| Principal  collected on loans and leases                                                                                               |   | 100,346                           |   | 85,494 |   |
| Securities  available for sale:                                                                                                        |   |                              |   |   |   |
| Sales  and maturities and repayments                                                                                                   |   | 21,050                            |   | 32,851 |   |
| Purchases                                                                                                                              |   | (32,659                           | )      | (44,760 | ) |
| Purchase of Federal Home Loan Bank stock                                                                                               |   | (850                              | )      | (694 | ) |
| Redemption  of Federal Home Loan Bank stock                                                                                            |   | 3,181                             |   | — |   |
| Proceeds  from sale of office properties and equipment                                                                                 |   | —                            |   | 9 |   |
| Purchase  of office properties and equipment                                                                                           |   | (417                              | )      | (752 | ) |
| Purchase  of servicing rights                                                                                                          |   | (542                              | )      | (263 | ) |
| Proceeds  from sale of foreclosed real estate and other properties, net                                                                |   | 426                               |   | 455 |   |
| Net  cash (used in) investing activities                                                                                               |   | (13,352                           | )      | (54,524 | ) |
|                                                                                                                                        |        |                                   |        |  |  |  |  |

* *

*See accompanying notes tounaudited consolidated financial statements.*

 

4

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|                                                                   |   | **Six Months Ended December 31,** |   |
|------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                   |   | **2003**                          |   | **2002** |   |
|                                                                   |   |                              |   |   |   |
| **Cash flows from financing activities**                               |   |                              |   |   |   |
| Net  increase in deposit accounts                                      |   | $                                 | 3,627  |   | $ | 68,292 |   |
| Proceeds  of advances from Federal Home Loan Bank and other borrowings |   | 53,000                            |   | 473,250 |   |
| Payments  on advances from Federal Home Loan Bank and other borrowings |   | (74,731                           | )      | (471,537 | ) |
| Payment  of debt issue costs                                           |   | (158                              | )      | (300 | ) |
| Proceeds  from issuance of preferred securities                        |   | 7,000                             |   | 10,000 |   |
| Increase  (decrease) in advances by borrowers                          |   | (258                              | )      | 2,663 |   |
| Purchase  of treasury stock                                            |   | (431                              | )      | (783 | ) |
| Proceeds  from issuance of common stock                                |   | 367                               |   | — |   |
| Cash  dividends paid                                                   |   | (765                              | )      | (769 | ) |
| Net  cash provided by (used in) financing activities                   |   | (12,349                           | )      | 80,816 |   |
|                                                                   |   |                              |   |   |   |
| Increase  (decrease) in cash and cash equivalents                      |   | (16,643                           | )      | 14,490 |   |
|                                                                   |   |                              |   |   |   |
| Cash  and cash equivalents                                             |   |                              |   |   |   |
| Beginning                                                              |   | 44,214                            |   | 27,546 |   |
| Ending                                                                 |   | $                                 | 27,571 |   | $ | 42,036 |   |
|                                                                   |   |                              |   |   |   |
| Supplemental  Disclosures of Cash Flows Information                    |   |                              |   |   |   |
| Cash  payments for interest                                            |   | $                                 | 8,056  |   | $ | 9,732 |   |
| Cash  payments for income and franchise taxes, net                     |   | 259                               |   | 1,998 |   |
|                                                                   |   |                              |   |   |   |
| Supplemental  Schedule of Noncash Investing and Financing Activities   |   |                              |   |   |   |
| Loans  receivable reclassified as loans held for sale                  |   | $                                 | — |   | $ | 51,085 |   |
| Other  investments reclassified as cash and cash equivalents           |   | 98                                |   | — |   |
| Other  investments reclassified as other assets                        |   | 95                                |   | — |   |

 

*See accompanying notes tounaudited consolidated financial statements.*

 

5

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**HF FINANCIAL CORP.AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMEN****TS**

For The Three and Six Months EndedDecember 31, 2003 and 2002

(Unaudited)

 

**NOTE1.                SELECTED ACCOUNTINGPOLICIES**

 

*Basis of presentation:*

* *

Theconsolidated financial information of HF Financial Corp. (the “Company”) andits wholly-owned subsidiaries included in this Form 10-Q is unaudited.  However, in the opinion of management,adjustments (consisting of normal recurring adjustments) necessary for a fairpresentation for the interim periods have been included.  Results for any interim period are notnecessarily indicative of results to be expected for the year.  The accounting and reporting policies of theCompany and its subsidiaries conform to accounting principles generallyaccepted in the United States of America (“GAAP”) and to general practicewithin the industry.  

 

The interimconsolidated financial statements include the accounts of the Company, itswholly-owned subsidiaries, Home Federal Bank (the “Bank”), HF Financial CapitalTrust I (“Trust I”), HF Financial Capital Trust II (“Trust II”), HF FinancialCapital Trust III (“Trust III”), HF Financial Capital Trust IV (“Trust IV”),HomeFirst Mortgage Corp. (the “Mortgage Corp.”), HF Financial Group, Inc. (“HFGroup”), HF Card Services, LLC (“HF Card”), and the Bank’s wholly-ownedsubsidiaries, Mid America Capital Services, Inc. (“Mid America Leasing”), HomeFederal Securitization Corp. (“HFSC”), Hometown Insurors, Inc. (“Hometown”),Mid-America Service Corporation and PMD, Inc. During the third quarter of fiscal year 2003, the Company dissolved HFCard.  All intercompany balances andtransactions have been eliminated in consolidation.

 

Health claims accrual:  The Company has a self-insured health planfor its employees.  The accrual estimatefor pending and incurred but not reported health claims is based upon a currentpending lag report provided by a third party provider.  Although management believes that it usesthe best information available to determine the accrual, unforeseen healthclaims could result in adjustments and net earnings being significantlyaffected if circumstances differ substantially from the assumptions used inestimating the accrual.  

 

Stock-based compensation:  TheCompany accounts for stock-based compensation in accordance with AccountingPrinciples Board (“APB”) Opinion No. 25, “*Accountingfor Stock Issued to Employees”,*and related interpretations.  Accordingly, no stock-based employee compensationcost has been recognized for grants under the fixed stock option plans, as alloptions granted under those plans had an exercise price equal to the marketvalue of the underlying common stock on the date of grant.  These stock-based compensation plans aredescribed more fully in the Company’s Annual Report on Form 10-K for the fiscalyear ended June 30, 2003, under Note 18 of “Notes to Consolidated FinancialStatements.”

 

The followingtable illustrates the effect on net income and earnings per share if theCompany had applied the fair value recognition provisions of FinancialAccounting Standards Board (“FASB”) Statement No. 123, “*Accounting for Stock-Based Compensation”,*tostock-based employee compensation. 

 

6

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|                                                                                                                                         |   | **Three Months Ended December 31,**              |   | **Six Months Ended December 31,** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------|--------|----------------------------------------|--------|
|                                                                                                                                         |   | **2003**                                              |   | **2002**                               |   | **2003** |   | **2002** |   |
|                                                                                                                                         |   | **(Dollars in Thousands, Except for Per Share Data)** |   |
|                                                                                                                                         |   |                                                  |   |
| Net income, as reported                                                                                                                      |   | $                                                     | 1,269  |                                   | $      | 1,434 |   | $ | 2,591 |   | $ | 2,944 |   |
| Deduct total stock-based employee compensation  expense determined under fair value based method for all awards, net of  related tax effects |   | (35                                                   | )      | (34                                    | )      | (70 | ) | (68 | ) |
| Pro forma net income                                                                                                                         |   | $                                                     | 1,234  |                                   | $      | 1,400 |   | $ | 2,521 |   | $ | 2,876 |   |
| Basic earnings per share: (1)                                                                                                                |   |                                                  |   |                                   |   |   |   |   |   |
| As reported                                                                                                                                  |   | 0.35                                                  |   | 0.39                                   |   | $ | 0.73 |   | $ | 0.80 |   |
| Pro forma                                                                                                                                    |   | 0.34                                                  |   | 0.38                                   |   | 0.71 |   | 0.78 |   |
| Diluted earnings per share: (1)                                                                                                              |   |                                                  |   |                                   |   |   |   |   |   |
| As reported                                                                                                                                  |   | 0.34                                                  |   | 0.38                                   |   | $ | 0.70 |   | $ | 0.79 |   |
| Pro forma                                                                                                                                    |   | 0.33                                                  |   | 0.38                                   |   | 0.69 |   | 0.78 |   |

 

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

 

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

 

The following table setsforth the Bank’s compliance with its minimum capital requirements for a wellcapitalized institution at December 31, 2003:

 

|                    |   | **Amount**                 |   | **Percent** |   |
|-------------------------|--------|----------------------------|--------|-------------|--------|
|                    |   | **(Dollars in Thousands)** |   |
| Tier  I (core) capital: |   |                       |   |        |   |
| Required                |   | $                          | 39,080 |        | 5.00   | % |
| Actual                  |   | 68,087                     |   | 8.71        |   |
| Excess                  |   | 29,007                     |   | 3.71        |   |
| Risk-based  capital:    |   |                       |   |        |   |
| Required                |   | $                          | 64,344 |        | 10.00  | % |
| Actual                  |   | 68,206                     |   | 10.60       |   |
| Excess                  |   | 3,862                      |   | 0.60        |   |

 

**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) duringthe period.  Shares issued during theperiod and shares reacquired during the period are weighted for the portion ofthe period that they were outstanding. The weighted average number of basiccommon shares outstanding for the three month period ended December 31, 2003and 2002 was 3,582,667 and 3,664,571, respectively.

 

7

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The weighted average numberof basic common shares outstanding for the six month period endedDecember 31, 2003 and 2002 was 3,569,780 and 3,666,639, 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 options outstandinghad been exercised. The weighted average number of common and dilutivepotential common shares outstanding for the three month period endedDecember 31, 2003 and 2002 was 3,687,746 and 3,713,513, respectively.  The weighted average number of common anddilutive potential common shares outstanding for the six month period endedDecember 31, 2003 and 2002 was 3,677,444 and 3,704,687, respectively.

 

Allearnings per share data and number of common shares outstanding have beenretroactively adjusted for the 10% stock dividend paid on December 31,2003 to shareholders of record as of December 3, 2003.  See Note 5 of the “Notes to ConsolidatedFinancial Statements.”

 

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

 

On January 31, 2003,the Bank securitized and sold motor vehicle installment loans with principalbalances totaling $50.0 million for a gain of $308,000 through HFSC and HomeFederal Automobile Securitization Trust 2003-A (“Automobile SecuritizationTrust”).  As part of the salestransaction, the Bank retains servicing responsibilities.  In addition, the Bank retains the rights tocash flows remaining after investors in the Automobile Securitization Trusthave received their contractual payments and has pledged a $2.4 million reservefund to the Automobile Securitization Trust. These retained interests are subordinated to investors’ interests.  The investors and Automobile SecuritizationTrust have no recourse to the Bank’s other assets for failure of debtors to paywhen due.  The pass through rate toinvestors is 2.65%.

 

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

 

Key economic assumptionsused and the sensitivity of fair value of the retained interest as ofDecember 31, 2003 are as follows:

 
|                                       |   | **Retained  Interest**     |   | **Servicing  Rights** |   |
|--------------------------------------------|--------|----------------------------|--------|-----------------------|--------|
|                                       |   | **(Dollars in Thousands)** |   |
|                                       |   |                       |   |                  |   |
| Fair Value                                 |   | $                          | 3,064  |                  | $      | 120 |   |
| Weighted average life (in years)           |   | 2.98                       |   | 2.98                  |   |
| Prepayment speed (ABS annual rate):        |   | 21.60                      | %      | 21.60                 | %      |
| Impact on fair value of 10% adverse change |   | $                          | (30    | )                     | $      | (9 | ) |
| Impact on fair value of 20% adverse change |   | (68                        | )      | (17                   | )      |
| Credit losses (annual rate):               |   | 0.63                       | %      | 0.63                  | %      |
| Impact on fair value of 10% adverse change |   | $                          | (17    | )                     | $      | — |   |
| Impact on fair value of 20% adverse change |   | (33                        | )      | —                |   |
| Discount rate:                             |   | 11.43                      | %      | 10.00                 | %      |
| Impact on fair value of 10% adverse change |   | $                          | (33    | )                     | $      | (1 | ) |
| Impact on fair value of 20% adverse change |   | (66                        | )      | (2                    | )      |

 

8

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

 

**NOTE 5.****                                ****PAYMENT OF 10% STOCKDIVIDEND**

 

During the second quarter offiscal 2004, the Company declared a 1-1/10-for-1 stock split of all of thecommon stock of the Company outstanding, payable in the form of a 1/10-for-1stock dividend.  The 10% stock dividendwas paid on December 31, 2003 to shareholders of record as ofDecember 3, 2003.

 

**NOTE 6.**                                 **FASB STATEMENT NO. 91 ANDREGULATION S-X**

 

During the second quarter offiscal 2004, the Company completed a reclassification of its deferred loanorigination fees and other loan fees and costs.  This process was done upon a fuller interpretation of StatementNo. 91 as issued by the FASB and Regulation S-X (“Reg S-X”) as issued by theSecurities and Exchange Commission.  All periods presented have been revised in presentation to reflect thisreclassification and there was no change to net income or earnings per share asa result of this reclassification.  Thechange to net interest margin for the three months ended December 31, 2003was an increase of approximately 0.15% compared to an increase of approximately0.10% for the same period in the prior fiscal year as a result of thereclassification.  The change to netinterest margin for the six months ended December 31, 2003 was an increaseof approximately 0.13% compared to an increase of approximately 0.11% for thesame period in the prior fiscal year as a result of the reclassification.

 

The following table reflectsthe effects of the reclassification on the Company’s consolidated statements ofincome for the three and six months ended December 31, 2003 and 2002.

 
|                                                                   |   | **Three Months Ended  December 31,** |   | **Six Months Ended  December 31,** |   |
|------------------------------------------------------------------------|--------|-------------------------------------------|--------|-----------------------------------------|--------|
|                                                                   |   | **2003**                                  |   | **2002**                                |   | **2003** |   | **2002** |   |
|                                                                   |   | **(Dollars  in Thousands)**               |   |
| **Summary of FASB 91 and Reg S-X  Reclassification:**                  |   |                                      |   |                                    |   |   |   |   |   |
| Increase in interest on loans and leases  receivable                   |   | $                                         | 258    |                                    | $      | 192 |   | $ | 478 |   | $ | 375 |   |
| Decrease in loan fees, service charges and gain  on sale of loans, net |   | (427                                      | )      | (665                                    | )      | (1,149 | ) | (1,148 | ) |
| Decrease in compensation and employee benefits                         |   | 169                                       |   | 473                                     |   | 671 |   | 773 |   |
| **Net income change related to  above**                                |   | $                                         | — |                                    | $      | — |   | $ | — |   | $ | — |   |

 

 

**NOTE 7.****                                ****SEGMENT REPORTING**

 

Operating segments aredefined as components of an enterprise for which separate financial informationis available that is evaluated regularly by the chief operating decision makersin deciding how to allocate resources and in assessing performance.  The Company’s reportable segments are“banking”

 

9

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(including leasingactivities) and “other”.  The “banking”segment is conducted through the Bank and Mid America Leasing and the “other”segment is composed of smaller nonreportable segments, the Company andinter-segment eliminations.

 

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

 
| **Three Months Ended December 31, 2003**                 |   | **Banking**                |    | **Other** |   | **Total** |   |
|---------------------------------------------------------------|--------|----------------------------|---------|-----------|--------|-----------|--------|
|                                                          |   | **(Dollars in Thousands)** |    |
|                                                          |   |                       |    |      |   |      |   |
| Net interest income                                           |   | $                          | 6,863   |      | $      | (743      | )      | $ | 6,120 |   |
| Intersegment interest income                                  |   | (198                       | )       | 198       |   | —    |   |
| Provision for losses on loans and leases                      |   | (634                       | )       | —    |   | (634      | )      |
| Noninterest income                                            |   | 2,524                      |    | (52       | )      | 2,472     |   |
| Intersegment noninterest income                               |   | (100                       | )       | 100       |   | —    |   |
| Noninterest expense                                           |   | (5,696                     | )       | (220      | )      | (5,916    | )      |
| Intersegment noninterest expense                              |   | 2                          |    | (2        | )      | —    |   |
| Income (loss) from continuing operations before  income taxes |   | $                          | 2,761   |      | $      | (719      | )      | $ | 2,042 |   |
|                                                          |   |                       |    |      |   |      |   |
| Total assets at December 31, 2003                        |   | $                          | 785,935 |      | $      | 2,603     |   | $ | 788,538 |   |

 
| **Three Months Ended December 31, 2002**                 |   | **Banking**                |    | **Other** |   | **Total** |   |
|---------------------------------------------------------------|--------|----------------------------|---------|-----------|--------|-----------|--------|
|                                                          |   | **(Dollars in Thousands)** |    |
|                                                          |   |                       |    |      |   |      |   |
| Net interest income                                           |   | $                          | 7,484   |      | $      | (705      | )      | $ | 6,779 |   |
| Intersegment interest income                                  |   | (224                       | )       | 224       |   | —    |   |
| Provision for losses on loans and leases                      |   | (449                       | )       | —    |   | (449      | )      |
| Noninterest income                                            |   | 2,395                      |    | 152       |   | 2,547     |   |
| Intersegment noninterest income                               |   | (122                       | )       | 122       |   | —    |   |
| Noninterest expense                                           |   | (6,065                     | )       | (478      | )      | (6,543    | )      |
| Intersegment noninterest expense                              |   | —                     |    | —    |   | —    |   |
| Income (loss) from continuing operations before  income taxes |   | $                          | 3,019   |      | $      | (685      | )      | $ | 2,334 |   |
|                                                          |   |                       |    |      |   |      |   |
| Total assets at December 31, 2002                        |   | $                          | 802,784 |      | $      | 4,388     |   | $ | 807,172 |   |

 

10

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| **Six Months Ended December 31, 2003**                   |   | **Banking**                |    | **Other** |   | **Total** |   |
|---------------------------------------------------------------|--------|----------------------------|---------|-----------|--------|-----------|--------|
|                                                          |   | **(Dollars in Thousands)** |    |
|                                                          |   |                       |    |      |   |      |   |
| Net interest income                                           |   | $                          | 13,538  |      | $      | (1,049    | )      | $ | 12,489 |   |
| Intersegment interest income                                  |   | (404                       | )       | 404       |   | —    |   |
| Provision for losses on loans and leases                      |   | (1,071                     | )       | —    |   | (1,071    | )      |
| Noninterest income                                            |   | 5,288                      |    | (6        | )      | 5,282     |   |
| Intersegment noninterest income                               |   | (188                       | )       | 188       |   | —    |   |
| Noninterest expense                                           |   | (12,146                    | )       | (504      | )      | (12,650   | )      |
| Intersegment noninterest expense                              |   | 4                          |    | (4        | )      | —    |   |
| Income (loss) from continuing operations before  income taxes |   | $                          | 5,021   |      | $      | (971      | )      | $ | 4,050 |   |
|                                                          |   |                       |    |      |   |      |   |
| Total assets at December 31, 2003                        |   | $                          | 785,935 |      | $      | 2,603     |   | $ | 788,538 |   |

 
| **Six Months Ended December 31, 2002**                   |   | **Banking**                |    | **Other** |   | **Total** |   |
|---------------------------------------------------------------|--------|----------------------------|---------|-----------|--------|-----------|--------|
|                                                          |   | **(Dollars in Thousands)** |    |
|                                                          |   |                       |    |      |   |      |   |
| Net interest income                                           |   | $                          | 14,622  |      | $      | (925      | )      | $ | 13,697 |   |
| Intersegment interest income                                  |   | (465                       | )       | 465       |   | —    |   |
| Provision for losses on loans and leases                      |   | (1,483                     | )       | —    |   | (1,483    | )      |
| Noninterest income                                            |   | 4,842                      |    | 291       |   | 5,133     |   |
| Intersegment noninterest income                               |   | (212                       | )       | 212       |   | —    |   |
| Noninterest expense                                           |   | (11,875                    | )       | (807      | )      | (12,682   | )      |
| Intersegment noninterest expense                              |   | 1                          |    | (1        | )      | —    |   |
| Income (loss) from continuing operations before  income taxes |   | $                          | 5,430   |      | $      | (765      | )      | $ | 4,665 |   |
|                                                          |   |                       |    |      |   |      |   |
| Total assets at December 31, 2002                        |   | $                          | 802,784 |      | $      | 4,388     |   | $ | 807,172 |   |

 

11

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**ITEM 2. MANAGEMENT’S DISCUSSION****AND ANALYSIS OF FINANCIAL****CONDITION AND RESULTS OF OPERATIONS**

 

**General**

 

The Company is a financial services provider and, as such, has inherentrisks that must be managed in order to achieve net income.  Primary risks that affect net income includecredit risk, liquidity risk, operational risk, regulatory compliance risk andreputation risk.  The Company’s netincome is derived by managing net interest margin, the ability to collect feesfrom services provided, by controlling the costs of delivering services and themanagement of loan and lease losses. The primary source of revenues comes from the net interest margin, whichrepresents the difference between income on interest-earning assets (i.e. loansand investment securities) and expense on interest-bearing liabilities (i.e.deposits and borrowed funding).  The netinterest margin is affected by regulatory, economic and competitive factorsthat influence interest rates, loan demand and deposit flows.  Fees earned include charges for depositservices, trust services and loan services. Personnel costs are the primary expenses required to deliver theservices to customers.  Other costsinclude occupancy and equipment and general and administrative expenses.

 

**Forward-LookingStatements**

 

This Form 10-Q and otherreports issued by the Company, including reports filed with the Securities andExchange Commission, contain “forward-looking statements” that deal with futureresults, expectations, plans and performance. In addition, the Company’s management may make forward-looking statementsorally to the media, securities analysts, investors or others.  These forward-looking statements mightinclude one or more of the following:

 

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

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

•                  Forecastsof future economic performance.

•                  Descriptionsof assumptions underlying or relating to such matters.

 

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

 

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

 

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

 

12

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**Financial ConditionData**

 

At December 31, 2003, the Company had total assets of $788.5million, a decrease of $11.9 million from the level at June 30, 2003.  The decrease in assets was due primarily todecreases in cash and cash equivalents of $16.6 million, loans held for sale of$5.4 million and Federal Home Loan Bank (“FHLB”) stock of $2.3 million offsetby increases in securities available for sale of $10.5 million and net loansand leases receivable of $2.5 million. The decrease in liabilities of $13.7 million from June 30, 2003 toDecember 31, 2003 was due to decreases in advances from the FHLB and otherborrowings of $21.7 million and accrued expenses and other liabilities of $2.3million offset by an increase in the liability for company obligatedmandatorily redeemable preferred securities of $7.0 million and deposits of$3.6 million from the levels at June 30, 2003.  In addition, stockholders’ equity increased $1.7 million to $51.1million at December 31, 2003 from $49.4 million at June 30, 2003primarily due to net income of $2.6 million offset by cash dividends paid of$765,000.

 

The decrease in cash and cash equivalents of $16.6 million was dueprimarily to decreased liquidity. Federal funds sold decreased $8.0 million in part due to not renewingmaturing advances with the FHLB.  See“Liquidity and Capital Resources.”

 

The decrease in loans held for sale of $5.4 million was primarilyrelated to a $13.2 million decrease in mortgage loan closings duringDecember 2003 as compared to June 2003.  Mortgage loans held for sale decreased $9.1 million from $16.0million at June 30, 2003 to $6.9 million at December 31, 2003.  Offsetting the decrease in mortgage loansheld for sale was an increase in student loans held for sale in the amount of $3.7million at December 31, 2003. During the second quarter of fiscal 2004, the Company began classifyingits student loan portfolio as held for sale.

 

The net decrease in FHLB stock of $2.3 million was primarily the resultof the Company’s redemption of $3.2 million of stock, through the Bank, due toa FHLB capital structure change effective July 1, 2003.

 

The increase in securities available for sale of $10.5 million wasprimarily the result of purchases of $32.7 million exceeding sales, maturitiesand repayments of $21.1 million.  Thepurchases of $32.7 million included variable-rate, mortgage-backed securitiesof $29.3 million.  Included in the $21.1million of sales, maturities and repayments was approximately $15.1 million ofmortgage-backed securities principal repayments.  Variable-rate mortgage-backed securities comprise 69.9% of theCompany’s securities available for sale portfolio.

 

The increase in net loans and leases receivable of $2.5 million was dueprimarily to an increase in purchases and originations over sales, amortizationand repayments of principal.  Consumerindirect automobile loans increased $13.8 million over the levels atJune 30, 2003.  In the secondquarter of fiscal 2004, the Company sold approximately $5.0 million of studentloans to the Student Loan Finance Corporation.

 

Advances from the FHLB and other borrowings decreased $21.7 millionprimarily due to the Company’s repayment on two short-term notes with FirstTennessee Bank, NA totaling $4.0 million and maturing advances with the FHLB inthe amount of $5.4 million.  Inaddition, the Company made a repayment of $11.3 million on one long-term notewith the FHLB during the second quarter of fiscal 2004.

 

Accrued expenses and other liabilities decreased $2.3 million primarilydue to the decrease in balances of accrued compensation expenses of $594,000and collections due on loans sold to third parties of $1.3 million.

 

13

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The liability for company obligated mandatorily redeemable preferredsecurities increased $7.0 million due to the Company issuing additional trustpreferred securities through Trust IV during the first quarter of fiscal 2004.

 

The $3.6 million increase in deposits was primarily due to increases inmoney market accounts of $11.9 million and savings accounts of $6.1 millionoffset by decreases in out-of-market certificates of deposit of $7.8 millionand in-market certificates of deposits of $7.0 million.  Of the $6.1 million increase in savingsaccounts, a $4.9 million increase was attributable to an increase in publicfund money.  Of the $7.8 decrease inout-of-market certificates of deposit, a $702,000 million decrease wasattributable to public fund money and of the $7.0 million decrease in in-marketcertificates of deposit, a $1.4 million decrease was attributable to a declinein public fund money.

 

The following tables show the composition of the Company’s loan andlease portfolio and deposit accounts at the dates indicated.

 
|                              |   | **At December 31, 2003** |    | **At June 30, 2003**               |   |
|-----------------------------------|--------|-------------------------------|---------|-----------------------------------------|--------|
|                              |   | **Amount**                    |    | **Percent of  Loans in  Each Category** |   | **Amount** |   | **Percent of  Loans in  Each Category** |   |
|                              |   | **(Dollars in Thousands)**    |    |
|                              |   |                          |    |                                    |   |   |   |   |   |
| One-to four-family (1)            |   | $                             | 84,203  |                                    | 13.99  | % | $ | 83,722 |   | 13.97 | % |
| Commercial real estate            |   | 92,220                        |    | 15.32                                   | %      | 93,192 |   | 15.55 | % |
| Multi-family real estate          |   | 44,002                        |    | 7.31                                    | %      | 49,171 |   | 8.21 | % |
| Commercial business               |   | 112,093                       |    | 18.62                                   | %      | 113,406 |   | 18.93 | % |
| Equipment finance leases          |   | 23,082                        |    | 3.83                                    | %      | 23,070 |   | 3.85 | % |
| Consumer (2) (3)                  |   | 185,902                       |    | 30.89                                   | %      | 173,246 |   | 28.91 | % |
| Agricultural                      |   | 56,010                        |    | 9.31                                    | %      | 58,095 |   | 9.69 | % |
| Construction and development      |   | 4,387                         |    | 0.73                                    | %      | 5,357 |   | 0.89 | % |
| Total Loans and Leases Receivable |   | $                             | 601,899 |                                    | 100.00 | % | $ | 599,259 |   | 100.00 | % |

 

----

(1)            Excludes $6,909 and$15,984 loans held for sale at December 31, 2003 and June 30, 2003,respectively.

(2)            Includes mobilehome loans.

(3)            Excludes $3,703 and$0 student loans held for sale at December 31, 2003 and June 30,2003, respectively.

During the second quarter of fiscal 2004, theCompany began classifying its student loan portfolio as held for sale.

 
|                                  |   | **At December 31, 2003** |    | **At June 30, 2003**                  |   |
|---------------------------------------|--------|-------------------------------|---------|--------------------------------------------|--------|
|                                  |   | **Amount**                    |    | **Percent of  Deposits in  Each Category** |   | **Amount** |   | **Percent of  Deposits in  Each Category** |   |
|                                  |   | **(Dollars in Thousands)**    |    |
|                                  |   |                          |    |                                       |   |   |   |   |   |
| Noninterest bearing checking accounts |   | $                             | 69,005  |                                       | 11.04  | % | $ | 77,004 |   | 12.39 | % |
| Interest bearing accounts             |   | 52,164                        |    | 8.35                                       | %      | 43,699 |   | 7.03 | % |
| Money market accounts                 |   | 190,027                       |    | 30.40                                      | %      | 178,113 |   | 28.66 | % |
| Savings accounts                      |   | 60,548                        |    | 9.69                                       | %      | 54,462 |   | 8.77 | % |
| Certificates of deposit               |   | 253,264                       |    | 40.52                                      | %      | 268,103 |   | 43.15 | % |
| Total Deposits                        |   | $                             | 625,008 |                                       | 100.00 | % | $ | 621,381 |   | 100.00 | % |

 

14

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**Analysis of Net Interest Income**

 

Net interest income represents the difference between income oninterest-earning assets and expense on interest-bearing liabilities.  Net interest income depends upon the volumeof interest-earning assets and interest-bearing liabilities and the interestrates earned or paid on them.

 

*Average Balances, Interest Rates and Yields.*  The following table presents for the periodsindicated, the total dollar amount of interest income from averageinterest-earning assets and the resulting yields, as well as the interestexpense on average interest-bearing liabilities, expressed both in dollars andrates, and the net interest margin.  Thetable does not reflect any effect of income taxes.  All average balances are monthly average balances and include thebalances of nonaccruing loans.  Theyields and costs for the three months and six months ended December 31,2003 and 2002 include fees which are considered adjustments to yield.  Balances related to discontinued credit cardloan operations have been reclassified to non-interest earning assets for allperiods presented.

 

15

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|                                                                                                                           |   | **THREE MONTHS ENDED  DECEMBER 31,** |    |
|--------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|---------|
|                                                                                                                           |   | **2003**                                  |    | **2002** |   |
|                                                                                                                           |   | **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)                                                                                                |   | $                                         | 611,711 |   | $ | 9,112 |   | 5.91 | % | $ | 610,675 |   | $ | 10,489 |   | 6.81 | % |
| Investment securities (2) (3)                                                                                                  |   | 96,322                                    |    | 702 |   | 2.89 | % | 99,537 |   | 976 |   | 3.89 | % |
| FHLB stock                                                                                                                     |   | 4,540                                     |    | 30 |   | 2.62 | % | 6,332 |   | 51 |   | 3.20 | % |
|                                                                                                                           |   |                                      |    |   |   |   |   |   |   |   |   |   |   |
| Total interest-earning assets                                                                                                  |   | $                                         | 712,573 |   | $ | 9,844 |   | 5.48 | % | $ | 716,544 |   | $ | 11,516 |   | 6.38 | % |
| Noninterest-earning assets                                                                                                     |   | 61,490                                    |    |   |   |   |   | 55,941 |   |   |   |   |   |
| Total assets                                                                                                                   |   | $                                         | 774,063 |   |   |   |   |   | $ | 772,485 |   |   |   |   |   |
|                                                                                                                           |   |                                      |    |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                                                                                                  |   |                                      |    |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                                                                                      |   |                                      |    |   |   |   |   |   |   |   |   |   |   |
| Checking and money market                                                                                                      |   | $                                         | 227,132 |   | $ | 631 |   | 1.10 | % | $ | 191,148 |   | $ | 673 |   | 1.40 | % |
| Savings                                                                                                                        |   | 47,098                                    |    | 67 |   | 0.56 | % | 34,052 |   | 61 |   | 0.71 | % |
| Certificates of deposit                                                                                                        |   | 257,301                                   |    | 1,779 |   | 2.74 | % | 295,611 |   | 2,598 |   | 3.49 | % |
| Total interest-bearing deposits                                                                                                |   | $                                         | 531,531 |   | $ | 2,477 |   | 1.85 | % | $ | 520,811 |   | $ | 3,332 |   | 2.54 | % |
| FHLB advances and other borrowings                                                                                             |   | 77,051                                    |    | 921 |   | 4.74 | % | 107,059 |   | 1,189 |   | 4.41 | % |
| Company obligated mandatorily redeemable  preferred securities of subsidiary trusts that solely holds subordinated  debentures |   | 27,000                                    |    | 326 |   | 4.79 | % | 16,753 |   | 216 |   | 5.12 | % |
|                                                                                                                           |   |                                      |    |   |   |   |   |   |   |   |   |   |   |
| Total interest-bearing liabilities                                                                                             |   | $                                         | 635,582 |   | $ | 3,724 |   | 2.32 | % | $ | 644,623 |   | $ | 4,737 |   | 2.93 | % |
| Noninterest-bearing deposits                                                                                                   |   | 66,685                                    |    |   |   |   |   | 58,556 |   |   |   |   |   |
| Other liabilities                                                                                                              |   | 21,020                                    |    |   |   |   |   | 19,791 |   |   |   |   |   |
| Total liabilities                                                                                                              |   | $                                         | 723,287 |   |   |   |   |   | $ | 722,970 |   |   |   |   |   |
| Equity                                                                                                                         |   | 50,776                                    |    |   |   |   |   | 49,515 |   |   |   |   |   |
| Total liabilities and equity                                                                                                   |   | $                                         | 774,063 |   |   |   |   |   | $ | 772,485 |   |   |   |   |   |
|                                                                                                                           |   |                                      |    |   |   |   |   |   |   |   |   |   |   |
| Net interest income; interest rate spread (4)                                                                             |   |                                      |    | $ | 6,120 |   | 3.16 | % |   |   | $ | 6,779 |   | 3.45 | % |
|                                                                                                                           |   |                                      |    |   |   |   |   |   |   |   |   |   |   |
| Net interest margin (4) (5)                                                                                                    |   |                                      |    |   |   | 3.41 | % |   |   |   |   | 3.75 | % |

 

----

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

(2)            Includes federalfunds sold.

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

(4)            Percentages for thethree months ended December 31, 2003 and December 31, 2002 have beenannualized.

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

 

16

----

 
|                                                                                                                          |   | **SIX MONTHS ENDED  DECEMBER 31,** |    |
|-------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|---------|
|                                                                                                                          |   | **2003**                                |    | **2002** |   |
|                                                                                                                          |   | **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)                                                                                               |   | $                                       | 617,622 |   | $ | 18,718 |   | 6.01 | % | $ | 596,240 |   | $ | 21,173 |   | 7.04 | % |
| Investment securities (2) (3)                                                                                                 |   | 95,403                                  |    | 1,345 |   | 2.80 | % | 93,489 |   | 1,933 |   | 4.10 | % |
| FHLB stock                                                                                                                    |   | 4,610                                   |    | 65 |   | 2.80 | % | 6,683 |   | 99 |   | 2.94 | % |
|                                                                                                                          |   |                                    |    |   |   |   |   |   |   |   |   |   |   |
| Total interest-earning assets                                                                                                 |   | 717,635                                 |    | $ | 20,128 |   | 5.56 | % | 696,412 |   | $ | 23,205 |   | 6.61 | % |
| Noninterest-earning assets                                                                                                    |   | 60,892                                  |    |   |   |   |   | 51,699 |   |   |   |   |   |
| Total assets                                                                                                                  |   | $                                       | 778,527 |   |   |   |   |   | $ | 748,111 |   |   |   |   |   |
|                                                                                                                          |   |                                    |    |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                                                                                                 |   |                                    |    |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                                                                                     |   |                                    |    |   |   |   |   |   |   |   |   |   |   |
| Checking and money market                                                                                                     |   | $                                       | 226,195 |   | $ | 1,262 |   | 1.11 | % | $ | 190,449 |   | $ | 1,412 |   | 1.47 | % |
| Savings                                                                                                                       |   | 47,141                                  |    | 137 |   | 0.58 | % | 37,402 |   | 162 |   | 0.86 | % |
| Certificates of deposit                                                                                                       |   | 260,874                                 |    | 3,674 |   | 2.79 | % | 274,752 |   | 5,146 |   | 3.72 | % |
| Total interest-bearing deposits                                                                                               |   | 534,210                                 |    | 5,073 |   | 1.88 | % | 502,603 |   | 6,720 |   | 2.65 | % |
| FHLB advances and other borrowings                                                                                            |   | 81,653                                  |    | 1,989 |   | 4.83 | % | 105,715 |   | 2,374 |   | 4.45 | % |
| Company obligated mandatorily redeemable  preferred securities of subsidiary trusts that solely hold subordinated  debentures |   | 24,000                                  |    | 577 |   | 4.77 | % | 15,465 |   | 414 |   | 5.31 | % |
| Total interest-bearing liabilities                                                                                            |   | 639,863                                 |    | 7,639 |   | 2.37 | % | 623,783 |   | 9,508 |   | 3.02 | % |
| Noninterest-bearing deposits                                                                                                  |   | 68,107                                  |    |   |   |   |   | 55,734 |   |   |   |   |   |
| Other liabilities                                                                                                             |   | 20,316                                  |    |   |   |   |   | 19,212 |   |   |   |   |   |
| Total liabilities                                                                                                             |   | 728,286                                 |    |   |   |   |   | 698,729 |   |   |   |   |   |
| Equity                                                                                                                        |   | 50,241                                  |    |   |   |   |   | 49,382 |   |   |   |   |   |
| Total liabilities and equity                                                                                                  |   | $                                       | 778,527 |   |   |   |   |   | $ | 748,111 |   |   |   |   |   |
|                                                                                                                          |   |                                    |    |   |   |   |   |   |   |   |   |   |   |
| Net interest income; interest rate  spread (4)                                                                           |   |                                    |    | $ | 12,489 |   | 3.19 | % |   |   | $ | 13,697 |   | 3.59 | % |
|                                                                                                                          |   |                                    |    |   |   |   |   |   |   |   |   |   |   |
| Net interest margin (4) (5)                                                                                                   |   |                                    |    |   |   | 3.45 | % |   |   |   |   | 3.90 | % |

 

----

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

(2)            Includes federalfunds sold.

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

(4)            Percentages for thesix months ended December 31, 2003 and December 31, 2002 have beenannualized.

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

 

17

----

 

**Rate/Volume Analysisof Net Interest Income**

 

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

 
|                                                                                                                          |   | **Three Months Ended  December 31,  2003 vs 2002** |       | **Six Months Ended  December 31,  2003 vs 2002** |   |
|-------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------|------------|-------------------------------------------------------|--------|
|                                                                                                                          |   | **Increase  (Decrease)  Due to  Volume**                |       | **Increase  (Decrease)  Due to  Rate**                |   | **Total  Increase  (Decrease)** |   | **Increase  (Decrease)  Due to  Volume** |   | **Increase  (Decrease)  Due to  Rate** |   | **Total  Increase  (Decrease)** |   |
|                                                                                                                          |   | **(Dollars in Thousands)**                              | ** ** |
| Interest-earning assets:                                                                                                      |   |                                                    |       |                                                  |   |   |   |   |   |   |   |   |   |
| Loans and leases receivable (1)                                                                                               |   | $                                                       | 18         |                                                  | $      | (1,395 | ) | $ | (1,377 | ) | $ | 759 |   | $ | (3,214 | ) | $ | (2,455 | ) |
| Other investment securities (2)                                                                                               |   | (32                                                     | )          | (242                                                  | )      | (274 | ) | 40 |   | (628 | ) | (588 | ) |
| FHLB stock                                                                                                                    |   | (13                                                     | )          | (8                                                    | )      | (21 | ) | (31 | ) | (3 | ) | (34 | ) |
|                                                                                                                          |   |                                                    |       |                                                  |   |   |   |   |   |   |   |   |   |
| Total interest-earning assets                                                                                                 |   | $                                                       | (27        | )                                                     | $      | (1,645 | ) | $ | (1,672 | ) | $ | 768 |   | $ | (3,845 | ) | $ | (3,077 | ) |
|                                                                                                                          |   |                                                    |       |                                                  |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                                                                                                 |   |                                                    |       |                                                  |   |   |   |   |   |   |   |   |   |
| Deposits:                                                                                                                     |   |                                                    |       |                                                  |   |   |   |   |   |   |   |   |   |
| Checking and money market                                                                                                     |   | $                                                       | 127        |                                                  | $      | (169 | ) | $ | (42 | ) | $ | 265 |   | $ | (415 | ) | $ | (150 | ) |
| Savings                                                                                                                       |   | 23                                                      |       | (17                                                   | )      | 6 |   | 42 |   | (67 | ) | (25 | ) |
| Certificates of deposit                                                                                                       |   | (337                                                    | )          | (482                                                  | )      | (819 | ) | (260 | ) | (1,212 | ) | (1,472 | ) |
| Total interest-bearing deposits                                                                                               |   | (187                                                    | )          | (668                                                  | )      | (855 | ) | 47 |   | (1,694 | ) | (1,647 | ) |
| FHLB advances and other borrowings                                                                                            |   | (333                                                    | )          | 65                                                    |   | (268 | ) | (540 | ) | 155 |   | (385 | ) |
| Company obligated mandatorily redeemable  preferred securities of subsidiary trusts that solely hold subordinated  debentures |   | 132                                                     |       | (22                                                   | )      | 110 |   | 228 |   | (65 | ) | 163 |   |
|                                                                                                                          |   |                                                    |       |                                                  |   |   |   |   |   |   |   |   |   |
| Total interest-bearing liabilities                                                                                            |   | $                                                       | (388       | )                                                     | $      | (625 | ) | $ | (1,013 | ) | $ | (265 | ) | $ | (1,604 | ) | $ | (1,869 | ) |
|                                                                                                                          |   |                                                    |       |                                                  |   |   |   |   |   |   |   |   |   |
| Net interest income                                                                                                           |   |                                                    |       |                                                  |   | $ | (659 | ) |   |   |   |   | $ | (1,208 | ) |

 

----

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

(2)            Includes federalfunds sold.

 

18

----

 

**Application ofCritical Accounting Policies**

 

GAAP requires management to utilize estimates when reporting financialresults.  The Company has identified thepolicies discussed 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 setaside reserves or maintain an allowance against probable loan and lease lossesin the loan and lease portfolio. Management must develop a consistent and systematic approach to estimatethe appropriate balances that will cover the probable losses.  Due to the uncertainty of future events, theapproach includes a process that may differ significantly from othermethodologies and still produce an estimate that is in accordance with GAAP.

 

The allowance is compiled by utilizing the Company’s loan risk ratingsystem which is structured to identify weaknesses in the loan portfolio.  The risk rating system has evolved to aprocess whereby management believes the system will properly identify thecredit risk associated with the loan portfolio.  Due to the stratification of loans for the allowance calculation,the estimate of the allowance for loan and lease losses could change materiallyif the loan risk rating system would not properly identify the strength of alarge or a few large loan customers. Although management believes that it uses the best information availableto determine the allowance, unforeseen market or borrower conditions couldresult in adjustments and net earnings being significantly affected ifcircumstances differ substantially from the assumptions used in making thefinal determinations.

 

Mortgage Servicing Rights (“MSR”) – The Company records a servicingasset for contractually separated servicing from the underlying mortgageloans.  The asset is initially recordedat fair value and represents an intangible asset backed by an income streamfrom the serviced assets.  The asset isamortized in proportion to and over the period of estimated net servicingincome.

 

At each balance sheet date, the MSRs areanalyzed for impairment which occurs when the fair value of the MSRs is lowerthan the amortized book value. The Company’s MSRs are primarily servicingrights acquired on South Dakota Housing Development Authority first time homebuyers program.  Due to the lack ofquoted markets for the Company’s servicing portfolio, the Company estimates thefair value of the MSRs using present value of future cash flow analysis.  If the analysis produces a fair value thatis greater than or equal to the amortized book value of the MSRs, no impairmentis recognized.  If the fair value isless than the book value, an expense for the difference is charged to earningsby initiating a MSR valuation account. If the Company determines this impairment is temporary, any futurechanges in fair value are recorded as a change in earnings and thevaluation.  If the Company determinesthe impairment to be permanent, the valuation is written off against the MSRswhich results in a new amortized balance.

 

Due to the substantial decline in interestrates over the last fiscal year, the Company has included MSRs as a critical accountingpolicy because the use of estimates for determining fair value using presentvalue concepts may produce results which may significantly differ from otherfair value analysis perhaps even to the point of recording impairment.  The risk to earnings is when the underlyingmortgages payoff significantly faster than the assumptions used in thepreviously recorded amortization. Estimating future cash flows on the underlying mortgages is a difficultanalysis and requires judgment based on the best information available.  The Company looks at alternative assumptionsand projections when preparing a reasonable and supportable analysis.  Based on the Company’s analysis of MSRs atquarter-end, there is no impairment to the MSRs.

 

19

----

 

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

 

**Asset Quality andPotential Problem Loans**

 

When a borrowerfails to make a required payment on real estate secured loans within 10 to 15days after the payment is due, the Bank generally institutes collectionprocedures by issuing a late notice. The customer is contacted again when the payment is 30 days pastdue.  In the case of consumer loans, theborrower is sent a notice when a loan is 10 days past due and is contacted bytelephone when a loan is 30 days past due.  In most cases, delinquencies are cured promptly; however, if aloan has been delinquent for more than 30 days, the Bank attempts additionalwritten as well as verbal contacts and, if necessary, personal contact with theborrower in order to determine the reason for the delinquency and to effect acure, and, where appropriate, reviews the condition of the property and thefinancial circumstances of the borrower. Based upon the results of any such investigation, the Bank may: (i)accept a repayment program which under appropriate circumstances could involvean extension in the case of consumer loans for the arrearage from the borrower,(ii) seek evidence, in the form of a listing contract, of efforts by theborrower to sell the property if the borrower has stated that he is attemptingto sell, or (iii) initiate foreclosure proceedings. When a loan payment isdelinquent for 90 days, the Bank generally will initiate foreclosureproceedings unless management is satisfied the credit problem is correctable.

 

Loans are generally classified as nonaccrual when there are reasonabledoubts as to the collectibility of principal and/or interest and/or whenpayment becomes 90 days past due, except loans which are well secured and inthe process of collection.  Interest collectionson nonaccrual loans, for which the ultimate collectibility of principal isuncertain, are applied as principal reductions.

 

Nonperforming assets (nonaccrual loans and leases, accruing loans andleases delinquent more than 90 days and foreclosed assets) decreased to $4.9million at December 31, 2003 from $6.2 million at June 30, 2003, adecrease of $1.3 million, or 21.0%.  Inaddition, the ratio of nonperforming assets to total assets, which is one indicatorof credit risk exposure, decreased to 0.63% at December 31, 2003 ascompared to 0.77% at June 30, 2003. The decrease in the ratio of nonperforming assets to total assets atDecember 31, 2003 as compared to June 30, 2003 was due to the decreasein nonperforming assets of $1.3 million. In addition, asset quality continues to improve in part due tosignificant impaired loan credit resolution and the Company’s conservativeunderwriting on new loan production.

 

Nonaccruing loans and leases decreased 4.5% or $200,000 to $4.2 millionat December 31, 2003 compared to $4.4 million at June 30, 2003.  Included in nonaccruing loans and leases atDecember 31, 2003 were three loans totaling $95,000 secured by one- tofour-family real estate, five loans totaling $1.3 million secured by commercialreal estate, ten commercial business loans totaling $691,000, three equipmentfinance leases totaling $186,000, two agricultural loans totaling $1.4 millionand thirty-three consumer loans totaling $555,000.  Nonaccruing commercial real estate loans increased $970,000 atDecember 31, 2003 from the levels at June 30, 2003 as the result ofone purchased participation loan in the amount of $976,000 that is experiencingfinancial difficulties.  Managementplaced the commercial participation loan on nonaccrual at December 31,2003 with specific reserve set up in the amount of $20,000.  This loan is included in the Company’s $2.3million of classified participation loan purchases described below.  Nonaccruing agricultural loans decreased$1.1 million primarily as a result of payoffs and paydowns on loans classifiedas nonaccrual at June 30, 2003.

 

The Company’s nonperforming loans and leases, which representnonaccrual and past due 90 days and still accruing, have decreased $1.0 millionor 17.2% from the levels at June 30, 2003.  The risk rating system

 

20

----

 

in place is designed to identify and manage the nonperforming loans andleases.  Commercial and agriculturalloans and equipment finance leases will have specific reserve allocations basedon collateral values or based on the present value of expected cash flows ifthe loans and leases are deemed impaired. Loans and leases that are not performing do not necessarily result in aloss.

 

The Company continues to liquidate a significant impaired loan.  The specific reserve on this loan wasincreased to $808,000 during the second quarter of fiscal 2004 based on changesin commodity prices.  The specific reserveon this loan was $808,000 at December 31, 2003, $714,000 at June 30,2003 and $500,000 at December 31, 2002. The liquidation is expected to be finalized over the next few months.

 

As of December 31, 2003, the Company had $120,000 of foreclosedassets.  The balance of foreclosedassets at December 31, 2003 consisted of $72,000 in consumer collateraland $48,000 in single-family residences. The Company did not have any foreclosed assets secured by mobile homeloans at December 31, 2003.

 

At December 31, 2003, the Company had criticized $5.1 million ofits assets as special mention and classified $9.6 million of its assets thatmanagement has determined need to be closely monitored because of possiblecredit problems of the borrowers or the cash flows of the securedproperties.  At December 31, 2003the Company had $49.4 million in multi-family, commercial business, commercialreal estate and agricultural participation loans purchased, of which $2.3million or 4.7%, were included in the Company’s $9.6 million of classifiedassets.  Other potential problem loansand leases are included in criticized and classified assets.  Criticized and classified loans and leaseswere considered in determining the adequacy of the allowance for loan and leaselosses.  The allowance for loan andlease losses is established based on management’s evaluation of the risksprobable in the loan and lease portfolio and changes in the nature and volumeof loan and lease activity.  Suchevaluation, which includes a review of all loans and leases for which fullcollectability may not be reasonably assured, considers the estimated fairmarket value of the underlying collateral, present value of expected principaland interest payments, economic conditions, historical loss experience andother factors that warrant recognition in providing for an adequate loan and leaseloss allowance.

 

Although the Company’s management believes that the December 31,2003 recorded allowance for loan and lease losses was adequate to provide forprobable losses on the related loans and leases, there can be no assurance thatthe allowance existing at December 31, 2003 will be adequate in thefuture.

 

21

----

 

In accordance with the Company’s internal classification of assetspolicy, 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 areplaced on nonaccrual status when the collection of principal and/or interestbecome doubtful.  Foreclosed assetsinclude assets acquired in settlement of loans.  The following table sets forth the amounts and categories of theCompany’s nonperforming assets from continuing operations for the periodsindicated.

 
|                                                                   |   | **Nonperforming Assets As Of** |   |
|------------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                                   |   | **December 31,  2003**    |   | **June 30,  2003** |   |
|                                                                   |   | **(Dollars  in Thousands)**    |   |
| Nonaccruing loans and leases:                                          |   |                           |   |   |   |
| One- to four-family                                                    |   | $                              | 95     |   | $ | 103 |   |
| Commercial real estate                                                 |   | 1,280                          |   | 310 |   |
| Commercial business                                                    |   | 691                            |   | 472 |   |
| Equipment finance leases                                               |   | 186                            |   | 30 |   |
| Consumer (1)                                                           |   | 555                            |   | 909 |   |
| Agricultural                                                           |   | 1,389                          |   | 2,541 |   |
| Total                                                                  |   | 4,196                          |   | 4,365 |   |
|                                                                   |   |                           |   |   |   |
| Accruing loans and leases delinquent more than 90  days:               |   |                           |   |   |   |
| One- to four-family                                                    |   | 170                            |   | 330 |   |
| Commercial real estate                                                 |   | 97                             |   | 42 |   |
| Commercial business                                                    |   | 21                             |   | 779 |   |
| Equipment finance leases                                               |   | 155                            |   | 313 |   |
| Consumer                                                               |   | 26                             |   | 2 |   |
| Agricultural                                                           |   | 158                            |   | — |   |
| Total                                                                  |   | 627                            |   | 1,466 |   |
|                                                                   |   |                           |   |   |   |
| Foreclosed assets: (2)                                                 |   |                           |   |   |   |
| One- to four-family                                                    |   | 48                             |   | 258 |   |
| Consumer                                                               |   | 72                             |   | 77 |   |
| Total                                                                  |   | 120                            |   | 335 |   |
|                                                                   |   |                           |   |   |   |
| Total nonperforming assets                                             |   | $                              | 4,943  |   | $ | 6,166 |   |
|                                                                   |   |                           |   |   |   |
| Ratio of nonperforming assets to total assets                          |   | 0.63                           | %      | 0.77 | % |
|                                                                   |   |                           |   |   |   |
| Ratio of nonperforming loans and leases to total  loans and leases (3) |   | 0.79                           | %      | 0.95 | % |

 

----

(1)            Includes mobilehome loans.

(2)            Total foreclosedassets do not include land or other real estate owned held for sale.

(3)            Nonperforming loansand leases include both nonaccruing and accruing loans and leases delinquentmore than 90 days.

 

22

----

 

The followingtable sets forth information with respect to activity in the Company’sallowance for loan and lease losses from continuing operations during theperiods indicated.  Balances related todiscontinued credit card loan operations have been eliminated for all periodspresented.

 
|                                                                                                      |   | **Six Months Ended  December 31,** |   |
|-----------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|--------|
|                                                                                                      |   | **2003**                                |   | **2002** |   |
|                                                                                                      |   | **(Dollars in Thousands)**              |   |
|                                                                                                      |   |                                    |   |   |   |
| Balance at beginning of period                                                                            |   | $                                       | 3,842  |   | $ | 4,461 |   |
| Charge-offs:                                                                                              |   |                                    |   |   |   |
| One- to four-family                                                                                       |   | (6                                      | )      | (7 | ) |
| Commercial real estate                                                                                    |   | (16                                     | )      | — |   |
| Commercial business                                                                                       |   | (339                                    | )      | (772 | ) |
| Equipment finance leases                                                                                  |   | (23                                     | )      | (35 | ) |
| Consumer (1)                                                                                              |   | (677                                    | )      | (593 | ) |
| Total charge-offs                                                                                         |   | (1,061                                  | )      | (1,407 | ) |
|                                                                                                      |   |                                    |   |   |   |
| Recoveries:                                                                                               |   |                                    |   |   |   |
| One- to four-family                                                                                       |   | 4                                       |   | — |   |
| Commercial business                                                                                       |   | 2                                       |   | 2 |   |
| Equipment finance leases                                                                                  |   | 54                                      |   | 6 |   |
| Consumer (1)                                                                                              |   | 101                                     |   | 177 |   |
| Total recoveries                                                                                          |   | 161                                     |   | 185 |   |
|                                                                                                      |   |                                    |   |   |   |
| Net (charge-offs)                                                                                         |   | (900                                    | )      | (1,222 | ) |
|                                                                                                      |   |                                    |   |   |   |
| Additions charged to operations                                                                           |   | 1,071                                   |   | 1,483 |   |
|                                                                                                      |   |                                    |   |   |   |
| Balance at end of period                                                                                  |   | $                                       | 4,013  |   | $ | 4,722 |   |
|                                                                                                      |   |                                    |   |   |   |
| Ratio of net (charge-offs) during the period to  average loans and leases outstanding during the period   |   | (0.15                                   | )%     | (0.20 | )% |
|                                                                                                      |   |                                    |   |   |   |
| Ratio of allowance for loan and lease losses to  total loans and leases at end of period                  |   | 0.66                                    | %      | 0.76 | % |
|                                                                                                      |   |                                    |   |   |   |
| Ratio of allowance for loan and lease losses to  nonperforming loans and leases at end of period (2) |   | 83.21                                   | %      | 51.14 | % |
|                                                                                                           |        |                                         |        |  |  |  |  |  |

 

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(1)            Includes mobilehome loans.

(2)            Nonperforming loansand leases include both nonaccruing and accruing loans and leases delinquentmore than 90 days.

 

23

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Thedistribution of the Company’s allowance for loan and lease losses and impairedloss summary at the dates indicated are summarized in the followingtables.  The combination of FASB 5 andFASB 114 calculations comprise the Company’s allowance for loan and leaselosses.

 
|                     |   | **FASB 5  Allowance  for loan and  lease losses** |   | **FASB 114  Impaired Loan  Valuation  Allowance** |   | **FASB 5  Allowance  for loan and  lease losses** |   | **FASB 114  Impaired Loan  Valuation  Allowance** |   |
|--------------------------|--------|---------------------------------------------------|--------|---------------------------------------------------|--------|---------------------------------------------------|--------|---------------------------------------------------|--------|
| **Loan Type**            |   | **At December 31, 2003**                     |   | **At June 30, 2003**                         |   |
|                     |   | (Dollars in Thousands)                            |   |
|                     |   |                                              |   |                                              |   |                                              |   |                                              |   |
| One- to four-family      |   | $                                                 | 19     |                                              | $      | —                                            |   | $                                                 | 28     |   | $ | — |   |
| Commercial real estate   |   | 87                                                |   | 20                                                |   | 130                                               |   | —                                            |   |
| Multi-family real estate |   | 88                                                |   | —                                            |   | 111                                               |   | —                                            |   |
| Commercial business      |   | 774                                               |   | —                                            |   | 652                                               |   | 132                                               |   |
| Equipment finance leases |   | 262                                               |   | —                                            |   | 250                                               |   | —                                            |   |
| Consumer (1)             |   | 1,655                                             |   | —                                            |   | 1,595                                             |   | —                                            |   |
| Agricultural             |   | 300                                               |   | 808                                               |   | 230                                               |   | 714                                               |   |
| Total                    |   | $                                                 | 3,185  |                                              | $      | 828                                               |   | $                                                 | 2,996  |   | $ | 846 |   |

 

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(1)            Includes mobilehome loans.

 

 

**FASB 114 Impaired Loan Summary**

 
|                   |   | **Number  of Loan  Customers** |   | **Loan  Balance** |   | **Impaired Loan  Valuation  Allowance** |   |
|------------------------|--------|--------------------------------|--------|-------------------|--------|-----------------------------------------|--------|
| **Loan Type**          |   | **At December 31, 2003**  |   |
|                   |   | **(Dollars  in Thousands)**    |   |
| Commercial business    |   | 5                              |   | $                 | 154    |                                    | $      | — |   |
| Commercial real estate |   | 2                              |   | 1,002             |   | 20                                      |   |
| Agricultural           |   | 1                              |   | 1,328             |   | 808                                     |   |
| Total                  |   | 8                              |   | $                 | 2,484  |                                    | $      | 828 |   |

 

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**FASB 114 Impaired Loan Summary**

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

 

The allowance for loan and lease losses was $4.0 million atDecember 31, 2003 as compared to $4.7 million at December 31,2002.  The ratio of the allowance forloan and lease losses to total loans and leases was 0.66% at December 31,2003 compared to 0.76% at December 31, 2002, a decrease of 13.2%.  The Company’s management has considerednonperforming loans and leases and potential problem loans and leases inestablishing the allowance for loan and lease losses.  The Company continues to monitor its allowance for probable loanand lease losses and make future additions or reductions in light of the levelof loans and leases in its portfolio and as economic conditions dictate.  The current level of the allowance for loanand lease losses is a result of management’s assessment of the risks within theportfolio based on the information revealed in credit reporting processes. TheCompany utilizes a risk-rating system on all commercial business, agricultural,construction and multi-family and commercial real estate loans, includingpurchased loans.  A periodic creditreview is performed on all types of loans and leases to establish the necessaryreserve based on the estimated risk within the portfolio. This assessment ofrisk takes into account the composition of the loan and lease portfolio,historical loss experience for each loan and lease category, previous loan andlease experience, concentrations of credit, current economic conditions andother factors that in management’s judgment deserve recognition.

 

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

 

Although management believes that it uses the best informationavailable to determine the allowances, unforeseen market conditions couldresult in adjustments and net earnings being significantly affected ifcircumstances differ substantially from the assumptions used in making thefinal determinations.  Future additionsto the Company’s allowances result from periodic loan, property and collateralreviews and thus cannot be predicted in advance.

 

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**Comparison of theThree Months Ended December 31, 2003 and December 31, 2002**

 

**Continued Operations:**

 

*General*. The Company’s net income from continuing operations was $1.3 million or$0.35 and $0.34 for basic and diluted earnings per share, respectively, for thethree months ended December 31, 2003, a $200,000 decrease in earningscompared to $1.5 million or $0.42 and $0.41 for basic and diluted earnings pershare, respectively, for the same period in the prior fiscal year.  For the three months ended December 31,2003, the return on average equity from continuing operations was 10.00%, a19.8% decrease compared to 12.47% for the same period in the prior fiscalyear.  For the three months endedDecember 31, 2003, the return on average assets from continuing operationswas 0.66%, a 17.5% decrease compared to 0.80% for the same period in the priorfiscal year.  As discussed in moredetail below, the decreases were due to a variety of key factors, includingdecreases in net interest income of $700,000 and noninterest income of $75,000and an increase in the provision for losses on loans and leases of $185,000offset by decreases in noninterest expense of $600,000 and income tax expenseof $17,000.

 

*Interest and Dividend Income.*  Interest and dividend income was $9.8million for the three months ended December 31, 2003 as compared to $11.5million for the same period in the prior fiscal year, a decrease of $1.7million or 14.8%.  A $1.6 milliondecrease in interest and dividend income was the result of a 14.1% decrease inthe average yield on interest-earning assets. The average yield on interest-earning assets was 5.48% for the threemonths ended December 31, 2003 as compared to 6.38% for the same period inthe prior fiscal year.  For the threemonths ended December 31, 2003, the average yield on loans and leasesreceivable was 5.91%, a decrease of 13.2% from 6.81% for the same period in theprior fiscal year.  The overall decreasein interest and dividend income was primarily due to repricing of loans andinvestments that generally reflected the decline in national interest rates.  From June 30, 2002 to December 31,2003, the prime rate dropped from 4.75% to 4.00.  Asof June 30, 2003,  the Bank stated it had exceeded the 20% HomeOwners’ Loan Act (“HOLA”) limitation for commercial loans. This calculation wasbased on information provided in OTS filings.  The Bank has reviewed itsoptions with the OTS and has been informed by the OTS that it can designateloans under HOLA as real estate if the Bank substantially relies upon asecurity interest in real estate given by the borrower as a condition of makingthe loan.  The Bank has reviewed loans classified as commercial with realestate security in order to determine if reclassification is possible. Based upon findings, at December 31, 2003, the Bank has calculated andreported its HOLA percentage for commercial loans to be under the 20%limitation following certain reclassifications.  The Bank will submit itsfindings to the OTS.

 

*Interest Expense.*  Interest expense was $3.7 million for the three months endedDecember 31, 2003 as compared to $4.7 million for the same period in the priorfiscal year, a decrease of $1.0 million or 21.3%.  A $625,000 decrease in interest expense was the result of a 20.8%decrease in the average rate paid on interest-bearing liabilities.  The average rate on interest-bearingliabilities was 2.32% for the three months ended December 31, 2003 ascompared to 2.93% for the same period in the prior fiscal year.  For the three months ended December 31,2003, the average rate paid on interest-bearing deposits was 1.85%, a decreaseof 27.2% from 2.54% for the same period in the prior fiscal year.  Average volume decreases on FHLB advancesand other borrowings of $30.0 million also contributed to a $333,000 decreasein interest expense for the three months ended December 31, 2003 ascompared to the same period in the prior fiscal year.  While the overall average volume of interest-bearing depositsincreased $10.7 million, the average volume decrease of certificates of depositof $38.3 million, included in interest-bearing deposits, was substantial enoughto contribute to an overall decrease in interest expense from interest-bearingdeposits of $187,000 for the three months ended December 31, 2003 ascompared to the same period in the prior fiscal year.  Offsetting the above decreases in interest expense for the threemonths ended December 31, 2003 was an increase in interest expense of$132,000 as a result of average volume increases of $10.2 million in companyobligated mandatorily redeemable preferred securities of subsidiary trusts ascompared to the same period in the prior fiscal year.

 

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*Net Interest Income.* The Company’s netinterest income from continuing operations for the three months endedDecember 31, 2003 decreased $700,000, or 10.3%, to $6.1 million comparedto $6.8 million for the same period in the prior fiscal year.  The decrease in net interest income was dueprimarily to a decreasing net interest margin as national rates continued toremain low over the prior year.  TheCompany’s net interest margin was 3.41% for the second quarter of fiscal 2004as compared to 3.75% for the same period in the prior fiscal year.

 

*Provision for Losses on Loans.*The allowance for loan and leaselosses is maintained at a level which is considered by management to be adequateto absorb probable losses on existing loans and leases that may becomeuncollectible, based on an evaluation of the collectability of loans and priorloan loss experience.  The evaluationtakes into consideration such factors as changes in the nature and volume ofthe loan and lease portfolio, overall portfolio quality, review of specificproblem loans and leases, and current economic conditions that may affect theborrower’s ability to pay.  Theallowance for loan and lease losses is established through a provision forlosses on loans and leases charged to expense.

 

During the three months ended December 31, 2003, the Companyrecorded a provision for losses on loans and leases of $634,000 compared to$449,000 for the three months ended December 31, 2002, an increase of$185,000.  See “Asset Quality” forfurther discussion.

 

*Noninterest Income.*  Noninterest income was $2.5 million for both of the three monthsended December 31, 2003 and 2002, respectively.  An overall $75,000 decrease in noninterest income was dueprimarily to decreases in net gain on sale of loans of $137,000 and fees ondeposits of $66,000 offset by increases in loan servicing income of $55,000,net gain on sale of securities of $42,000 and other noninterest income of$31,000.

 

Net gain on sale of loans was $312,000 for the three months endedDecember 31, 2003 as compared to $449,000 for the same period in the priorfiscal year, a decrease of $137,000 or 30.5%. The decrease was primarily due to a decrease in the amount ofresidential mortgage loans sold into the secondary market during the secondquarter of fiscal 2004 as compared to the same period in the prior fiscalyear.  Residential mortgage loanproduction decreased 55.1% in dollar volume for the three months endedDecember 31, 2003 as compared to the same period in the prior fiscalyear.  As is the case with the industry,residential mortgage loan pipelines decreased back to more historical levels atSeptember 30, 2003 and was reflected in fiscal 2004 second quarterearnings.  Offsetting the decrease ingain from residential mortgage loans, was a second quarter fiscal 2004 gain inthe amount of $141,000 resulting from the sale of $5.0 million in student loansto the Student Loan Finance Corporation.

 

Fees on deposits were $1.1 million for both of the three months endedDecember 31, 2003 and 2002, respectively. An overall $66,000 decrease in fees on deposits was due primarily to adecrease in nonsufficient funds and overdraft fees on deposit accounts of$99,000.

 

Loan servicing income increased 15.1% to $419,000 for the three monthsended December 31, 2003 as compared to $364,000 for the same period in theprior fiscal year due additional income from the securitization of automobileloans during the third quarter of fiscal 2003. The Company recorded $56,000 in net servicing income from automobileloans during the second quarter of fiscal 2004.  See Note 4 of the “Notes to Consolidated Financial Statements.”

 

Net gain on sale of securities increased $42,000 for the three monthsended December 31, 2003 as compared to the same period in the prior fiscalyear due to no sales occurring during the second quarter of fiscal 2003.

 

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Other noninterest income increased 5.1% to $642,000 for the threemonths ended December 31, 2003 as compared to $611,000 for the same periodin the prior fiscal year due to income in the amount of $115,000 recorded onthe retained interest obtained through the securitization of automobile loans.  See Note 4 of the “Notes to ConsolidatedFinancial Statements.”  Offsetting theabove increase in noninterest income for the three months endedDecember 31, 2003 as compared to the same period in the prior fiscal yearwas a decrease in commission and insurance income in the amount of $172,000primarily due to the sale of the Company’s property and casualty book ofbusiness.

 

*Noninterest Expense.*  Noninterest expense was $5.9 million for the three months endedDecember 31, 2003 as compared to $6.5 million for the three months endedDecember 31, 2002, a decrease of $600,000 or 9.2%.  The decrease in noninterest expense was dueprimarily to decreases in compensation and employee benefits of $400,000 andother expenses of $219,000.

 

Compensation and employee benefits were $3.5 million for the threemonths ended December 31, 2003 as compared to $3.9 million for the sameperiod in the prior fiscal year, a decrease of $400,000 or 10.3%.  The decrease was primarily due to decreasesin variable compensation (performance incentives and bonuses) of $297,000,health claims, net of stop loss, of $270,000 and pension plan expense of$152,000 due to a combination of changes in payroll covered and the investmentperformance of the pension trust account. Offsetting the above decreases in compensation and employee benefits wasan increase in deferred compensation related to loan originations in the amountof $349,000 for the three months ended December 31, 2003 as compared tothe same period in the prior fiscal year.

 

Other noninterest expense decreased 12.3%, or $219,000, for the threemonths ended December 31, 2003 as compared to the same period in the priorfiscal year primarily due to decreases in advertising of $97,000, telephone of$27,000, charitable contributions of $28,000 and consultant services of $77,000offset by an increase in legal expenses of $44,000 and a one-time, five yearcumulative catch up of VISA charges in the amount of $62,000.   The remaining $96,000 decrease in othernoninterest expense is comprised of miscellaneous and various other general andadministrative expenses.

 

*Income tax expense.*  The Company’s income tax expense for the three months endedDecember 31, 2003 decreased $17,000 or 2.2% to $773,000 compared to$790,000 for the same period in the prior fiscal year.  The effective tax rate was 37.9% and 33.8%for the three months ended December 31, 2003 and December 31, 2002,respectively.  The increase in effectivetax rate for the quarter was the result of an increase in the expectedeffective tax rate for the year ending June 30, 2004, which is currentlyexpected to be 36.0%.

 

**Discontinued Operations:**

 

*(Loss) from discontinued operations. *Loss fromdiscontinued operations was $0 for the three months ended December 31,2003 as compared to a loss of ($110,000) the same period in the prior fiscalyear primarily due to the sale of the credit card loan portfolio onJanuary 31, 2003.

 

There has been no activity from the discontinued operations during thesecond quarter of fiscal 2004.

 

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**Comparison of the SixMonths Ended December 31, 2003 and December 31, 2002**

 

**Continued Operations:**

 

*General*. The Company’s net income from continuing operations was $2.6 million or$0.73 and $0.70 for basic and diluted earnings per share, respectively, for thesix months ended December 31, 2003, a $400,000 decrease in earningscompared to $3.0 million or $0.82 and $0.81 for basic and diluted earnings pershare, respectively, for the same period in the prior fiscal year.  For the six months ended December 31,2003, the return on average equity from continuing operations was 10.31%, a15.0% decrease compared to 12.13% for the same period in the prior fiscalyear.  For the six months ended December 31,2003, the return on average assets from continuing operations was 0.67%, a16.3% decrease compared to 0.80% for the same period in the prior fiscalyear.  As discussed in more detailbelow, the decrease was primarily due to a decrease in net interest income of$1.2 million offset by decreases in provision for losses on loans and leases of$400,000, noninterest expense of $32,000 and income tax expense of $200,000offset by an increase in noninterest income of $200,000.

 

*Interest and Dividend Income.*  Interest and dividend income was $20.1million for the six months ended December 31, 2003 as compared to $23.2million for the same period in the prior fiscal year, a decrease of $3.1million or 13.4%.  A $3.8 milliondecrease in interest and dividend income was the result of a 15.9% decrease inthe average yield on interest-earning assets. The average yield on interest-earning assets was 5.56% for the sixmonths ended December 31, 2003 as compared to 6.61% for the same period inthe prior fiscal year.  For the sixmonths ended December 31, 2003, the average yield on loans and leasesreceivable was 6.01%, a decrease of 14.6% from 7.04% for the same period in theprior fiscal year.  The overall decreasein interest and dividend income was primarily due to repricing of loans andinvestments that generally reflected the decline in national interestrates.  From June 30, 2002 toDecember 31, 2003, the prime rate dropped from 4.75% to 4.00%.  Average volume increases of $21.4 million inloans and leases receivable contributed to a $759,000 increase in interest anddividend income for the six months ended December 31, 2003 as compared tothe same period in the prior fiscal year. As ofJune 30, 2003,  the Bank stated it had exceeded the 20% Home Owners’Loan Act (“HOLA”) limitation for commercial loans. This calculation was basedon information provided in OTS filings.  The Bank has reviewed its optionswith the OTS and has been informed by the OTS that it can designate loans underHOLA as real estate if the Bank substantially relies upon a security interestin real estate given by the borrower as a condition of making the loan. The Bank has reviewed loans classified as commercial with real estate securityin order to determine if reclassification is possible.  Based uponfindings, at December 31, 2003, the Bank has calculated and reported itsHOLA percentage for commercial loans to be under the 20% limitation followingcertain reclassifications.  The Bank will submit its findings to the OTS.

 

*Interest Expense.*  Interest expense was $7.6 million for the six months endedDecember 31, 2003 as compared to $9.5 million for the same period in theprior fiscal year, a decrease of $1.9 million or 20.0%.  A $1.6 million decrease in interest expensewas the result of a 21.5% decrease in the average rate paid on interest-bearingliabilities.  The average rate oninterest-bearing liabilities was 2.37% for the six months endedDecember 31, 2003 as compared to 3.02% for the same period in the priorfiscal year.  For the six months endedDecember 31, 2003, the average rate paid on interest-bearing deposits was1.88%, a decrease of 29.1% from 2.65% for the same period in the prior fiscalyear.  Average volume decrease on FHLBadvances and other borrowings of $24.1 million also contributed to a $540,000decrease in interest expense for the six months ended December 31, 2003 ascompared to the same period in the prior fiscal year.  Offsetting the above decreases in interest expense for the sixmonths ended December 31, 2003 was an increase in interest expense of$228,000 as a result of average volume increases of $8.5 million in companyobligated mandatorily redeemable preferred securities of subsidiary trusts ascompared to the same period in the prior fiscal year.

 

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*Net Interest Income.* The Company’s netinterest income from continuing operations for the six months endedDecember 31, 2003 decreased $1.2 million, or 8.8%, to $12.5 millioncompared to $13.7 million for the same period in the prior fiscal year.  The decrease in net interest income was dueprimarily to a decreasing net interest margin as national rates continued toremain low over the prior year.  TheCompany’s net interest margin was 3.45% for the first six months of fiscal 2004as compared to 3.90% for the same period in the prior fiscal year.

 

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

 

During the six months ended December 31, 2003, the Companyrecorded a provision for losses on loans and leases of $1.1 million, comparedto $1.5 million for the six months ended December 31, 2002, a decrease of$400,000.  See “Asset Quality” forfurther discussion.

 

*Noninterest Income.*  Noninterest income was $5.3 million for the six months endedDecember 31, 2003 as compared to $5.1 million for the six months endedDecember 31, 2002, an increase of $200,000  or 3.9%.  The increase innoninterest income was due primarily to increases in net gain on sale of loansof $168,000 and other noninterest income of $300,000 offset by a decrease innet gain on sale of securities of $308,000.

 

Net gain on sale of loans increased 25.2% to $834,000 for the sixmonths ended December 31, 2003 as compared to $666,000 for the same periodin the prior fiscal year primarily due to a gain of $141,000 recorded in thesecond quarter of fiscal 2004 resulting from the sale of $5.0 million instudent loans to the Student Loan Finance Corporation.

 

Other noninterest income increased 27.3% to $1.4 million for the sixmonths ended December 31, 2003 as compared to $1.1 million for the sameperiod in the prior fiscal year due to income in the amount of $236,000recorded on the retained interest obtained through the securitization ofautomobile loans.  See Note 4 of the“Notes to Consolidated Financial Statements.” In addition, the Bank recorded an increase of $94,000 in other noninterestincome for BOLI as compared to the same period in the prior fiscal year.  Also included in noninterest income for thesix months ended December 31, 2003 is $116,000 net gain on the sale of theCompany’s property and casualty book of business.  Offsetting the above increases in noninterest income for the sixmonths ended December 31, 2003 as compared to the same period in the priorfiscal year was a decrease in commission and insurance income in the amount of$290,000 primarily due to the sale of the Company’s property and casualty bookof business.

 

Net gain on sale of securities decreased $308,000 for the six monthsended December 31, 2003 as compared to the same period in the prior fiscalyear due to fewer sales occurring during the first six months of fiscal 2004.

 

*Noninterest Expense.*  Noninterest expense was $12.7 million for both of the six monthsended December 31, 2003 and December 31, 2002, respectively.  An overall $32,000 decrease in noninterestexpense was due primarily to decreases in occupancy and equipment expense of $38,000and other noninterest expense of $125,000 offset by an increase in compensationand employee benefits of $131,000.

 

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Occupancy and equipment expense decreased 2.3%, or $38,000,  for the six months ended December 31,2003 as compared to the same period in the prior fiscal year in part due todecreases in payroll processing expenses of $25,000 and depreciation of officeproperties and equipment of $23,000.

 

Other noninterest expense decreased 3.8%, or $125,000, for the sixmonths ended December 31, 2003 as compared to the same period in the priorfiscal year primarily due to a decrease in advertising expenses of $86,000,consultant services of $42,000 and amortization of intangible assets of $59,000offset by an increase in legal expenses of $92,000.

 

Compensation and employee benefits increased 1.7%, or $131,000, for thesix months ended December 31, 2003 as compared to the same period in theprior fiscal year primarily due to increases in employee base compensation of$279,000 and deferred compensation related to loan originations of $120,000offset by decreases in variable compensation (performance incentives andbonuses) of $201,000 and pension plan expense of $134,000 due to a combinationof changes in payroll covered and the investment performance of the pensiontrust account.  All other personnelcosts attributed to a $65,000 increase in compensation and employee benefitsfor the six months ended December 31, 2003 as compared to the same periodin the prior fiscal year.

 

*Income tax expense.*  The Company’s income tax expense for the six months endedDecember 31, 2003 decreased $200,000 or 11.8% to $1.5 million compared to$1.7 million for the same period in the prior fiscal year, primarily due to areduction in net income of $537,000. The effective tax rate was 36.0% and 35.8% for the six months endedDecember 31, 2003 and December 31, 2002, respectively.

 

**Discontinued Operations:**

 

*(Loss) from discontinued operations. *Loss fromdiscontinued operations was $0 for the six months ended December 31, 2003as compared to a loss of ($51,000) for the same period in the prior fiscal yearprimarily due to the sale of the credit card loan portfolio on January 31,2003.  There has been no activity fromthe discontinued operations during the first six months of fiscal 2004.

 

**Liquidity and CapitalResources**

 

The Bank’s primary sources of funds are earnings, in-market deposits,FHLB advances and other borrowings, repayments of loan principal, mortgage-backed securities and callableagency securities and, to a lesser extent, sales of mortgage loans, sales andmaturities of securities, mortgage-backed securities, out-of-market depositsand short-term investments.  Whilescheduled loan payments and maturing securities are relatively predictable,deposit flows and loan 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 areinvested in overnight funds.

 

Liquidity management is both a daily and long-term responsibility ofmanagement.  The Bank adjusts itsinvestments in liquid assets based upon management’s assessment of (i) expectedloan demand, (ii) projected loan sales, (iii) expected deposit flows, (iv)yields available on interest-bearing deposits, and (v) the objectives of itsasset/liability management program. Excess liquidity is invested generally ininterest-bearing overnight deposits and other short-term government and agencyobligations.  At December 31, 2003,the Bank had $8.0 million invested in federal funds sold.  During the six months endedDecember 31, 2003, the Bank decreased its borrowings with the FHLB by$17.2 million.

 

The Bank anticipates that it will have sufficient funds available tomeet current loan commitments.  AtDecember 31, 2003, the Bank had outstanding commitments to originate andpurchase mortgage and commercial loans and leases of $45.5 million and to sellloans of $11.8 million.  Commitments bythe Bank to

 

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originate loans are not necessarily executed by the customer.  The Bank monitors the ratio of commitmentsto fundings for use in liquidity management. At December 31, 2003, the Bank had commitments to purchase $400,000of securities available for sale and no commitments to sell securitiesavailable for sale.

 

Although in-market deposits are the Bank’s primary source of funds, theBank’s policy has been to utilize borrowings where the funds can be invested ineither loans or securities at a positive rate of return or to use the funds forshort-term liquidity purposes.  The Bankcurrently has two $10.0 million unsecured lines of federal funds withcorrespondent banks.  There were nofunds drawn on either line of credit at December 31, 2003.  Also, the Bank has implemented arrangementsto acquire out-of- market certificates of deposit and money market accounts asan additional source of funding.  As ofDecember 31, 2003, the Bank had $27.8 million in out-of-marketcertificates of deposit and $11.8 million in out-of-market money market accounts.  The Bank may also seek other sources ofcontingent liquidity including additional federal funds purchased lines withcorrespondent banks and lines of credit with the Federal Reserve Bank.

 

The Company issued trust preferred securities of $7.0 million duringthe first quarter of fiscal 2004 in order to increase its liquidity and payofftwo unsecured notes with First Tennessee Bank, NA totaling $4.5 million.

 

The Company uses its capital resources to pay dividends to itsstockholders, to repurchase Company stock in the market pursuant to Board ofDirectors’ approved plans, to support organic growth, to make acquisitions, toservice its debt obligations and to provide funding for investment into theBank of tier 1 (core) capital.

 

The Company currently has in effect a stock buy back program in whichup to 10% of the common stock of the Company outstanding on May 1, 2003 may beacquired through April 30, 2004.  Atotal of 74,200 shares of common stock have been purchased pursuant to thecurrent program, with 25,600 shares purchased during the three months endedDecember 31, 2003.

 

Savings institutions insured by the Federal Deposit InsuranceCorporation are required by the Financial Institutions Reform, Recovery andEnforcement Act of 1989 (“FIRREA”) to meet three regulatory capitalrequirements.  If a requirement is notmet, regulatory authorities may take legal or administrative actions, includingrestrictions on growth or operations or, in extreme cases, seizure.  Institutions not in compliance may apply foran exemption from the requirements and submit a recapitalization plan.  Under these capital requirements, atDecember 31, 2003, the Bank met all current capital requirements.

 

The OTS has adopted capital requirement for savings institutionscomparable to the requirement for national banks.  The minimum OTS Tier 1 (core) capital requirement for wellcapitalized institutions is 5.00% of total adjusted assets for thrifts.  The Bank had Tier 1 (core) capital of 8.71%at December 31, 2003.  The minimumOTS risk-based capital requirement for well capitalized institutions is 10.00%of risk-weighted assets.  The Bank hadrisk-based capital of 10.60% at December 31, 2003.

 

**Off-Balance SheetFinancing Arrangements**

 

During fiscal 2003, the Bank securitized and sold consumer automobileloans in the amount of $50.0 million through HFSC and Automobile SecuritizationTrust.  The outstanding balance of thesecuritized automobile loans was $25.2 million at December 31, 2003.  As part of the sales transaction, the Bankretains servicing responsibilities and a retained interest in the receivableswhich is subordinated to third party investors’ interests.  The receivables were sold without legal recourse.  The sale provided the Bank with anadditional source of liquidity at interest rates more favorable than it couldreceive through other forms of financing. It also assisted in reducing capital requirements and credit risk to theBank, in addition to giving the

 

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Bank access to the national capital markets.  See Note 4 of the “Notes to Consolidated FinancialStatements”  for further detail.

 

**Impact of Inflationand Changing Prices**

 

The Consolidated Financial Statements and Notes thereto presented inthis Form 10-Q have been prepared in accordance with GAAP, which require themeasurement of financial position and operating results in terms of historicaldollars without considering the change in the relative purchasing power ofmoney over time due to inflation.  Theimpact of inflation is reflected in the increased cost of the Bank’soperations. Unlike most industrial companies, nearly all the assets and liabilitiesof the Bank are monetary in nature.  Asa result, interest rates have a greater impact on the Bank’s performance thando the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to thesame extent as the prices of goods and services.

 

**Recent AccountingPronouncements**

 

In March 2003, the FASB started a project, pursuant to FASBStatement No. 123, *“Accounting forStock-Based Compensation”,*to address issues related to stock-basedcompensation (“SBC”).  The objective ofthis project is to cooperate with the International Accounting Standards Boardto achieve convergence to one single, high-quality global accounting standardon SBC.   The FASB has discussed severalissues relating to SBC arrangements, but continues to deliberate on other SBCissues.

 

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

 

The Company continues to monitor the progress of the FASB regarding itsSBC project and will continue applying the guidance of APB Opinion No. 25.  The Company will reevaluate its accountingpolicy on SBC upon the FASB’s issuance of an exposure draft and finalaccounting standard regarding SBC as a result of its current SBC project.

 

In January 2003, the FASB issued Interpretation No. 46 *“Consolidation of Variable Interest Entities.”*  This Interpretation was issued in an effortto expand upon and strengthen existing accounting guidance that addresses whena company should include in its financial statements the assets, liabilitiesand activities of another entity.  Ingeneral, a variable interest entity is a corporation, partnership, trust, orany other legal structure used for business purposes that either (i) does nothave equity investors with voting rights or (ii) has equity investors that donot provide sufficient financial resources for the entity to support itsactivities.  A variable interest entityoften holds financial assets, including loans or receivables, real estate orother property.  To further assistfinancial statement users in assessing a company’s risks, the Interpretationalso requires disclosures about variable interest entities that the Company isnot required to consolidate but in which it has a significant variableinterest.  The consolidationrequirements of Interpretation No. 46 apply immediately to variable interestentities created after January 31, 2003. The consolidation requirements for older entities were effective at thebeginning of the first interim period beginning after June 15, 2003,however, on October 8, 2003 the FASB deferred the implementation date ofInterpretation No. 46 until the first period ending after December 15,2003.  The Company expects to fullyimplement this standard, as revised, as of March 31, 2004.  As a result, the Company expects todeconsolidate its Capital Trust entities, which will result in mandatorilyredeemable preferred securities of subsidiary trusts, which are classified asliabilities, being excluded from the Company’s financial statements andreplaced with subordinated debentures, also classified as liabilities, payableto the trusts of approximately the same amount.  The overall effect on the Company’s 

 

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financial position and operating results of the deconsolidation willnot be material, and will not affect reported equity or net income.

 

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

 

In April 2003, FASB issued SFAS Statement No. 149, *“Amendment of Statement 133 on Derivative Instrumentsand Hedging Activities.”* This Statement improves financial reporting by requiring that contractswith comparable characteristics be accounted for similarly.  In particular, this Statement (i) clarifiesunder what circumstances a contract with an initial net investment meets thecharacteristics of a derivative, (ii) clarifies when a derivative contains afinancing component, (iii) amends the definition of an underlying to conform itto language used in FASB Interpretation No. 45, *“Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others”* and (iv)amends certain other existing pronouncements. The changes will result in more consistent reporting on contracts andhedging relationships entered into or modified after June 30, 2003.   The Company extends to borrowers and sellsto secondary markets interest rate loan commitments (“IRLC”) on a “bestefforts” basis and is continuing to review guidance from FASB with respect tovaluation of IRLC.

 

In May 2003, FASB issued SFAS Statement No. 150, *“Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity”*.  This Statement establishes standards for howan issuer classifies and measures certain financial instruments with characteristicsof both liabilities and equity. It requires that an issuer classify a financialinstrument that is within its scope as a liability (or an asset in somecircumstances instead of equity). This Statement was effective at the beginningof the first interim period beginning after June 15, 2003, except formandatorily redeemable financial instruments of nonpublic entities, in whichcase the effective date has been indefinitely deferred by the FASB.  The adoption of this Statement did not havea material effect on the Company’s financial position, liquidity or results ofoperations, however, management continues to review guidance from the FASB.

 

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**ITEM 3.  QUANTITATIVE****ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

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

 

The composition of the Bank’s balance sheet results in maturitymismatches between interest-earning assets and interest-bearingliabilities.  The scheduled maturitiesof the Bank’s fixed rate interest-earning assets are longer than the scheduledmaturities of its fixed rate interest-bearing liabilities.  This mismatch exposes the Bank to interestrate risk.  In a rising rate scenario,as measured by the OTS interest rate risk exposure simulation model, theestimated market or portfolio value (“PV”) of the Bank’s assets would declinein value to a greater degree than the change in the PV of the Bank’sliabilities, thereby reducing net portfolio value (“NPV”), the estimated marketvalue of its shareholders’ equity.

 

As set forth below, depending upon thevolatility of the rate change, the change in asset or liability mix of theCompany or other factors may produce a decrease in net interest margin in anupward moving rate environment even as the NPV estimate indicates an increasein net value.  The converse situationcan also be  expected.  One approach used to quantifyinterest rate risk is the NPV analysis. In essence, this analysis calculates the difference between the presentvalue of the liabilities and the present value of expected cash flows fromassets and off-balance sheet contracts. The following tables set forth, at September 30, 2003 (the mostrecent report available) and June 30, 2003, an analysis of the Company’sinterest rate risk as measured by the estimated changes in NPV resulting frominstantaneous and sustained parallel shifts in the yield curve (+ 300 or —100basis points, measured in 100 basis point increments).  Due to the abnormally low prevailinginterest rate environment, -200 and —300 NPV were not estimated by theOTS.  Management does not believe thatthe Company has experienced any material changes in its market risk positionfrom that disclosed in the Company’s Annual Report on Form 10-K for the fiscalyear ended June 30, 2003 or that the Company’s primary market riskexposures and how those exposures were managed during the six months endedDecember 31, 2003 changed significantly when compared to June 30,2003.

 

The data in the following tables is based on assumptions utilized bythe OTS in assessing interest rate risk of thrift institutions and published in“Selected Asset and Liability Price Tables as of June 30, 2003” and“Selected Asset and Liability Price Tables as of September 30, 2003”.  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, 2003

 

| **Change in  Interest Rates** |   | **Estimated  NPV  Amount**   |   | **Estimated  Increase  (Decrease) in NPV** |   |
|-------------------------------|--------|------------------------------|--------|--------------------------------------------|--------|
| **Amount**                    |   | **Percent**                  |
|                          |   | **(Dollars  in thousands )** |   |                                       |   |
|                          |   |                         |   |                                       |   |
| Basis Points                  |   |                         |   |                                       |   |
|                          |   |                         |   |                                       |   |   |   |
| +300                          |   | $                            | 81,396 |                                       | $      | (2,609 | ) | (3% | ) |
| +200                          |   | 83,788                       |   | (217                                       | )      | — |   |
| +100                          |   | 84,872                       |   | 867                                        |   | 1 |   |
| —                        |   | 84,005                       |   | —                                     |   | — |   |
| -100                          |   | 82,629                       |   | (1,376                                     | )      | (2 | ) |
|                               |        |                              |        |                                            |        |  |  |  |  |

 

June 30, 2003

 

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

 

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

 

**ITEM 4****.  DISCLOSURE CONTROLS AND PROCEDURES**

 

TheCompany’s management has evaluated, with the participation of the Company’sChairman, President and Chief Executive Officer and the Executive VicePresident, Chief Financial Officer and Treasurer, the effectiveness of thedesign and operation of the Company’s disclosure controls and procedures, andhave concluded that, as of the end of the period covered by this QuarterlyReport, the Company’s disclosure controls and procedures (as defined in Rule13(a)-15(e) under the Exchange Act) are effective for gathering, analyzing anddisclosing information the Company is required to disclose in its periodicreports filed under such Act.

 

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**PARTII**

 

**Item1.****                              LegalProceedings**

 

The Company, Home Federal and its subsidiariesare involved as plaintiff or defendant in various legal actions arising in thenormal course of their businesses. While the ultimate outcome of these proceedings cannot be predicted withcertainty, it is the opinion of management, after consultation with counselrepresenting Home Federal and the Company in the proceedings, that theresolution of these proceedings should not have a material effect on theCompany’s consolidated financial position or results of operations.  The Company and its direct and indirectsubsidiaries are not aware of any legal actions or proceedings outside of thenormal course of business.

 

**Item2.****                              Changesin Securities and Use of Proceeds**

 

None

 

**Item3.****                                   Defaultsupon Senior Securities**

 

None

 

**Item4.****                                   Submissionof Matters to a Vote of Security Holders**

 

The following matters were submitted to a vote by the stockholders ofHF Financial Corp. at the Annual Meeting of Stockholders on November 19,2003:

 

a.                                       Electionof Board of Directors of the Company.

 
| JoEllen Koerner *      | For:   2,895,801 | Vote Withheld:   97,292 |
|------------------------|---------------------------------|----------------------------------------|
| Wm. G. Pederson *      | For:   2,924,800 | Vote Withheld:   68,293 |
| *Terms to expire 2006. |
|                        |                                 |                                        |  |

 

Continuing Board of Directors – Curtis L. Hage, Robert L. Hanson,Jeffrey G. Parker, Steven R. Sershen and Thomas L. Van Wyhe.

 

b.                                      Ratificationof the re-appointment of McGladrey & Pullen, LLP as the Company’s auditorsfor the fiscal year ending June 30, 2004.

 
| For:     |   | 2,940,166 |   |
|----------|--------|-----------|--------|
| Against: |   | 44,619    |   |
| Abstain: |   | 8,308     |   |

 

**Item5.****                              OtherInformation**

 

None

 

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**Item6.****                              Exhibitsand Reports on Form 8-K**

 

(a)                        Exhibits

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

 

(b)                       Reports on Form 8-K

 

On October 28, 2003, the Company filed Form 8-K, reporting underItem 12, “Results of Operations and Financial Condition,” the announcement ofthe results for the first quarter ended September 30, 2003.

 

On November 21, 2003, the Company filed Form 8-K, reporting underItem 5, “Other Events,” announcement of a 10% stock dividend paid onDecember 31, 2003 to shareholders of record as of December 3, 2003.

 

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**HF FINANCIAL CORP.**

 

**FORM10-Q**

**SIGNATURES**

 

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

 

 
|   |                   |   | HF Financial Corp.                            |                         |
|--------|------------------------|--------|-----------------------------------------------|------------------------------|
|   |                   |   | (Registrant)                                  |                         |
|   |                   |   |                                          |
|   |                   |   |                                          |
| Date:  | February 10, 2004 |   | By:                                           | /s/ Curtis L. Hage           |   |
|   |                   |   | Curtis L. Hage, Chairman, President           |                         |
|   |                   |   | And Chief Executive Officer                   |                         |
|   |                   |   | (Duly Authorized Officer)                     |                         |
|   |                   |   |                                          |                         |
| Date:  | February 10, 2004 |   | By:                                           | /s/  Darrel L. Posegate |   |
|   |                   |   | Darrel L. Posegate, Executive Vice President, |                         |
|   |                   |   | Chief Financial Officer and Treasurer         |                         |
|   |                   |   | (Principal Financial and Accounting Officer)  |                         |
|        |                        |        |                                               |                              |  |  |  |

 

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